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. 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 Rise Of The Rogue Trader

    We look at what makes a trader "rogue," why they do what they do, and how they get caught.
  3. Trading

    How To Prevent Rogue Trading

    These are the ways rogue trading affects banking, financial regulations and investors.
  4. 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.
  5. Trading

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  6. 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.
  7. Investing

    Are Nike's Kobe Sneakers Ready for Prime Time? (NKE, UA)

    Will Kobe Bryant’s legacy drive sneaker sales for Nike the way Michael Jordan did?
  8. Trading

    Why The Yen Is So Strong

    We look at why the yen strengthened after the tsunami and how it impacts the global economy.
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. Bear Straddle

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

    Asia-Pacific's first publicly traded exchange that was inaugurated ...
  5. Insurance Derivative

    A financial instrument that derives its value from an underlying ...
  6. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
Hot Definitions
  1. Co-pay

    A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such ...
  2. Protectionism

    Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local ...
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  5. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
  6. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
Trading Center