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Nicholas Leeson is best known for trading the Barings out of existence by hiding losses for years.
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Its epicenter was the prominent port city of Kobe, Japan. Its magnitude was measured at between 6.9 to 7.3, and it lasted 20 seconds and killed over 6,000 residents. Its effect was to cause massive upheaval in the Asian markets as well as in Leeson's plans.
Not to be outdone, and in attempt to recoup his losses,
Leeson then embarked on a series of increasingly risky new investments. He bet that the Nikkei stock average would recover swiftly. This did not occur and Leeson was further compromised.
Leeson carried on requesting funds from Barings to continue trading, in the hope that he would rectify his losses. In three months he purchased more than 20,000 futures contracts—worth around 180,000 dollars each— in an attempt to move the market. His attempts were all in vain, and these trades totaled three quarters of the eventual 1.3 billion dollar loss suffered by Barings.
On February 23, 1995, two days before he turned 28, Leeson decided the situation was beyond his control and he would never redeem himself. He fled, leaving a note that simply stated, "I'm sorry." Barings executives discovered what he had done, were forced to inform the Bank of England. Thanks to Leeson, Barings bank went bust.
The 233-year-old Barings bank incurred losses of 827 million pounds, or $1.4 billion at the exchange rate of that time. The sum amounted to twice the bank's trading capital and reserves, and led to its immediate collapse.
Investors lost their savings and 1,200 employees lost their jobs. Dutch bank ING agreed to assume the majority of Barings's debt and acquired the bank for one pound.
When questioned, Leeson claimed to have opened the 88888 error account to hide a 20,000 pound trade, made by one of his subordinates, which had been incorrectly recorded. In fact, over time, he used the account to cover numerous bad trades of his own. Leeson claimed never to have used the account for his gain but lawyers for Barings eventually found several bank accounts linked to Leeson, with a total worth in the region of 35 million dollars.
Barings was not entirely without blame. Leeson had been able to conduct his dealings in secret and hide his losses from the bank due to an administrative abnormality. Barings management had allowed him to perform functions usually done by two people. That is, in an unethical move, Leeson had acted as chief trader while also settling his own trades.
It was discovered during the investigation that in 1993, an internal memo had been written, warning the London head office of this very problem. "We are in danger of setting up a system that will prove disastrous," read the memo. Nothing was done to resolve the issue. In January 1995, SIMEX communicated their concern about Leeson's activities to Barings, but to no avail.
When Leeson and his wife went on the run, they first fled to Malaysia, then to Brunei and finally to Germany. It was there that the law caught up with him, and Leeson was arrested in Frankfurt airport on March 2, 1995, just less than two months after his first short straddle.
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