A:

When an earthquake shook Kobe, Japan in 1995, it also broke open an ongoing scandal within the walls of Barings Bank. At the epicenter of the financial earthquake was Nick Leeson, a derivatives trader who, by the age of 28, had risen through the ranks of Barings to head its operations on the Singapore International Monetary Exchange (SGX).

Leeson initially was very successful in speculative trades, making huge profits for Barings and ensuring his upward mobility. Unfortunately, Leeson lost his touch as his speculative range increased. Leading up to 1995, he had been hiding losses from bad trades in a secret account. Leeson was able to accomplish this because of a management flaw in Barings that gave him the responsibility of double-checking his own trades, rather than having him report to a superior. Instead of reigning in his speculative gambles, Leeson continued to play increasingly bigger odds in an attempt to recover lost money.

Ironically, the trade that undid Leeson and the 200-year-old bank was one of his more conservative positions. Leeson placed a short straddle on the Nikkei, guessing that the exchange would remain stable overnight, neither going up nor down by a significant margin. Normally, Leeson would have been safe in such a position, but the earthquake in Kobe caused a sharp drop in the Nikkei and other Asian markets.

Faced with huge losses, Leeson panicked and attempted to offset the losses with increasingly desperate, short-term gambles that were based on the rate of recovery of the Nikkei. Sadly, the severity of the earthquake squashed all hopes of a rapid recovery. Leeson fled the country, but eventually he was arrested in Germany. Barings, having lost over $1 billion -more than twice its available capital - went bankrupt. Leeson wrote his aptly titled Rogue Trader while serving time in a Singapore prison. Leeson held the world title for losses due to unrestricted trades for over a decade, but he was eclipsed on January 25, 2008 when French bank Societe Generale announced that a rogue trader had lost more than $7 billion.

(For more on this topic, read The Biggest Stock Scams of All Time and Trading's 6 Biggest Losers.)

This question was answered by Andrew Beattie.

RELATED FAQS
  1. Who set the record loss for "rogue traders"?

    Every trader wants to set a record, but the hope is that it will be a record profit rather than a loss. With losses topping ... Read Answer >>
  2. What is the difference between speculation and gambling?

    Learn about speculation and gambling, examples of speculation and gambling, and the main difference between a speculator ... Read Answer >>
  3. How did currency trader John Rusnak hide $691 million in losses before being caught ...

    In 1993, Allfirst Bank hired a currency trader to shift the bank's forex (FX) operations from a merely hedging endeavor to ... Read Answer >>
  4. How do hedge funds use leverage?

    Learn how hedge funds use leverage techniques such as margin, credit lines and financial derivatives to increase return on ... Read Answer >>
  5. Why is Singapore considered a tax haven?

    Discover why Singapore is considered a tax haven, and learn about corporate tax rates and incentives that make this city-state ... Read Answer >>
Related Articles
  1. Trading

    Trading's 6 Biggest Losers

    These "rogue traders" are famous for their billion-dollar mistakes.
  2. Trading

    The Three Most Notorious Rogue Traders

    The conviction of former Barclays trader Tom Hayes has once again shone the spotlight on rogue traders. Here are three of them.
  3. Trading

    The World's 10 Most Famous Traders Of All Time

    A review of the most famous and infamous traders in history.
  4. Financial Advisor

    The 10 Must Watch Movies For Finance Professionals

    Finance makes for great cinema; here are 10 of the best offerings by Hollywood on the subject.
  5. Financial Advisor

    10 Must Watch Documentaries for Finance Professionals

    Find out about some of the best documentaries that finance professionals can watch to gain a better understanding of their industry.
  6. Trading

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  7. Personal Finance

    Traveling In Japan: Very Safe, Mostly

    Japan is one of the world's safest nations – but it is subject to earthquakes and other natural disasters. Should you be worried?
  8. Trading

    5 Must Watch Films and Documentaries for Day Traders

    Discover these five must-watch films and documentaries for day traders reviewed with the takeaway lessons that inspire, motivate and entertain.
  9. Insights

    Singapore Exchange in talks to buy Baltic Exchange (SGX)

    Singapore Exchange confirms it has entered into exclusive takeover talks with London's Baltic Exchange.
  10. Insights

    Sony Shares Rise Despite Forecasting -46% In Income (SNE)

    Sony's ADRs rose in New York even after the company forecast a 46% decline in net income for the coming fiscal year.
RELATED TERMS
  1. Nick Leeson

    A former manager with England's Barings Bank, Leeson became a ...
  2. Rogue Trader

    A trader who acts independently of others - and, typically, recklessly ...
  3. Barings Bank

    A British merchant bank that was started in 1762, and for centuries ...
  4. Bear Straddle

    A speculative options trading strategy that consists of purchasing ...
  5. Singapore Exchange - SGX

    Asia-Pacific's first publicly traded exchange that was inaugurated ...
  6. Bare Trust

    A basic trust in which the beneficiary has the absolute right ...
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center