Collapse of Barings

by Kong, Yoke Mun

Founded in 1762, Barings was the oldest merchant bank in Britain before its collapse in 1995.1 The 233-year-old bank was brought down single-handedly by its employee, Nicholas William Leeson,2 better known as Nick Leeson, a derivatives trader and general manager at the Baring’s Singapore office.3 After landing the bank with a debt of S$1.4 billion – largely through futures trading contracts – Leeson fled Singapore.4 By the time of the bank’s collapse on 26 February 1995, it had accumulated losses amounting to S$2.2 billion.5 Leeson was sentenced to six and a half years of imprisonment in Singapore for two charges of fraud and forgery.6 The incident led to the amendment of the Futures Trading Act in Singapore and measures to strengthen the regulatory framework of futures trading.


Background
Baring Futures (Singapore) (BFS) was incorporated in Singapore on 17 September 1986. Leeson joined the settlements department of Baring Securities (London), an investment arm of Baring Group, as a clerk in July 1989. He was transferred to Singapore three years later.7

Leeson arrived in Singapore in April 1992 as a derivatives operations manager of Baring Securities (Singapore). He became a trader after passing the Institute of Banking and Finance's Futures Trading Test in June that year. Leeson was of one of two traders at BFS in July 1992, when it started trading on the Singapore International Monetary Exchange (SIMEX, which has since merged with the Stock Exchange of Singapore to form the Singapore Exchange).On 3 July, Leeson opened an error account, 88888, for BFS. The account was originally opened to report error trades made by inexperienced staff of BFS.9 However, Leeson used the account for his unauthorised trading.10 By the end of September 1992, the losses in the 88888 account had amounted to S$8.8 million.11

Unauthorised trading and losses
Leeson was appointed assistant director and general manager of BFS on 28 June 1993. He took charge of not only the front office, which conducted the trading, but also the back office, which processed the paperwork. This enabled him to hide his losses and unauthorised trading using the 88888 account. In 1994, Leeson started dealing in Japanese government bonds and also dabbled in Nikkei 225 futures and options.12

An internal audit of BFS was conducted for the period 19 July 1994 to 1 August 1994.13 The audit report, circulated to Barings’ senior management in London, revealed that BFS was exposed to great risks with Leeson taking charge of both the dealing and settlement operations. However, the bank chose to retain Leeson’s position, because of his experience and the profits he had generated. They did not know at the time that Leeson had already incurred big losses, which were hidden in the 88888 account. By the end of December 1994, the losses had risen to S$373.9 million.14

In January 1995, a senior auditor found a discrepancy in the BFS accounts.15 Leeson managed to convince the auditors by fabricating a story about a trade transaction between Barings and US investment firm Spear, Leeds & Kellogg. He produced a doctored payment statement to support his explanation.16 In the same month, SIMEX alerted Barings to BFS’s large volume of trading of Nikkei futures and options, but the bank’s senior management assured SIMEX that Barings had sufficient assets to back the trades, hence averting a potential suspension of BFS from trading by SIMEX.17

Despite the enormous losses accumulated in the 88888 account, Leeson continued to bet heavily in the Nikkei index in January 1995, hoping that it would not fall below 19,000 points.18 However, the Nikkei plunged after an earthquake hit Kobe, Japan, on 17 January. When the Nikkei 225 dropped to 17,785 points on 23 January, he continued to raise the stakes in hope that the market would bounce back.19 With the market sliding further to a low of 17,580 on 23 February, losses accumulated to S$1.4 billion.20

Investigations and collapse of Barings
On 23 February 1995, a senior settlements clerk on secondment from the Barings head office in London spotted a discrepancy in Leeson’s account. He tried but failed to get an explanation from Leeson, who said he had to visit his wife at the hospital and left the office.21 Knowing that he could not recover the cumulative losses, Leeson fled to Kuala Lumpur with his wife on the night of 23 February.22 Several attempts to contact Leeson were futile.23 The London Barings office was informed of the situation, and the BFS office checked its accounts for unauthorised transactions. Its initial fear was that Leeson embezzled money and disappeared. On 24 February, BFS officials found out about the 88888 account and linked the discrepancy to that account.24

Barings in London did not have sufficient funds to continue trading and was forced into administration on 26 February 1995. The Bank of England attempted to rescue the bank but failed. The total losses amounted to S$2.2 billion at the time of Barings’s collapse on 26 February.25 BFS was placed under interim judicial management by SIMEX the next day.26 In early March, the Commercial Affairs Department of Singapore launched an investigation into allegations of fraud and criminal misconduct against Leeson. Investigations broadened to BFS when then Finance Minister Richard Hu appointed two inspectors to look into allegations of misconduct on 9 March, culminating in the release of a report on 17 October. The report blamed Barings’s senior management for concealing Leeson’s fraudulent trades in BFS, and SIMEX for not launching an audit on BFS sooner.27

Aftermath and arrest of Leeson
Leeson and his wife left Kuala Lumpur for Sabah on 24 February 1995. The couple then left Sabah on a flight to Frankfurt via Seri Begawan, Bangkok and Abu Dhabi on 1 March.28 They were detained on arrival at the Frankfurt airport on 2 March.29 Leeson was jailed by the German court while waiting for the decision for Singapore’s request for his extradition.30 Dutch finance group Internationale Nederlanden Groep (ING) completed the Barings takeover proceedings on 6 March, injecting £540 million to pay creditors.31 In April, Singapore submitted a full arrest warrant for Leeson to support its extradition request, which Leeson’s lawyers attempted to fight by seeking an extradition to Britain and raising doubts about Singapore’s legal system and prison conditions. By October, Leeson had changed his mind, deciding to voluntarily return to Singapore for trial after he was convinced that he would get a fair trial in the local court.32

With the German government’s and court’s permission, Leeson was extradited to Singapore on 23 November 1995.33 He pleaded guilty to two charges of fraud and forgery on 1 December, and was sentenced to six and a half years in prison in Singapore. Leeson was released early on one-third remission on 3 July 1999 for good behaviour, after serving three and a half years of his sentence. He had earlier appealed for early release for medical reasons in September 1998 after he was diagnosed and treated for colon cancer, but it was rejected.34 A £100 million court injunction placed on him also ensured that half of his earnings, including from various media deals and speaking engagements, would be submitted to the liquidator. Meanwhile, on 13 June 1996, the Commercial Affairs Department dropped investigations against four men, including two of Leeson’s supervisors, as there were insufficient grounds for criminal charges.35

Impact
Despite this incident, the crisis did not put SIMEX into financial loss or affected financial institutions in Singapore.36 To prevent another similar incident from happening, amendments were made to the Futures Trading Act, which enabled the Monetary Authority of Singapore to monitor the activities of traders selling futures contracts more closely. It also mandated the licensing of traders in Singapore.37 The Futures Trading (Amendment) Act commenced on 1 April 1995.38 The Singapore government also introduced measures to strengthen the regulatory framework of futures trading under SIMEX and its financial soundness.39


Timeline
17 Sep 1986:
 Baring Futures (Singapore) is incorporated.

Jul 1989: Nick Leeson joins Baring Securities (London).
Apr 1992: Leeson joins Baring Securities (Singapore).
3 Jul 1992: Leeson opens account 88888.
Sep 1992: Losses in account 88888 reach S$8.8 million.
Dec 1994: Losses balloon to S$373.9 million.
Jan 1995: Leeson bets heavily on Nikkei 225 index.
17 Jan 1995: Nikkei 225 plunges due to the Kobe earthquake.
23 Feb 1995: Leeson flees to Malaysia with his wife.
24 Feb1995: Discovery of 88888 account.
26 Feb 1995: Barings London is forced into administration.
27 Feb 1995: BFS is placed under interim judicial management.
2 Mar 1995: Leeson is arrested in Frankfurt.
6 Mar 1995: Barings takeover by Dutch finance institution Internationale Nederlanden Groep.
1 Apr 1995: Futures Trading (Amendment) Act 1995 comes into force.
23 Nov 1995: Leeson is extradited to Singapore.
1 Dec 1995: Leeson pleads guilty to two charges and is sentenced to six-and-a-half years’ imprisonment in Singapore.
3 Jul 1999: Leeson is released from prison.



Authors
Kong Yoke Mun and Goh Lee Kim



References
1. Chan Wee Chuan, “Investors Better Protected with Changes to Futures Trading Rules,” Straits Times, 8 April 1996, 36; “The Fateful, Frantic Hours That Broke a Bank,” Business Times, 4 March 1995, 3. (From NewspaperSG)
2. Judith H. Rawnsley, Going for Broke: Nick Leeson and the Collapse of Barings Bank (London: HarperCollins, 1995), 71. (Call no. RSING 332.60941 RAW)
3. L. Beckering, “The Fall of the House of Barings,” Straits Times, 30 July 1995, 4; Chan Sue Meng, “Leeson Saga, and Key Role of 88888 Account,” Straits Times, 24 November 1995, 49; “Fateful, Frantic Hours.” (From NewspaperSG)
4. “Fateful, Frantic Hours.”
5. Chan, “Leeson Saga”; Michael Lim Choo San and Nicky Tan Ng Kuang, Baring Futures (Singapore) Pte Ltd: The Report of the Inspectors Appointed by the Minister for Finance: Investigation Pursuant to Section 231 of the Companies Act (Chapter 50) (Singapore: Ministry of Finance,1995), 155. (Call no. RSING 332.632 LIM)
6. Nick Leeson, Rogue Trader, with Edward Whitley (London: Warner, 1997), 357. (Call no. RSING 332.632092 LEE); Rawnsley, Going for Broke, 190.
7. Lim and Tan, Baring Futures (Singapore) Pte Ltd, A ix.; Chan, “Leeson Saga.”
8. Lim and Tan, Baring Futures (Singapore) Pte Ltd, A ix.
9. Chan, “Leeson Saga”; C. Raj, “Crimes Were Acts of Desperation,” Business Times, 2 December 1995, 2 (From NewspaperSG); Rawnsley, Going for Broke, 164–65.
10. Chan, “Leeson Saga”; Chan Sue Meng, Lim Li Hsien and Douglas Wong, “Audit Made Leeson Cook Up Deal to Hide Activities,” Straits Times, 2 December 1995, 28 (From NewspaperSG); Rawnsley, Going for Broke, 164–65.
11. Lim and Tan, Baring Futures (Singapore) Pte Ltd, B ii.
12. Lim and Tan, Baring Futures (Singapore) Pte Ltd, A x, B iii, 18; Chan, “Leeson Saga.”
13 Lim and Tan, Baring Futures (Singapore) Pte Ltd, A x.
14. Lim and Tan, Baring Futures (Singapore) Pte Ltd, B ii, B vi, 12; “Leeson Had Too Much Power,” Straits Times, 5 March 1995, 1. (From NewspaperSG)
15. Chan, Lim and Wong, “Audit Made Leeson Cook Up Deal.”
16. Lim and Tan, Baring Futures (Singapore) Pte Ltd, B viii, B ix; Chan, “Leeson Saga”; Chan, Lim and Wong, “Audit Made Leeson Cook Up Deal.”
17. Chan Sue Meng, “Simex Sounded Alarm to Barings HQ in January.” Straits Times, 5 March 1995, 1. (From NewspaperSG)
18. Beckering, “Fall of the House of Barings”; “Nick and the Nikkei,” Business Times, 4 March 1995, 3 (From NewspaperSG); Leeson, Rogue Trader, 220–21.
19. “Nick and the Nikkei”; Rawnsley, Going for Broke, 169.
20. “Nick and the Nikkei”; “Leeson on the Run,” Business Times, 4 March 1995, 3. (From NewspaperSG)
21. Lim and Tan, Baring Futures (Singapore) Pte Ltd, 14; Beckering, “Fall of the House of Barings.” 
22. “Leeson on the Run.”
23. Lim and Tan, Baring Futures (Singapore) Pte Ltd, A xviii; Rawnsley, Going for Broke, 14.
24. Rawnsley, Going for Broke, 14; Lim and Tan, Baring Futures (Singapore) Pte Ltd, 153.
25. Lim and Tan, Baring Futures (Singapore) Pte Ltd, 15, 155.
26. Lim and Tan, Baring Futures (Singapore) Pte Ltd, A xviii; Beckering, “Fall of the House of Barings.” 
27. C. Raj, “CAD Launches Fraud Probe at Barings,” Business Times, 1 March 1995, 1; Gerry de Silva and Chan Sue Meng, “Probe into Barings Fall Widens,” Straits Times, 10 March 1995, 1; Chan Sue Meng, “S'pore Report on Barings Collapse out Today,” Straits Times, 17 October 1995, 1. (From NewspaperSG)
28. Beckering, “Fall of the House of Barings”; “Leeson on the Run.”
29. “Leeson on the Run.”
30. Catherine Ong, “Trial Is over for Leeson as He Pleads Guilty to 2 Charges,” Business Times, 2 December 1995, 1. (From NewspaperSG)
31. “Dutch Giant ING Acquires Barings,” Straits Times, 7 March 1995, 1; “ING Gets Barings, Will Provide £540m Fund for Creditors,” Business Times, 7 March 1995, 1. (From NewspaperSG)
32. “S'pore Files Full Arrest Warrant for Nick Leeson,” Straits Times, 27 April 1995, 40; “Leeson Likely to Appear before Judge Today,” Business Times, 10 March 1995, 23; Chan Sue Meng, “German Prosecutors to Ask for Report on Prisons Here,” Straits Times, 22 March 1995, 40; Catherine Ong, “Leeson Won't Appeal against Extradition Order,” Business Times, 30 October 1995, 1. (From NewspaperSG)
33. “Bonn Approves Leeson's Extradition,” Straits Times, 15 November 1995, 40; 23; Chan Sue Meng, German Court Allows Leeson's Extradition,” Straits Times, 5 October 1995, 1; Catherine Ong, “‘Give Us a Smile,’ and the $2.2b Man Obliged,” Business Times, 24 November 1995, 2. (From NewspaperSG)
34. Chong Chee Kin, Chua Chin Hon and Sharon Vasoo, “Leeson Free after 3 Years in Jail,” Straits Times, 4 July 1999, 1; Catherine Ong, “Trial Is Over For Leeson As He Pleads Guilty To 2 Charges,” Business Times, 2 December 1995, 1; “Appeal Rejected,” New Paper, 19 September 1998, 5 (From NewspaperSG); Rawnsley, Going for Broke, 190.
35. Douglas Wong, “CAD Drops Probe into Leeson's Two Ex-bosses,” Straits Times, 14 June 1996, 1; “Rogue Trader Leeson in the Market for a Job,” Business Times, 20 October 2003, 2. (From NewspaperSG)
36. Catherine Ong, “Barings is Bust, Losses Hit S$1.6b, but Simex Is Safe,” Business Times, 28 February 1995, 1; “Barings Crisis ‘Has Not Put Futures Exchange at Risk',” Straits Times, 2 March 1995, 1; Quak Hiang Whai, Govt Tightens Up on Futures; Simex Not at Risk: Dr Hu,” Business Times, 2 March 1995, 1. (From NewspaperSG)
37. Chan, “Investors Better Protected with Changes to Futures Trading Rules”; Paul Leo and Siow Li Sen, “Law Tightened to Prevent Another Barings,” Business Times, 21 March 1996, 1 (From NewspaperSG); Lim and Tan, Baring Futures (Singapore) Pte Ltd, 117.
38. Futures Trading (Amendment) Act 1995, Act 9 of 1995, Government Gazette. Acts Supplement, 24 March 1995.
39. Quak Hiang Whai, “Govt to Tighten Supervision of Futures Trading,” Business Times, 2 March 1995, 4. (From NewspaperSG)



The information in this article is valid as at 2009 and correct as far as we are able to ascertain from our sources. It is not intended to be an exhaustive or complete history of the subject. Please contact the Library for further reading materials on the topic.

 

 

Subject
Merchant banks--Great Britain
Merchant banks--Singapore
Bank failures--Great Britain
Trade and industry
Bank failures--Singapore