The Collapse of Barings Bank Case, Essay Example

What was Nick Leeson’s strategy to earn trading profits on derivatives?

Nick Leeson wanted to earn a profit by purchasing futures on the Japanese Stock Exchange, which in essence is a gamble on where the market will be at a particular time in the future.  If he guessed correctly, the profits could be phenomenally lucrative.

What went wrong that caused his strategy to fail?

The problem was that as Nikkei continued to fall, Leeson did not learn from his mistakes and get out while he could.  He continued to purchase more of the stock, instead of unloading it when the value fell.

Why did Nick Leeson establish a bogus error account (88888) when a legitimate account (99002) already existed?

He established a bogus account so that none of the higher administrators with Barings would be able to notice what he was doing.  In fact, he used 88888 to put all of the major losses into one account and showed fictitious gains in all of the other accounts.  This earned him a very strong reputation as a top trader in the futures and arbitrage markets.  He was paid over 250,000 pounds every year and earned outlandish bonuses for his apparent success, although it was all a big lie.

Why did Barings and its auditors not discover that the error account was used by Leeson for unauthorized trading?

First of all, Leeson was a well-respected young trader that was only placed in Singapore to do minor arbitrage deals that would yield small profits.  None of the administrators believed that he would be deadline in millions of pounds through unauthorized trading, especially the top officials that he had grown close to over his years as a trader.  Secondly, Leeson has outstanding back room knowledge of the workings of a trading company and used his knowledge to establish the 88888 account and keep the accounting in a positive light where many auditors would not recognize until they became explosively out of control.

Why was Barings Bank willing to transfer large cash sums to Barings Futures Singapore?

They were willing to transfer large cash sums because Leeson and his staff in Singapore continued to show growth each and every year on the accounting books that Leeson would turn in to Barings Bank headquarters.  Again, with his knowledge of back room dealings, his reputation as a top-level young trader, and his close relationships with the top officials at Barings led to them never having a doubt that Leeson and the Singapore staff were doing anything but being successful traders within the authorized trading markets.

Why did the attempt by the Bank of England to organize a bailout for Barings fail?

The Barings debt was so monumental that it really would be been nearly impossible to receive a bailout of that magnitude to cover the costs of Leeson’s market mistakes.  There was a large outcry against Barings Bank, despite its 233-year prominent existence that caused the Bank of England to refuse to organize a bailout for Barings.  Eventually, ING purchased the company and all of its assets for only 1 pound.