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Francis Baring, with his older brother John as a mostly silent partner. They were
sons of John (née Johan) Baring, wool trader of Exeter, born in Bremen, Germany.
The company began in offices off Cheapside, but within a few years moved to
larger quarters in Mincing Lane [3]. Barings gradually diversified from wool into
many other commodities, providing financial services necessary for the rapid
growth of international trade. By 1790, Barings had greatly expanded its resources;
both through Francis' efforts in London and by association with leading
upstairs, above the offices.

sale had the effect of financing Napoleon's war effort. A fall off in business and a
of London to thecrival firm of N M Rothschild & Sons. Barings remained a
powerful firm, however, and in the 1830s the leadership of new Americancpartner

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U.S. government, a position they held until 1871.

through overexposure to Argentine and Uruguayan debt. In 1890, Argentine
president Miguel Juárez Celman was forced to resign following the Revolución del
finally exposed the vulnerability of Barings position. Lacking sufficient reserves to
William Lidderdale. The resulting turmoil in financial markets became known as
the Panic of 1890.

The descendants of five of the branches of the Baring family tree were elevated to
the peerage, with the titles Baron Revelstoke, Earl of Northbrook, Baron
Ashburton, Baron Howick of Glendale and Earl of Cromer..

remained an important player in the market, until 1995.

" " 
The collapse of Britain's " c"  in February 1995 is perhaps the
quintessential tale of financial risk management gone wrong. The failure was
completely unexpected. Over a course of days, the bank went from apparent
strength to bankruptcy. Barings was Britain's oldest merchant bank. It had financed
Queen's bank. 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

The trader was c

 . He had grown up in the Watford suburb of London.

After attending university, he worked briefly for Morgan Stanley before joiningc
Barings. At both firms, he worked in operations, but shortly after joining Barings,
he applied for and received a transfer to the Far East. His first task when he arrived
was working through a back-office mess in Jakarta. The bank was sitting on GBP
100MM in stock certificates and bearer bonds that were not in deliverable form.
Many of the stocks had been purchased on behalf of clients. Because the stock
market had subsequently declined, the clients trying to avoid taking delivery they
complained that certificates were in the wrong denomination, not properly
document or in physically unacceptable condition. Over a period of 10 months,
Leeson worked his way through the certificates, addressing the problems and
making delivery.

Barings had maintained an office in Singapore since 1987. Called Baring

Securities (Singapore) Limited (BSS), it had originally focused on equities, but its
volume of futures trading on the SIMEX (today's Singapore Exchange) was
growing. Without a seat on the exchange, BSS was having to pay commissions for
all its transactions. The next step was to purchase a seat and hire traders.

Leeson's accomplishments in Jakarta attracted the attention of Barings

management. When he applied for a position within BSS, they not only accepted
him, but they made him general manager with authority to hire traders and back
office staff.

Leeson arrived 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 of traders. 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.

1.c transacting futures and options orders for clients or for other firms within the
Barings organization, and
2.c arbitraging price differences between Nikkei futures traded on the SIMEX
and Japan's Osaka exchange.

Perhaps it was the inherent lack of risk in such 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 Japanese government 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 used the
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 Singapore. The sheer volume of his trading suggests a
simple desire to speculate. He lost money from the beginning. Increasing his bets
208MM. Barings management remained blithely unaware. On February 23, 1995,
Nick Leeson hopped on a plane to Kuala Lumpur leaving behind a GBP 827MM
hole in the Barings balance sheet.

Traders sometimes speculate without authorization. Presumably, a few are able to

cover their tracks. Others are caught. When they are caught, they are fired, and
their employer eats the loss. Usually, neither the trader nor his employer has any
interest in publicizing the incident. Leeson made headlines precisely because he
was so unlucky. By the time he was discovered, he had bankrupted his employer.
Publicity was unavoidable.

What is amazing about Leeson's activities is the fact that he was able to accumulate
such staggering losses without Barings' management noticing. As Leeson lost
money, he had to pay those losses to SIMEX in the form of margin. Leeson needed
cash. By falsifying accounts and making various misrepresentations, he was able to
secure funding from various companies within the Barings organization and from
client accounts. His misrepresentations were flimsy at best. For example, he
claimed that he needed funds to make margin payments on behalf of BSS clients,
and he gave a technical argument related to how the SIMEX collected margin as
justification. This claim was false. It was actually against SIMEX rules for a broker
to post its own money as margin for a client. Even if the claim were true, the funds
would have been needed only temporarily until the client could make payment.
Instead, Leeson continued to ask for ever more funding. Most of this came from
three companies within the Barings organization:

Baring Securities Limited (BSL) securities arm of parent Barings Plc.;

Baring Securities (London) Limited (BSLL) BSL's London office;
c Baring Securities (Japan) Limited (BSJ) BSL's Japan office.
c Exhibit 1 tracks the funding of BSS by these three companies in the
months leading up to Barings' collapse.
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Funding for Baring Securities (Singapore) Limited

(BSS) came primarily from three companies within
the Barings organization. This exhibit tracks their
funding of BSS in the months leading up to the
failure of Barings.
Despite his having to fund millions of GBP in losses,
there were various factors that allowed Leeson to
avoid discovery..

" c   c c c

" c cÀ
 
c" 
 c

An abbreviated organizational structure for Barings

prior to the 1993 merging of BB&Co. and BSL.
Entities not relevant to this article have been
omitted. For example, BSL also had offices in New
York and Hong Kong.

In November 1993, BSL was merged into BB&Co. in anticipation of a subsequent

initiative to form a Barings Investment Bank (BIB). The merger was not easy
because the two firms had markedly different cultures. It was a distraction right in
the middle of Leeson's tenure at BSL. The new organizational structure following
the merger is indicated in Exhibit 3.

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cc
c" c cÀ
 
c" 
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An abbreviated organization structure for Barings

following the 1993 merging of BB&Co. and BSL. In
1994, BB&Co. and BSL became part of the new

Barings was just starting to form a risk management function. Risk controllers
were appointed in London, Tokyo and Hong Kong during 1994, but not in
Singapore. In BSS, Leeson effectively controlled the front and back offices. There
was no middle office. Also, there was no single person within Brings responsible
for supervising Leeson.

As part of the 1993 reorganization, Barings had adopted a "matrix" approach to

management of its offices. There was one reporting structure based upon products
that cut across all offices. Another was based upon operations, ensuring local
management of such items as systems, controls, settlement and accounting.
Employees complained that lines of reporting were not always clear.

Leeson was involved with two "products" futures arbitrage and trade execution
for clients or other companies within the Barings organization. During 1994, his
"product" line of reporting could arguably have been to either Ron Baker, who
managed derivatives, or Mike Killian, head of Global Futures and Options Sales.
Locally, Leeson could have reported to James Bax, who was head of the Singapore
office, or to Simon Jones, who was Regional Operations Manager for South East

Another issue was that Leeson was an accomplished liar. He falsified records,
fabricated letters and made up elaborate stories to deflect questions from
management, auditors and even representatives of SIMEX. Leeson actively played
on people's insecurities. He notes in his (1996) book P  that:


Some people did raise concerns about Leeson's activities. In a January 1995
internal e-mail, Brenda Granger, Head of Futures and Options Settlements in
London stated

Awaiting breakdown from my buddy Nick (once they creatively allocate the
Such concerns went largely unheeded. Leeson was somewhat of a celebrity within
Barings. While he was secretly accumulating losses in account 88888, he was
publicly recording profits in three arbitrage trading accounts, numbers 92000,
98007 and 98008. This was accomplished through cross-trades with account
88888. By performing futures transactions at off-market prices, Leeson was able to
achieve profits in the arbitrage accounts while placing offsetting losses in the
88888 account. During 1994, Leeson booked GBP 28.5MM in false profits. This
was a staggering profit to earn from futures arbitrage, but it ensured that Barings
employees earned bonuses that year.

In a famous 1993 quote, Peter Baring, Chairman of Barings, commented to Brian

Quinn, Director of the Bank of England that the recovery in profitability has been
amazing following the reorganization, leaving Barings to conclude that it was not
actually terribly difficult to make money in the securities markets.

Six days after fleeing Singapore, Leeson was arrested in Frankfurt trying to make
his way back to London. He was returned to Singapore to stand trial. Convicted of
fraud, he was sentenced to six and a half years in Singapore's Changi prison.
While there, he contracted cancer, which he survived, and was divorced by his
wife. For good behavior, he was released from prison early in July 1999.