Finance / The inside story: How Nick Leeson brought down Barings
The inside story: How Nick Leeson brought down Barings
3 August 2014 |
The collapse of Barings Bank followed the rise of an ambitious, working class boy from Watford who later made a series of mistakes and lost control of events. Nick Leeson admits that he had a “very exalted idea” of what success meant. “Success would have been the key motive through everything I did,” he says. “I wanted to succeed and be successful and be at the top of the organisation.”
This drive took him far. In the early 1980s he started working as a clerk with Coutts, followed by a number of other jobs in the industry, until he ended up at Barings in Singapore. Leeson was promoted to the trading floor and later became head of a new division focusing on the Singapore Monetary Exchange, which made money by betting on the future direction of Japan’s Nikkei Index, a stock market index roughly equivalent to the UK’s FTSE system.
Leeson made big profits, convincing his bosses in London that all was going well. He was credited with making them more than £10million in 1993. But in the following year, everything changed. With so many transactions being done every day, special accounts were commonly used at the time to temporarily hold losses from errors made on the trading floor. A loss could, for example, be held in the account until a trader could make up for it.
As Leeson puts it: “Lots of people used to use error accounts and run them for a couple of days. The role in the markets is to cut all errors straight away, but in reality that doesn’t always happen.” Leeson used a now notorious error account, 88888, which was of little interest to the bank’s London office. “The 88888 account was always there and it was an error account,” he says. “London didn’t want it. There were always errors when we were making trades. London said they only wanted to know the profit and loss.
“It [the account] became available to me. Over the years it became common practice. It became accepted that if one of the boys on the trading floor made a mistake, it got hoovered up. It stayed there, because they weren’t reported or admonished.”
Leeson’s first abuse of the account was to cover up a mistake made by a team member to stop them from potentially being fired. But, as he began to make big losses of his own, he started using the 88888 account – named so because eight was viewed as a lucky number in Chinese culture – to hide them away. “For me, the 88888 account wasn’t such a big step, because we had seen it happen before,” he says. “I knew it was wrong but I’d seen people doing it.”
By December 1994 Leeson had lost hundreds of millions, and began making increasingly risky bets in the hope of rescuing the situation. He was betting that the Japanese economy would recover after a long recession, but in January 1995 an earthquake in the city of Kobe sent the Nikkei Index tumbling. Leeson then made a series of large bets on a post-quake recovery which failed to come in.
At the end, the total value of his losses ran to around £862million – enough to topple the 233-year-old Barings. Because of the error account, a lack of questions about his actions and Leeson’s various excuses, the losses were not discovered until February 1995.
“In the weeks leading up to that, I remember getting some calls, being asked why I was exceeding my trading limit. Throughout the whole process, all I was ever doing was thinking on my feet,” Leeson says. “A response I gave to one call was entirely different to the response to another call, but if they had shared the responses they would have known something was wrong. Throughout the three years when I was at Barings, I was never challenged. Probably the only day was February 23, 1995, when someone had done a position check and asked me to explain it. At that point, I ran away.”
Leeson fled Singapore, famously leaving a note reading “I’m sorry” on his desk. He and his wife Lisa went on the run with the intention of reaching the UK, but were caught in Germany. He unsuccessfully tried to avoid being extradited to Singapore, and in December 1995 was sentenced to six and a half years in prison after pleading guilty to deceiving the bank’s auditors and cheating the Singapore exchange. Barings, on the verge of bankruptcy, was sold to ING, a Dutch bank, for £1 in 1995.
Leeson would leave prison – slightly earlier than expected, in 1999 – but not before he had endured captivity, divorce and a life-threatening illness. “Prison was tough,” he says. “You are locked up for 23 hours a day. Everyone you see in prison is a Triad gang member so you have to learn to adapt and understand the rules. It’s about evolving to the situation you are in – however tough it may be.”
Leeson admits that the strain of being incarcerated was intense, even before his wife divorced him and he was diagnosed with colon cancer. But he believes it fostered an inner strength. “The boredom was extreme,” he says. “At the time it felt like it would never end. Now it’s a very small part of my life. You have to survive, and it comes down to survival. You find that strength to keep with it, or you end up a manic depressive and either kill yourself or end up attempting to get someone else to do it, both of which were never on the agenda for me.”
Leeson’s wife had started working as an air hostess in order to be able to visit him in Singapore, but eventually the strain on the marriage was too much and they divorced. Later, he was diagnosed with cancer.
He says: “I never calculated going to prison or being diagnosed with a life-threatening illness. Both were consequences of my actions from being in Singapore. But cancer brought out another element of fight and survival for me. It became a stubborn two fingers up, and I thought ‘I’m going to survive through this’.
“I was ignorant about what cancer was, what it did, how it affected you. I had to go and get knowledge and get understanding and learn what was going on. What I had to do was ask questions of the doctor and challenge them.”
Leeson managed to survive prison and cancer – though he still needed some treatment after being freed – to write his confessional book, Rogue Trader. And when he was released, he was at unsure what to make of his life. “After prison you don’t know what you are going to do,” he says. “I relied very heavily on my lawyer. I hadn’t made any decisions for the four and a half years preceding that. I was seeing people, enjoying myself a bit. It became apparent that adequate structure was something missing from my life.
“I could go out Friday, Saturday, Sunday and I would wake up with a hangover on a Monday and my friends would go to work. That was demoralising and depressing so I did a degree [in psychology]. That tempers your behaviour and gets you a bit more normal. You continue enjoying yourself but everyone else is gone. The easiest way to find that structure is to get a job.”
Since then, Leeson has kept busy – from speaking and writing a second book to serving as CEO at Galway United Football Club, a position he resigned from in 2011. He says: “The offers were flooding in to do other things and to do after-dinner speaking and conference speaking came on the agenda.
“I would describe myself as extremely introverted and not a great communicator, so I had to go on courses. I like to think I have become an accomplished speaker, and I speak in various places around the world.”
Leeson, now happily married to Leona, may have given up the high life of a trader, but he says this has required a “reshaping” of what he initially viewed as success. “People can gain success simply by putting food on the table for their children,” he says.