Barings bank

The collapse of Britain's Barings Bank in February 1995 is perhaps the quintessential tale of financial risk management gone wrong. The failure was completely unexpected. Over a course of days, thebank went from apparent strength to bankruptcy. Barings was Britain's oldest merchant bank. It had financed the Napoleonic wars, the Louisiana purchase, and the Erie Canal. Barings was the Queen'sbank. What really grabbed the world's attention was the fact that the failure was caused by the actions of a single trader based at a small office in Singapore.
The trader was Nick Leeson.
Leesonarrived at BSS in 1992 and started hiring local staff. As general manager, Leeson's job was not trading, but he soon took the necessary exam so that he could trade on SIMEX along with his small team oftraders. He was now general manager, head trader and, due to his experience in operations, de facto head of the back office. Such an arrangement should have rung alarm bells, but no one within Barings'senior management seemed to notice the blatant conflicts of interest. Leeson and his traders had authority to perform two types of trading:
1. transacting futures and options orders for clients or forother firms within the Barings organization, and
2. arbitraging price differences between Nikkei futures traded on the SIMEX and Japan's Osaka exchange.
Perhaps it was the inherent lack of risk insuch trading that prompted people to not be concerned about Leeson wearing multiple hats.
Leeson took unauthorized speculative positions primarily in futures linked to the Nikkei 225 and Japanesegovernment bonds (JGB) as well as options on the Nikkei. He hid his trading in an unused BSS error account, number 88888. Exactly why Leeson was speculating is unclear. He claims that he originally usedthe 88888 account to hide some embarrassing losses resulting from mistakes made by his traders. However, Leeson started actively trading in the 88888 account almost as soon as he arrived in...