7/29/2019 Collapse of Barings Bank
1/19
Collapse of Barings Bank
ITM SMBA 16
7/29/2019 Collapse of Barings Bank
2/19
PRESENTORS
PRANAV THAKKAR
PRATIK SHAH
MIT TRIVEDI
BRIJESH
7/29/2019 Collapse of Barings Bank
3/19
Introduction of Barings Bank
Established in London in
1763
by
Sir FrancisBarings
Britain
Oldest Merchant Bank
Total Capital of Barings Bank till the
Yr 1995
was
$ 615 Mn
By
1989 Established Trading Operations
and in theYr 1990
Barings Bank appointed
Nick Leeson
Nick Leeson
in
1995
Lost $ 1.4 Billion
speculating
Primarily on Futures Contracts
7/29/2019 Collapse of Barings Bank
4/19
History
Barings Bank was founded in 1762 as the John and Francis BaringCompany by Francis Baring, with his older brotherJohn Baring as amostly silent partner.
1804 to1890 New Partnership and the company name was changed toBaring Brothers & Co
Panic Of 1890 In the 1880s, daring efforts in underwriting got the firminto serious trouble through overexposure to Argentine and
Uruguayan debt.
In 1890, Argentine president Miguel Jurez Celman was forced toresign following the Revolutions del Parque, and the country was closeto defaulting on its debt payments.
7/29/2019 Collapse of Barings Bank
5/19
History
During the Second World War, the British government used Barings toliquidate assets in the United States and elsewhere to help finance thewar effort.
After the war, Barings was overtaken in size and influence by otherbanking houses, but remained an important player in the market until1995
1995 Collapse
ING a Dutch bank, purchased Barings Bank in 1995 for the nominal
sum of
1
7/29/2019 Collapse of Barings Bank
6/19
Collapse
Barings was brought to its knees by Nick Leeson in aSingapore office
He was employed by Barings to profit from low riskarbitrage opportunities between derivatives contractson the SIMEX and Japans Osaka Exchange
Leeson left a $1.4 billion hole in Barings balance sheetdue to his unauthorized derivatives speculation,causing the 233-year-old banks demise.
7/29/2019 Collapse of Barings Bank
7/19
Nick Leeson
7/29/2019 Collapse of Barings Bank
8/19
Who was Nick Leeson??
He grew up in Londons Watford suburb.
Worked forMorgan Stanley after graduating university.
Leeson then joined Barings (Jakarta) to sort throughback-office mess involving 100 million of sharecertificates.
Successfully rectified the situation in 10 months.
Then transferred to Singapore and worked with a lot of
power & freedom.
7/29/2019 Collapse of Barings Bank
9/19
Leesons Activities
Was supposed to be Arbitraging.
Instead ofHedging, Gambled on the future
direction of the Japanese markets.
Had long futures positions on OSE Was not shorton SIMEX.
Kobe earthquake of January 17,1995 led to thecrash of Nikkei and his investments.
7/29/2019 Collapse of Barings Bank
10/19
Leesons Activities
Used Account no. 88888 for unauthorizedspeculation to cover losses
Ended with huge losses
(GBP 827 MM)
The activities ofNick Leeson ledto the fall of Barings
7/29/2019 Collapse of Barings Bank
11/19
Leesons Deceptive Strategies
Use ofCross Trade
Breaking down the total number of contracts into severaldifferent trades
Changed the trade prices thereon to cause profits
Profits credited to Switching' accounts & Losses to becharged to Account 88888
Details of this account were never transmitted to the
treasury or risk control offices in London
7/29/2019 Collapse of Barings Bank
12/19
Leeson: Then
He was then extradited back to Singapore where he received a 6and a half year sentence to jail. Barings creditors went legalproceedings.
Many executives who were involved in the failure to controlLeeson either resigned or were sacked.
In July 1999, Nicholas Leeson was released from jail on the
ground of good behavior.
Ruined, abandoned by his wife and sick with a cancer (detectedwhile in prison), Nicholas Leeson became quite popular as thesymbol of the ROGUE TRADER
7/29/2019 Collapse of Barings Bank
13/19
Managements Failure to
Control Leeson Effectively let Leeson settle his own trades by putting him
in charge of both the dealing desk and the back office
He had the final say on
payments,
ingoing and outgoing confirmations and contracts
reconciliation statements
accounting entriesposition reports
Leeson was considered perfectly placed to relay false
information back to London
7/29/2019 Collapse of Barings Bank
14/19
Specific lessons have been learnt
but loopholes appear all the time
Raised the standards of internal controls and compliance.
Banks are better capitalized which makes them less likelyto collapse in case of future rogue trader strikes.
Front and back office operations are carried outindependently from each other.
Although lessons have been learnt there are loopholes.The market is always changing in terms of products ,complexity, and vulnerability to fraud within andsupervision from outside.
7/29/2019 Collapse of Barings Bank
15/19
Could the regulators have
done more? Most of the banks are of the opinion that regulators should
not me blamed for the rouge trader incidents.
The regulators cannot stop rogue traders from trying tofool banks internal control.
Others suggested of having minimum risk managementstandards for every branch irrespective of its size andvolume
None of the regulatory authorities in Singapore, Japan andUK discovered the true use of error account.
7/29/2019 Collapse of Barings Bank
16/19
Could the regulators have
done more? SIMEX assumed that Barings was hedging and not
speculating when it granted an exemption on the numberof contracts that Barings could hold.
In addition, the speculative position of Barings was hiddendue to use of an omnibus account to clear trades.
With an omnibus account, the identity of the brokers
account is hidden from the exchange and clearing house.
7/29/2019 Collapse of Barings Bank
17/19
Our Observations
Management wanted to enter a new market but Bank wasnot prepared for the activity on a derivative market
Stronger competition search additional profits gaveso much control only to the one person
Derivatives in recent years a powerful tool in the hands oftraders
Strict regulations are needed in order to avoid the nextBarings
7/29/2019 Collapse of Barings Bank
18/19
SOME GOOD THOUGHTS
It is possible that the scrupulously honest man may not grow rich
so fast as the unscrupulous and dishonest one; but the successwill be of a truer kind, earned without fraud or injustice. And eventhough a man should for a time be unsuccessful, still he must be
honest: better lose all and save character. For character is itself afortune.Samuel Smiles
Fraud and falsehood only dread examination. Truth invites it. Samuel Johnson
There are three things in the world that deserve no mercy,
hypocrisy, fraud, and tyranny. Frederick W. Robertson
Ive moved on and, hopefully, so has everyone else. Nick
Leeson
7/29/2019 Collapse of Barings Bank
19/19