Who Is Nick Leeson?
Nick Leeson was a rising young trader at England's Barings Bank in 1995 when he lost $1.3 billion of the bank's money in risky derivatives and unauthorized derivatives trades.
The venerable bank collapsed, and Leeson spent four years in a Singapore prison.
Nick Leeson In Depth
At the age of 27, Leeson became a star derivatives trader in the Singapore office of Barings Bank, one of Britain's oldest merchant banks. He rose through the ranks, winding up as general manager of the company's Singapore trading division. His job primarily involved arbitrage trading on the Nikkei 250, the main Tokyo index, on behalf of Barings clients.
- Neeson lost $1.3 billion of his employer's money-making risky trades in derivatives.
- His misadventure forced banks to reassess their internal controls and trade auditing procedures. It also bankrupted Barings, one of England's oldest banks.
- Neeson's record trading loss held until 2008 when a French trader blew through $8 billion.
Leeson scored massive profits for Barings via several trades in 1992. Then, in a series of subsequent risky trades in futures and options, he lost more than $1 billion of the company's capital and hid the records of the losses from his superiors by falsifying the records in a little-used errors account called 88888. Most of the losing trades occurred in the futures market.
Had he followed his employer's rules, the bulk of his trades would have been cash neutral. In such a strategy, a trader manages an investment portfolio without adding capital to it. Any profits or losses on the trades would belong to the client. Barings' only compensation would have been a commission. Meanwhile, a trader was supposed to make a limited number of proprietary trades on behalf of the bank itself.
Once he got going, Leeson began siphoning off the bank’s money for risky derivatives plays in an effort to recoup earlier trading losses. He began relying on an extremely risky "doubling" strategy. That is, every time he lost money on a trade, he placed a new bet at double the amount of the loss in hopes of recouping it. He dipped farther and farther into the banks' reserves to keep it going.
His desperate attempts to make good on his losses came to a crashing halt in early 1995, when the Kobe earthquake hit Japan and the Nikkei fell sharply. His entire strategy had been based on a bet that the Nikkei would rise. For the next few days, he kept betting on a quick turnaround and lost even more of Barings' money.
One lesson: A trader desperate to recoup losses tends to gamble more, and lose more.
With his plans unraveling and detection imminent, Leeson fled Singapore to avoid prosecution, leaving behind a written confession. He was eventually arrested in Germany. His $1 billion trading losses turned out to be about twice the available capital of Barings.
The bank, which had been founded in 1762, was declared insolvent. The Dutch bank ING bought the ruins in 1995.
A single rogue trader lost $1.3 billion of other people's money and nobody noticed until a major international bank collapsed. Naturally, questions were asked.
The case certainly spurred greater attention to internal controls and more careful auditing of trades to avoid a repeat of one rogue trader's misadventure.
A Hard-Earned Lesson
One observation was that a trader desperate to recover from losses tends to risk more money in an attempt to get whole. Leeson's initial trading losses were just under $200 million. That total skyrocketed when he made even riskier bets on the direction of futures in the hope of reducing if not erasing his losses.
Leeson held the world title for losses due to unrestricted trades until 2008. He was eclipsed that year by a trader for Société Générale named Jerome Kerviel, who lost more than $7 billion in a series of unauthorized and falsified trades.
Leeson emerged from prison in 1999. In addition to a ruined career and a marriage that had ended in divorce, he faced a battle with colon cancer.
The Rogue Trader
He defied the odds and, eventually, thrived. Leeson wrote a memoir, aptly called Rogue Trader, which was made into a movie. He moved to Ireland, remarried, and joined the celebrity speaker's circuit, where he specialized in speaking about shady financial practices.
His rehabilitation appeared complete in 2005, when he was named commercial manager of Galway Football club, rising to chief executive officer of the club before leaving in 2011.