collapse of barings bank

7/29/2019 Collapse of Barings Bank

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Collapse of Barings Bank

ITM SMBA 16


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PRESENTORS

PRANAV THAKKAR

PRATIK SHAH

MIT TRIVEDI

BRIJESH


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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


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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.


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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


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.


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Nick Leeson


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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.


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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.


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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


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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


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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


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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


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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.


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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.


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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.


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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


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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


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collapse of barings bank

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