Chapter Four

Nick Leeson and Baring Brothers, 1995

There is arguably not a more polarizing figure to emerge in the twentieth century than former British Prime Minister Margaret Thatcher, the so-called “Iron Lady.” On the one hand, she is credited with bringing the United Kingdom out of deep recession, extremely high unemployment, and stagnation. On the other, she’s vilified for the methods she employed to accomplish that difficult task. How is it that one person—the first and only female prime minister in the country’s history—can be simultaneously loved and vilified? The simple answer is that it’s not that simple, but at its core, the answer revolves around her unyielding views about competition.

To truly appreciate Margaret Thatcher, one has to go back to just a few years before her election as prime minister. The winter months of 1978 and 1979 are referred to as the “Winter of Discontent” in Britain. It was the coldest winter in sixteen years, strikes were rampant, and inflation had just come off its peak of 26.9 percent in 1975. Leading with the slogan “Labour Isn’t Working,” Thatcher was one of the loudest voices criticizing the Labour government and its policies, which culminated in her election on May 4, 1979 as prime minister.

Thatcher was a staunch disciple of a laissez-faire approach for government, meaning that she felt the government and regulations should play a minimal role in the economy. Once in power, she privatized the public sector utilities such as gas, water, and electric, including the world-famous Sheffield steelworks.

Left alone during her first term were the English financial markets, housed in the section of London that is colloquially referred to as “The City of London” or “The Square Mile.” The City had been the center of the financial world throughout much of the eighteenth and nineteenth centuries, but following two world wars, New York became the new hub of the world’s financial wheeling and dealing. That said, London was still a major international financial center in Europe, serving the local British economy as well as being the center of the European Eurobond markets, and the world’s largest foreign exchange market.

Throughout its history, the City was run by an “old-boy network”—a system that rewarded those who went to the right English public schools (the equivalent of American private schools), and the right school crest or necktie was more important than actual hard work and intelligence. This insular structure did not end with the people who worked there. Financial firms were also relegated to one of two distinct categories: brokers and jobbers. The brokers were the sales force for the financial system, introducing buy and sell orders to the traders who made markets in the securities, called the jobbers. It was a division of labor that had existed for over two hundred years, and nobody in the City saw any good reason to change it.

Nobody, that is, except for Margaret Thatcher. When the prime minister won reelection in 1983, those who worked in the City cheered her victory. They assumed that because she’d previously ignored the City, they were safe from the Iron Lady’s sweeping changes. In reality, Thatcher was opposed to any industry operating in a protected status, which included the financial services in London. Right after her reelection, she desperately set out to change everything. The brokers, jobbers, and everyone else in the City would soon be subject to reforms.

Under the old system of brokers and jobbers, the brokers were guaranteed a 1.65 percent commission, no matter what. The jobbers made their money through an exclusive right to bid and offer the securities they traded. Who traded with whom was based on relationships; one broker worked exclusively with one jobber. For example, a broker might have an order to buy shares of a particular stock, and the order would be sent to the jobber firm the broker worked with. The jobber got back with a price that made a nice profit, no matter what. Then they celebrated the trade over a leisurely lunch. Everybody won. Well, at least two of the three parties involved won; the big loser in the game was the customer.

The jobbers, meanwhile, had many shortcomings. They were, as a collective group, undercapitalized to properly make markets in the face of any kind of competition. Fortunately for them, the whole system was closed to outsiders in a number of ways. If you weren’t a graduate of a distinguished British public school, you had no chance of getting in. If you were a foreign firm new to the City, you also had no chance of getting in. And if you didn’t have a relationship with a good brokerage firm, you also had no way of getting in. The whole operation was rife with restrictions that afforded entry only to those with certain privileges.

For outsiders, the only sort of crumb thrown to the public was the chance to work for a bank in the position of clerk, a nice position to which a young working-class man would enthusiastically aspire. Clerk was the general name given to the support staff within a bank, including the accounting department and the back office, as well as the mail room. Most clerks would expect to hold the same job for the duration of their working lives, with a possibility of being promoted to the head of their group as the highest achievement.

The upper echelons at banks even had a term to describe the clerks; they called them barrow boys. The derogatory term originated from the boys who pushed wheelbarrows full of produce around the City markets, including the famous Smithfield meat market. The barrow boys who worked at Smithfield’s pushed carts full of fresh and frozen meat up to the vendors’ stalls from the subterranean trains that brought the goods to the marketplace. It was tedious, hard work that was clearly reserved for occupants of the lower rungs of the social ladder. The life of the clerk—just like that of the barrow boy—was the lowest rung for those who worked at London’s banks, and the principle was the same: there was a clear and definite division that protected both the business and social structures.

Margaret Thatcher made her first swipe at reforming the City through a legal action filed against the London Stock Exchange. The lawsuit was later dropped when the London Stock Exchange “voluntarily” agreed to certain concessions, which included, among many things, opening up the financial markets to competition by the end of 1986.

On October 27, 1986, the London financial world literally exploded in what came to be known as the Big Bang. These changes were to become the most sweeping ever in a major financial center in such a short period of time. The private club atmosphere that had long been associated with the City would soon be gone. It would be replaced by what one financial reporter called “the rapacious, bonus-grabbing culture of the investment bank.” It was truly the beginning of modern banking in the United Kingdom. Constraints prohibiting foreign banks and securities firms from joining the London Stock Exchange were eradicated. Suddenly the London markets were open to international players, among them a slew of Americans.

The changes were far-reaching. For starters, the Big Bang ended the exchange controls that required British investors to pay taxes to buy foreign shares. Trading floors became computerized, doing away with the open-cry system that had prevailed for centuries. A regulatory board was created to oversee the deregulation of the markets, and perhaps most importantly, it did away with the antiquated division between the brokers and the jobbers.

For all of the old traditions that were being turned upside down by the Big Bang, much like opinions of Thatcher herself, opinions were both wildly positive and negative, depending on whom you asked. Gone were the days of alcohol-infused lunches where traders swapped stories of their public school days. They were replaced with such American practices as working breakfasts, cutthroat competition, and eighty-hour workweeks. As more foreign firms moved in, even more of those American practices were to follow, such as eye-popping bonuses on top of six-figure salaries. As one reporter described it, “Britain’s laxer regime brought an influx of U.S. firms, with their chinos, booze-free lunch breaks, and bumper bonuses, helping to bust open the old City cliques.”

As these new changes took root in the City, the financial industry also shifted its focus from longer-term client relationships to a more short-term approach—whatever made the most money in the least amount of time. The business model became one based on competition; the broker who got the trade was the one that offered the best price at that particular time.

The changes were immense and, as it turned out, permanent. Two centuries of tradition came crashing down literally overnight. But despite the rapidly changing landscape, there were still a few longtime residents of the City who resisted the new developments. Those old stalwarts were the keepers of the banking tradition; they had ruled the London financial world for years and weren’t anxious to step into the brave new world that became the City in the late 1980s. Some of those firms continued to act as if the Big Bang never even happened. One of those tradition-steeped institutions was Baring Brothers.

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Baring Brothers was known as the world’s first modern-day merchant bank, and the Baring family sat high on the English social ladder, including six peerages, five of which are still active today. Earls, viscounts, and barons all graced the branches of the Baring family tree; at one point, the Princess of Wales was the great-granddaughter of a Baring. One Baring went on to head the Admiralty under Prime Minister Gladstone, and one became the controller-general, then consul general of Egypt after serving as financial advisor to the British Viceroy of India. So great was the bank’s reputation that the Duc de Richelieu once said, “There are six great powers in Europe: England, France, Prussia, Austria, Russia, and Baring Brothers.”

Baring Brothers was founded in 1763 by the brothers John, Francis, and Charles. Their father had moved to England in 1717, originally as an apprentice to a wool merchant. By the time of their father’s death in 1748, the family was fast becoming one of the wealthiest in England, and within forty years of the bank’s founding, Barings was recognized as the most important merchant bank in the world.

The secret to the family’s success was good old-fashioned, steeped-in-tradition, nineteenth century–style banking. Barings had a strong presence in the New World, from financing the silver exports from Mexico to managing loans for the governments of Chili and Argentina. The family also played a big role in financing the newly formed United States: Alexander Baring presided over the loan negotiations when the country needed a $15 million for a real estate deal known as the Louisiana Purchase. Then the Barings went on to assist Cornelius Vanderbilt with the financing of vast railroad construction.

With its financial pedigree, experience, and connections, it stands to reason that the bank was always on a solid footing. But it was not the case by the late nineteenth century, when Barings’ loan portfolio was dominated by loans to Argentina. At that time, as much as 50 percent of England’s international investments were housed in that South American country, and Barings too found itself overexposed. In 1889, Argentina was effectively bankrupt. The country defaulted on its loans, and the country’s inability to make interest payments brought Barings to the brink of collapse.

Under the direction of the Bank of England, the other City banking houses attempted to set up a financial syndicate to save Barings. At first, London’s second-highest-regarded bank, N. M. Rothschild and Sons, refused to participate unless the English government joined in on the rescue fund. After repeated and increasingly forceful requests from the Bank of England, Lord Rothschild finally relented: “If capital is needed, I am here with £50 million.” Barings had been saved, but a lesson had also been learned. Baring Brothers & Co. was reorganized as Baring Brothers & Co., LTD, one of the first banks to become a limited liability company. Banking was clearly not without risk, and the Baring family was not about to risk its fortune again.

By the 1980s, Baring Brothers was still under the tutelage of the Baring family, with Sir John Baring serving as chairman, Nicholas Baring as deputy chairman, Peter Baring as senior finance director, and three other Barings working at the bank. The interior was much like you’d expect in a traditional British bank: old share certificates and ventures framed on the walls, an open fire burning in the hearth, and the partners sitting at large oak desks. Modern-day Baring Brothers was clearly still run like a gentlemen’s cooperative.

In the 1990s, Peter Baring succeeded his cousin John as chairman of the bank. In his fifties, Peter was known as an aloof man, which well suited the bank’s reputation. Baring Brothers, however, was being confronted by the same forces of change as other City banks. The irony was that Baring Brothers represented both the old and the new City together in one institution. Nowhere in any other London bank did a contrast exist such as the contrast between Baring Brothers and its subsidiary, Baring Securities.

Baring Securities was the brokerage arm of Barings Brothers and had ridden the tide of modernism wrought by the Big Bang. Money was the name of the game at Baring Securities, and any trader or salesman who was worth the title wanted as much of it as he could make. This arm—prosthetic as it might seem—was added in the mid-1980s, the time when Wall Street operating by the slogan “greed is good.”

Baring Securities broke with the Baring Brothers traditions when it came to just about everything. Whereas Baring Brothers had valued hiring people from the right schools and family ties, Baring Securities hired people who were hungry and aggressive, people who wanted to make money—lots of money. Whereas Baring Brothers had the same City address for over two hundred years, with all the style anyone would expect, Baring Securities had a shiny new office, decorated in Art Deco and located outside of the City in, ironically enough, America Square. Inside, the heart of Securities was the football field–size trading floor, with all the hustle and bustle of traders yelling and screaming across the floor to get their trades done. Baring Securities was immensely successful. Within ten years of its founding, it had grown from a twenty-man operation to one that employed over 1,400 people.

When Baring Brothers had wanted its firm to move away from the relatively safe harbor of the British markets and return to the emerging markets, it looked for the right operation to take it there. Because the wounds of its South American experience were still present even a hundred years later, the firm cast its eyes on Asia. In order to make that move, it looked to one man—the man who built Baring Securities from the ground up, the son of an Army general named Christopher Heath.

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Christopher Heath was many things to many people, but a prototypical Barings executive he was not. Born in 1946, Heath’s first career was a brief stint with Imperial Chemical Industries in the 1960s. One night at a dinner party, Heath was seated next to a City stockbroker who was working at a firm named George Henderson & Co. After speaking with the man all evening, Heath was hooked. The lure of money just waiting to be made was too much to pass up. It was surely the stockbroker’s life for him. And as luck would have it, George Henderson & Co. was recruiting new salesmen; Heath quickly joined the firm in February 1969.

After a few years of learning the ropes, Heath found himself a niche business selling Japanese stocks to British investors. Up until then, it was widely assumed within the ranks of British banks that the Japanese market was pretty insignificant; there just wasn’t anything going on. It was a modest point of interest at best. However, no one had counted on the Japanese economy growing as quickly as it did in the late 1970s and 1980s. By 1982, Heath was making a killing selling all kinds of great-performing Japanese securities to his customers, including a big array of Japanese equity warrants, which were completely underpriced at the time.

Heath was doing so well that he was allowed to spin off his part of the operation into what became Henderson Crosthwaite (Far East). The success he experienced didn’t go unnoticed at other firms, with Baring Brothers being one of them. In 1985, Barings expressed an interest in acquiring Henderson Crosthwaite (Far East), and a deal was struck to sell Heath’s business to the London financial stalwart for £5.8 million. The new acquisition would be called Baring Securities.

Heath continued under the newly branded name of Baring Securities, making what could only be called spectacular profits trading stocks in Japan. The new firm was wildly successful, even beyond the most optimistic of expectations, riding the spectacular gains of the Japanese economy. Whereas Baring Securities had been projected to turn a £3 million profit in its first year in 1986, it made £10 million. The cost of acquiring Heath’s business had been covered in a single year’s profits, with a few million pounds to spare.

By today’s standards, the person in charge of a company that’s so successful expects to be compensated handsomely. But this was Britain and this was Baring Brothers, where million-dollar bumper bonuses weren’t quite as ubiquitous as they are on Wall Street today. Those expectations were just starting to drift across the Atlantic following the Big Bang, and the traders and salesmen at Baring Securities expected to be compensated well beyond their peers at Baring Brothers. Heath was reportedly making £3 million a year in salary, plus a share of the profits generated by Baring Securities. That amount alone totaled over £33 million over his first six years at Barings, making Heath not only the highest-paid executive at Barings, but also in the whole of Great Britain.

At that time and place, Heath’s salary was high, scandalously high. And when word got out to the press and back to other Baring Brothers partners—some of them descendants of the actual Baring brothers—there was a less-than-generous response. The executives at Baring Brothers began to clamor for an undiluted ownership of Baring Securities. They were fine with Heath making incredible profits; they just didn’t want to share so much with him.

Heath, not surprisingly, was not interested in changing anything. He had grown accustomed to his wealth. He’d purchased for himself a 391-acre home and a stable of thoroughbred racehorses. His expansive home was appointed with the finest in English antiques and fine art. And when not at home, he could often be found lounging on his 148-foot yacht. Life was certainly good for Christopher Heath. He was making a fortune and was firmly in control of Baring Securities, surrounded by a fiercely loyal group of top producers.

Baring Securities was well entrenched in Asia when the Big Bang occurred. The Big Bang meant exchange controls were lifted, and Japanese securities were wide open to British investors. British money continued to flow into Japan, and Heath’s business sought out new avenues to generate more profits, expanding into derivatives trading and joining the different Asian futures exchanges, including the Singapore International Monetary Exchange (SIMEX) in 1987. The next year, the firm posted a staggering £60 million profit.

Everything was going well, and everyone was pretty happy at Baring Securities. The team in Tokyo was once described as “a loose group having a really exciting time.” Another executive said that in Asia, “there was much more freedom and a lot less compliance.” In other words, all of that business was being exploited by the successful traders and salesmen who worked there. Heath himself was no exception; he was constantly searching for “more money and less interference from London.” In other words, he wanted the executives at Baring Brothers to leave him alone to make his fortune.

But just like any good party, this one had to come to an end. In 1992, Baring Securities posted its first monthly loss in history. It was a small loss by all standards, but the Baring Brothers executives now had an excuse to rein in the organization that they saw as out of control and playing by its own rules. Heath was running the company as his own personal fiefdom, and they wanted it stopped immediately. Though Baring Securities ended up turning a profit for the year, it was a far cry from what it made in 1988. The firm had still made £10.8 million for the year, but it had commitments to pay out £18.5 million in bonuses. The problem was that paying out more in bonus than it had made was not part of Heath’s original deal with Baring Brothers.

Baring Brothers agreed to fund the year’s bonus payments, but there was a catch. Changes in management were required in exchange for its financial generosity, and Heath was part of the collateral damage. He was officially asked to leave the company in 1993, and he was not the only victim of the restructuring. Many of his loyal managers and other traders were let go too. There was a full-fledged purge in the upper ranks of Baring Securities, with Peter Norris, a longtime Baring Brothers executive, moving into the role of CEO.

Unbeknownst to them, the culture at Baring Securities was completely foreign to the partners of Baring Brothers. When Peter Norris moved into the executive suite, it was just a culture he didn’t understand. It was one thing to take control, but it would be another thing to manage. And trying to manage Baring Securities was, perhaps in hindsight, a grave mistake.

Heath had fostered a culture of aggressiveness at Baring Securities, a win-at-all-costs sort of attitude. “You don’t understand these guys,” he once told his bosses at Baring Brothers. “In our world, someone who gets £1 million just wants to make £2 million.” Perhaps most importantly, he was famous for asking those he interviewed, “Are you hungry?” If the answer had anything to do with money, the candidate was a shoo-in for the job. He reasoned that a trader who was hungry would work that much harder to make even more money. But Heath didn’t factor in another biological reality, namely the fact that a hungry animal—no matter if it walks on four legs or two—will take greater risks the hungrier it is. And while Heath might have been asking the question metaphorically, in reality he was asking recruits if they were willing to take whatever risks were required to make the most money. If they said they were, they got the job.

As it turns out, Nicholas Leeson was one of those recruits; he was very hungry.

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Nicholas William Leeson was born on February 25, 1967, in the London suburb of Watford, a town consistently ranked well below the national average in terms of income. He was the first of four children; his father Harry was a plasterer and his mother Anne a nurse. Though they were far from living on the brink of starvation, the family was nevertheless working class, and the combined income of his parents did not allow the family to own a home. All six of them lived in a small flat. It was a place that bred a kind of hunger, the kind of hunger to get out of Watford and make something of yourself.

Leeson attended Parmiter’s School, where he was better known for his soccer playing than his academics. His performance in school—coupled with his parents’ meager income—meant that college was certainly not in his future. As Leeson set his sights on working in the City, his basic education and lack of family connections meant he was only a candidate for the job of clerk, and he was lucky if he got such an opportunity.

As luck would have it, Leeson did just that after he graduated from high school in 1985. He was offered a position as a junior clerk with Coutts & Co., one of the City’s oldest and best-known financial institutions. He worked hard, but also played hard. He was only 18 years old, so perhaps he should be forgiven for some of his well-known social transgressions. At night after work he found himself overindulging at local pubs and involved in fights, and there was sometimes police involvement.

His temperament was indicative of his aggressive nature, and when the Big Bang hit in 1986, that personality would serve him well. A friend told him of a job opening at the newly formed office of Morgan Stanley. They were looking for a settlement clerk, a small step up from his junior clerk status, so he applied for the job and was hired in 1987. There, he found himself in the right place at exactly the right time.

Morgan Stanley had offered Leeson one of two positions: he could choose to work in either foreign exchange settlements or in futures and options settlements. He opted for the latter, working in the back office, processing trades as well as confirming contracts and money movements with other companies. The money was good for Leeson; a £20,000 base salary plus a £20,000 bonus was a huge sum compared to what his friends were making back home in Watford.

Leeson was able to build a strong reputation for being hardworking and extremely detail-oriented. Though he had bigger dreams for himself, he was well known for a variety of boasts around the office. One was a claim that he had played semiprofessional soccer for an English team named Hayes, which was part of the Isthmian League. While it is true he was an exceptional athlete in high school, there was no record of him playing for Hayes or any other semipro team. His story hit a snag when a coworker attended a Hayes game and noticed quite obviously that Leeson was nowhere to be seen.

The boasts hinted at the bigger picture of Leeson’s aggressive nature and his desire for more. Soon after, he turned in his resignation to Morgan Stanley, giving the firm a month’s notice of his intention to leave even though he did not have a new job.

Luckily, his unemployment didn’t last long, as he started at Baring Securities in July 1989. During the interview process, Leeson was asked about his career ambitions, and he replied quite frankly that he wanted to go into trading, despite the fact that he was not one of the City’s educated and connected elites. “I have a low boredom threshold,” he told the interviewer. His hunger propelled him forward, and he joined the settlements division at Baring Securities, again in futures and options. There, he quickly established himself again as someone who worked hard, and he proved he was more than capable. His superiors took notice; the working-class kid was clearly head and shoulders above his social peers.

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The Jakarta Stock Exchange in Indonesia has something of a turbulent history. It was first opened in 1912 by the Dutch colonial government, but faced closures during World War I and World War II. It was finally reopened in 1977, and Baring Securities was one of the first European banks on the scene. The move, however, was not without logistical difficulties. For starters, Barings had no office in Jakarta. Instead, the employees there worked out of a room at the Hotel Borobudur. The lack of a traditional office was only a minor setback compared to the backlog of approximately £100 million in unsettled East Asian stock certificates the firm had accumulated by 1989.

At that time in Asia, stock certificates were mostly issued in physical form, unlike today, where securities are electronic and transferred from one account to another via computer. Such a backlog was symptomatic of problems that plagued Baring Brothers collectively. On one hand, Baring Brothers was entrenched in its past traditions; on the other, Baring Securities rushed into new markets without much thought as to supporting the new businesses. Regardless, Barings needed someone to sort things out, and that someone was Nick Leeson.

At the end of 1989, Leeson traveled to Indonesia to sort out the Jakarta mess. The certificates were housed in a windowless, airless room that more closely resembled a medieval dungeon than a world-class clearing depository. Papers were scattered everywhere, many of them damaged. The certificates were oftentimes in different denominations, with the purchases not matching up with the sales. Leeson had to match up all of the shares with the clients’ accounts and sort it all out. It was a Herculean task.

He labored for three months on his own before Barings sent reinforcements to assist him. One of those reinforcements was a woman named Lisa Sims, who would later become Mrs. Nick Leeson. After a year’s work, the team managed to whittle the amount of outstanding certificates down to a mere £10 million, an amount that was acceptable to Baring Brothers, at least for the time being.

The executives who assigned Leeson to the Jakarta cleanup were very impressed with his work and dedication, and as a reward, Leeson was tapped to run the firm’s new operation in Singapore. Barings had acquired a seat on the SIMEX exchange back in 1987 but had yet to make it operational. The firm needed someone to set up the office, hire the staff, serve as the general manager, and make the whole thing profitable. That is, it needed someone with the kind of dedication and drive that Leeson had exhibited in Jakarta. At the age of twenty-seven, Nick Leeson was offered the opportunity of a lifetime for a kid from working-class Watford.

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SIMEX was a futures exchange modeled after the old-school style of open-outcry trading—characterized by traders wearing oddly colored jackets, shouting at the top of their lungs while making various hand gestures. It was throwback to the old trading pits of its earliest days, before modern technology began to creep in. Despite the fact that it was a relatively small marketplace, many customers preferred to trade on the SIMEX because it had less rigid rules than other exchanges, including lower margin requirements.

Margin deposits are a fail-safe for exchanges, as they provide a cash cushion to offset potential losses if members are unable to pay their bills. At the end of the trading day, the exchange tallies up each broker’s open contracts and sends the broker a margin call—a request to pledge either cash or securities to the exchange. The exact amount depends on a number of factors, including the rules of the exchange, the volatility of the market, and the underlying instruments.

After receiving the margin call, the futures broker will then collect the requisite margin amount from his own customers to cover the payment. The one caveat is that brokers are allowed to calculate their clients’ collective positions as a net amount. In the event that one client is long a contract and another client is short the same contract, the broker is not required to deposit any margin at the exchange. However, the broker still collects margin from both of the individual clients. Additionally, because customers often don’t want to be bothered with margin deposits every day, they will typically leave “excess margin” on deposit to cover the day-to-day margin calls. The end result is that the futures broker often has a lot of excess margin sitting around in the account—funds that can be invested at a profit.

The futures market is also what’s called listed derivatives, or sometimes exchange-traded derivatives. In basic terms, a derivative is a contract whose price is determined (or derived) from the price of another instrument—like a commodity or a stock index. It’s the equivalent of a bet at an athletic event. For example, if two men are sitting at a football game and they want to bet on the outcome, they’re betting who wins and who loses that particular game. They have no stake in the ownership of the team, the TV rights, which players are in the lineup, or what plays the coach calls. Rather, they’re simply betting on the outcome of that game.

The value of the S&P 500 stock index is a good example of a financial instrument used for futures contracts. Contracts are traded based on the price of that index at some month in the future, say December. If the price of the S&P 500 drops twenty points today, that decline will be reflected in the value of the December S&P 500 futures contact.

One important thing about exchange-traded derivatives is that they are regulated and standardized. Futures contracts trade on exchanges like the Chicago Mercantile Exchange (CME) or the London International Financial Futures Exchange (LIFFE), and they have predetermined delivery months and a strict delivery requirement for the underlying instrument, such as a specific type of wheat. And standing between the two parties in the transaction is the futures exchange’s clearinghouse, which guarantees the payment of the contracts.

One of the most important stock indices in Asia is the Nikkei 225, which is much like the S&P 500 or Dow Jones Industrial Average in the United States, but it’s a basket of 225 Japanese stocks. Nikkei stock index futures happen to trade on both the SIMEX and the Osaka futures exchanges. In the case of the SIMEX exchange, the market is smaller and less liquid, meaning that large orders can have major effects on the market, pushing prices one way or another. By contrast, the Osaka exchange is larger and more liquid; being the main futures exchange in Japan, it gets much of the domestic trading volume. And just as London evolved from open-outcry exchanges before the Big Bang to electronic trading, so too were similar changes happening in Asia. Osaka was an all-electronic marketplace, whereas SIMEX was still open-outcry. The differences in geography, open-outcry versus electronic, and market depth between the SIMEX and Osaka all created opportunities between the two markets.

Trading methods weren’t the only difference between the two exchanges. Whereas the SIMEX had minimal margin requirements, the Osaka exchange initially required a 9 percent margin deposit. Then in the summer of 1992 the Japanese government imposed tighter restrictions on the exchange, and the Nikkei 225 futures contract margin was ramped up to 15 percent. The new rule also required that no interest could be paid on those deposits. It created a much higher cost of doing business on the Osaka exchange, and many customers fled for the friendlier environment at the SIMEX. The result was a huge influx of new customers to the market where Baring Securities was by now a fixture.

And the main fixture at the Baring Securities Singapore office was Nick Leeson, its hard-working and hard-partying manager. He worked long hours—usually coming into the office at dawn and staying long into the evening. But after work, he was drinking just as hard as he worked. As one colleague said of the newly married Leeson, “His behavior was more like that of a bachelor.”

Despite his status as the office manager, there were two immediate supervisors who Leeson reported to: Ron Baker, a hard-working Australian, and Simon Jones, the regional operations manager of Barings South Asia, who everyone knew cared little for futures and options. Jones was officially in charge of the office and was Leeson’s direct boss, even though everyone on the trading floor knew that Leeson was really running the show.

Leeson and the other Barings floor traders had no authority to trade for themselves; they were strictly there to fill orders on behalf of clients. The Singapore operation was off to a good start, as Leeson was providing excellent service filling futures orders and bringing in new revenues to the firm. His trading floor skills were so immediately apparent that the Baring Securities’ traders in the Tokyo office even gave him the authority to hedge their positions at his own discretion.

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One of the many reasons why exchanges worldwide moved away from open-outcry to computer-based trading was to minimize trading errors. Amidst the confusion of a crowded trading pit, with traders yelling and gesturing at one another, it was easy for an order to be misunderstood by one party or the other. It wasn’t uncommon for pit traders to make errors such as booking the wrong amount or booking a trade the wrong way. For example, an order might be understood to be five contracts when it was supposed to be fifty. The trader simply heard the word “five” as opposed to the word that had actually been said, namely “fifty.” Worst-case scenario, an order yelled over to the pit trader was intended to be a buy order and understood as a sale. Any trade that doesn’t match what the other counterparty knows is called an out trade.

In cases of small discrepancies in the execution of futures orders, brokers typically rely on the firm’s error account. This is a cash reserve that serves the exact purpose its name suggests—covering trading errors. Generally such an account is reserved for small errors, problems that are less than $1,000.

Baring Securities maintained its own error account for futures out trades in its London office in an account numbered 99905. But as the volume of transactions in Singapore grew, so too did the number of minor trading errors the office was forced to account for. It became a quite the tedious and time-consuming process to maintain the error account in London, so the home office authorized Leeson to open his own error account in Singapore.

On July 3, 1992, Leeson was told to open an account and instructed to hold any minor execution errors there, sending only margin call requests back to London. He set up an account numbered 88888, or the “five eights account,” as it was called, to serve as the number on the account. Singaporeans are very superstitious as a population, a characteristic passed down from their Chinese origins, and the number eight was thought to be a lucky number. Because more eights meant greater luck, it was assumed that five eights would be a very lucky account number indeed. It would not turn out to be quite so lucky for Leeson, however.

The new error account got its first use just a couple of weeks later, on Friday, July 17. That Friday, a new clerk on the trading floor made what can be called a grave mistake—she sold twenty March Nikkei futures contracts instead of buying them. The problem was intensified when the error wasn’t discovered until the end of the day; by that time, the Nikkei was up four hundred points, and the loss realized by her gaffe was up to £20,000.

In the young clerk’s defense, she was new to the profession. Barings management had cut costs by hiring young and inexperienced personnel, as they were only paying clerks £4,000 a year in salary. But more importantly, her error opened the door for Leeson, making him realize he could easily hide losses as he saw fit. His plan was to temporarily hide the loss in the five eights account, giving him time to work his way out of the problem.

In order to do so, Leeson booked a fictitious trade with a customer, Fuji Bank, for the twenty contracts mistakenly sold. After “buying” the contracts back from Fuji Bank internally, he booked the trade in the 88888 account, leaving a £20,000 loss. It was a temporary fix, he reasoned. It would be there just long enough to avoid showing the loss over the weekend. He naturally planned to cover back the loss when the market opened again on the following Monday.

That Monday morning, Leeson studied the market conditions in the trading pit before the opening bell. The rally on that previous Friday was a big one, and he reasoned that investors would be pulling back at the start of the day, selling off to book some profits. His instincts were wrong, however, and the market continued to surge ahead. Rather than admit the error, he continued to hold on staying short the contracts. By the end of the day the loss was up to £60,000, an amount he couldn’t possibly admit to Simon Jones.

Since he couldn’t go to the London office to cover the shortfall in the 88888 account without the error being discovered, Leeson searched for another way to cover the funds. The easiest source of immediate cash was the excess funds in the customers’ margin accounts. Of course, that was supposed to be sacred money; the funds were only supposed to cover margin calls. But Leeson told himself he could use it temporarily as a short-term loan and pay it back before anyone knew it was gone. There could be no harm done, really.

Baring Securities kept its clients’ margin deposits in an account at Citibank in Singapore. With all of the clients that Baring represented, there was plenty of money in the account, so it was an easy source of cash. But Leeson had to get access to it first. He had no specific authority to withdraw funds from the account, but he was allowed to channel excess funds from one account to another. All he had to do was redirect money into the 88888 account. And because he was in charge of the back office, there was no one to challenge his money transfers that were now covering the losses. Problem solved.

The excess customer funds were sufficient for a while, but they began to run out as the losses mounted. Soon after the first trading error, Leeson made one himself when he incorrectly sold twenty Nikkei futures contracts instead of buying them on behalf of a client named Mitsuko. By the time Leeson figured out his mistake, the market had jumped up two hundred points, and he lost £18,000. Of course, the new loss went straight into the 88888 account.

By the end of 1992, an additional thirty errors had sapped up the resources of the 88888 account and the excess margin—a fact that should have been a stark embarrassment for Leeson, though he was still determined to make it all back. Before he could do that, he had to juggle more accounts to hide the losses for the month-end reports, which were being checked by the accounting department. Fortunately for Leeson, the Citibank margin account held a good chunk of money in it; at one point, he was siphoning £3 million out of it daily. When that wasn’t enough, he was also able to deduct some of the losses from its futures trading commissions, yet somehow nobody seemed to notice. Leeson would later say of his use of margin funds, “My dabble in error account 88888 had been a useful way to buy time.”

His secret was safe for time being, but the 88888 account was becoming something of an addiction for Leeson. By having a fallback to cover any trading errors, he garnered a reputation for giving clients fantastic executions in the futures pits, though many of those orders really resulted in losses for Barings. It wasn’t a problem for Leeson, though; any bad fills were just dumped into the 88888 account. In reality, had it not been for the 88888 account, he would have been just another run-of-the-mill floor trader. But because he had a method to cover bad fills so easily and not have to account for them, he seemed to have a Midas touch in the pit. His vanity grew by leaps and bounds, and he did everything he could to enjoy his rock-star reputation.

As the losses accumulated further, it became increasingly difficult to hide them. After a while, he was at his limit with the client margin and with using the futures commissions. One more titanic blunder on an order and the difficulty was about to go up exponentially. The inevitable trade happened when the wrong direction was executed on a particular sell order. The intent was to sell one hundred Nikkei futures contracts, but the floor trader had bought them instead. The market was moving fast and the immediate loss was up to £150,000; Leeson knew “[w]e were in trouble,” as he later said of the incident.

The amount was too large to charge against the commissions or the margin account; there just wasn’t enough there to cover the loss. Of course, the easiest option would have been to ask the London office to wire in the money after admitting a mistake, but that thought ran against every grain of Leeson’s ego. He couldn’t do that. He had to come up with a new way to raise money, and the only thing he could think of was to sell some options.

Options are financial contracts that give one party the option to buy a stock or a financial instrument from another party. The option contract is only good for a specific period of time and at a specific price; the date is called the expiration date, and the price is called the strike price. Options come in two varieties, calls and puts.

A call option is the option to buy a financial instrument, whereas a put option is the option to sell it. For example, if a trader thinks a stock is undervalued and expects the price to go up, a call option allows the trader to purchase the stock at a specified price if the stock’s price indeed moves higher. Assuming the trader bets correctly, he doesn’t have to actually own the stock to participate in the stock price appreciation.

On the reverse side, if the stock price falls, the trader is only out the money he paid to buy the option. And that’s the important point here. When traders want the right but not the obligation to buy something, they have to pay a price for that right. That’s the price of the option, or the premium. Say a trader paid $1 for the right to buy a stock at $10 a share. Someone else was willing to sell the trader that option, and was paid $1 a share. If there were one hundred thousand shares involved, the buyer is paying $100,000 for the option to buy, and the seller received a $100,000 premium by selling the option. The seller just made a lot of money, but also took a lot of risk, sometimes a huge amount of risk. If the stock price moves higher, the seller must deliver those shares at a price of $10, no matter where the stock is trading. The stock’s price could reach $15 a share, or even $30. Selling options can be very risky, and options traders have been known to take significant losses.

The upside for traders who sell options is that they keep the premium if the price of the security remains the same or goes down. In both of these cases, the option expires worthless with no further money changing hands. That’s the scenario that Leeson was banking on when he first walked into the Nikkei futures options pit to sell options. Let’s just say he was hanging his future on it.

Leeson reasoned that if he sold two options at the same time, puts and calls, he could collect premiums and be partially hedged against the market moving slightly in one direction or the other. On the last day of the month, right before the London office reviewed his reports, he sold the two options simultaneously, which is the practice known as selling a straddle. In the straddle, Leeson collected the premiums from the options buyers and prayed the market didn’t move suddenly before he bought back them back. On the first day of the next month, he bought back the options, giving back the options premiums to the traders in the options pit. It was an easy way to dig up some quick cash. Again, the risk was large, but it was only for one day, just enough to cover up his hole, at least as far as Barings in London was concerned.

When the dust had settled on his first straddle trade, Leeson had successfully raised £3.7 million in funds for that one-day period. What’s best, he had found a new source of cash to cover his burgeoning losses. There was, however, one problem with his straddle strategy, Leeson knew futures contracts really well, but options were a whole different world; he didn’t fully understand the intricacies of pricing them. When he walked into the options trading pit on the last day of the month, he was flying blind by all standards—overpaying every time he bought and sold. Options traders use sophisticated pricing models to determine where they buy and sell, whereas Leeson only knew that he needed money right then and there, and he didn’t have any other way of getting it. He had to take whatever prices they were offering.

None of the options traders had an inkling that Leeson was trading for his own account; they simply assumed he was trading for a client—a misinformed, misguided, and just naïve client. But despite his success is raising funds, Leeson was also losing as much as 10 percent of the cash he was generating just by paying the bid/offer spread by getting into the trade one day and getting out the next day. Over the course of a year—twelve months—it meant paying 120 percent of whatever amount he was borrowing, a fact that clearly made the options traders very happy. He actually became pretty popular in that area of the exchange too, and his activity in both futures and options around the SIMEX didn’t go unnoticed. After a while, he caught the attention of a man named Ang Swee Tian, the president of the exchange, who then introduced Leeson to a “valued client of the SIMEX,” a man named Philippe Bonnefoy.

*   *   *

Bonnefoy was what a Las Vegas casino would refer to as a whale. He traded upwards of five thousand Nikkei futures and options contracts daily, a number that put him second to only the legendary George Soros in terms of trading volume. His company was the Bahamas-based European Trust and Banking Company, and he wanted Leeson to handle the execution of his trades. In other words, just the buying and selling component—the clearing was handled by FIMAT, the futures broker owned by the French bank Société Générale. Bonnefoy also valued his privacy; his name was not supposed to become public, even within Barings. Around the firm, he would only be known only as “the mystery client” or “client X.”

Just days after their initial meeting in February 1994, Bonnefoy gave Leeson an order to buy four thousand futures contracts. It was a sizable order, and generated a commission of approximately £8,000. Bonnefoy immediately liked the futures prices Leeson got for him, so perhaps Leeson’s reputation as being able to execute the best prices was true; he therefore sent his new trader more and more of his business. The increase in orders added to Leeson’s status around the pits as well as in the halls of Baring Securities. From all angles, Leeson appeared to be a rising star.

As time passed, Leeson continued to afford Bonnefoy the same privileges he extended to his other clients—filling orders at extremely good prices and booking any losses in the 88888 account. Any mistakes or bad fills just ended up in the error account. One thing to remember: more volume meant more mistakes, which also meant the losses in the five eights account were growing. They culminated when Leeson mis-executed a straddle options trade on behalf of Bonnefoy that resulted in a loss of £650,000.

Speculation as to the identity of this mystery client ran rampant around the Barings offices. Most people assumed it was a hedge fund, but nobody was sure. The partners at Barings, however, just knew that Leeson was making a lot of money executing trades for the client, whoever it was. Peter Baring, speaking to the Bank of England about the surge in Barings Securities’ profitability, described it as “amazing.”

The mood at Baring’s Singapore office was equally jovial. This new client was helping Leeson dig himself out of the financial quagmire he’d created with the 88888 account. Other traders on the trading floor were in awe of the size of Leeson’s trades. At one point in July of 1993, Leeson actually managed to erase all of the losses in the 88888 account. He was once again on top of the world. As one trader put it, “He began to believe his own press clippings.” But just as Icarus flew too close to the sun and the wax on his wings began to melt, Leeson fell back to Earth; Nick Leeson was destined for collapse.

As Bonnefoy was pushing larger and larger trades Leeson’s way, the execution errors magnified. Given the young and inexperienced staff at Baring’s Singapore office, the chances of an error on any transaction were better than average. Most firms would have looked at the situation and realized there could be problems, then incorporated changes to limit the risks. But Leeson was young and wanted to prove himself. Rather than admit he needed additional help, he just continued to hide the losses the same way he’d done in the past.

The losses, however, began to pile up again. In the late summer of 1993, a loss totaling £70,000 ended up in the 88888 error account. Then, in September, a computer shutdown on the Osaka exchange sent orders scrambling into the SIMEX. On the first day, Leeson finished with a £75,000 loss and obviously expected to make it back the next day. Once again, the financial gods weren’t smiling down on him, and when the market turned against him, he found himself down a staggering £1.7 million.

Had these losses been discovered when they were still small, something could have been done to prevent them, or at least minimize them. Just having the error account located in London would have made all the difference. By now Leeson was convinced that he could trade his way out of anything, much like a gambler who doubles down after losing. Casinos stay in business for a reason: the gamblers keep coming back.

Losses aside, within Barings Leeson appeared to have all the markings of a major success, and in October 1993 he was promoted; with the title of assistant director, he was officially given charge of both trading and settlements. At the same time as his promotion, his losses added up to £32 million, all of them sitting in the 88888 account. At the end of the calendar year, he was able to scrape together £6.5 million from the customer margin account at Citibank, plus a last-minute £25 million from selling options. He was safe for the moment, but he was clearly at the end of his rope. He must have known, on some level, that neither of his cash sources was going to hold out forever. But he was able to close out 1993 on a positive note, taking home a £135,000 bonus from Barings.

Within a month, however, nothing was going his way. His losses had grown once again, this time up to £50 million, and the end of the month was rapidly approaching. He needed to find some money fast, or it would be clear that something was amiss in Singapore. Leeson’s ego—or perhaps his naïveté—wouldn’t allow him to admit the losses. He still needed to prove himself. At this point, he was in dire need of a major cash windfall if he was going to successfully navigate his way out of his mess. The losses had grown so large that even selling options straddles wasn’t enough; raiding the customer excess margin wasn’t either. In a last-ditch effort to save himself, Leeson opted for a radical plan. He invented a new business strategy for the Singapore office that he called “switching.”

His new business was modeled on the art of arbitrage. In financial terminology, arbitrage is the exploitation of price differences between two different markets. In the futures world in Asia, a trader could theoretically make money buying and selling the same futures contracts on two different exchanges. Think of how many exchanges around the world trade wheat or metals. For Leeson, the main futures contract on the SIMEX exchange was the Nikkei 225 stock index, which was also traded on the Osaka exchange. Given that Nikkei futures often moved more quickly on the SIMEX than they did on the Osaka exchange, there was an opportunity to profit by arbitraging the prices between the two exchanges. And because Baring Securities was one of the few brokers who had seats on both exchanges, Leeson was in the position to do exactly that.

The only thing standing in his way was his lack of funds, but that was easy enough to overcome. Leeson managed to convince those in London that he was uniquely positioned to spot tiny differences in the prices of Nikkei futures contracts between the SIMEX and Osaka exchanges, and he could make massive profits exploiting them. He just needed the London office to wire him funds to post as margin for his trades at the exchanges.

Leeson had the perfect explanation for needing additional cash, money that was really using to cover losses in the 88888 account. On the surface, his request made perfect sense. If he owned Nikkei futures contracts on the Osaka exchange and was short on the SIMEX exchange, he needed money to post as margin at both exchanges. Exchange rules dictate that margin deposits are required, so there’d be nothing suspicious about Leeson’s need for additional funds. However, a fact unbeknownst to the executives in London was that SIMEX margin rules specifically allowed them to net their margin payments if they had an offsetting position at the Osaka exchange.

Leeson sold his strategy in basic terms. He told them he was simply long futures on one exchange and short on the other. One early arbitrage trade he had done made some decent profits, netting him £16,000. Given that the trade took approximately two and a half seconds to execute, Leeson promoted the trading strategy heavily, and the London office saw it as easy money. Leeson was, at least temporarily, a financial genius in its eyes. He had an easy way to double dip on margin fund requests and had access to more cash. In layman’s terms, he created a massive lie to his bosses.

Financial reporters, taking note of his trading, asked Leeson what he was doing. He replied that he was “buying Nikkei futures here and selling them there.” It sounded so simple, and plenty of other traders tried to employ the same strategy. Not surprisingly, they found they couldn’t make enough money to make it worth the risk and the effort. One Japanese executive said of Leeson’s methods, “We figured that it is such a sophisticated operation that they probably had a hedge going in another market that we didn’t know about.”

Leeson’s business was about to take a turn for the worse. Philippe Bonnefoy—the mysterious “client X”—had ceased using Leeson to execute trades on June 27, 1994. That meant Leeson had to work even harder to create the appearance that he still had some big client making gargantuan trades. Between needing money to cover margin payments for this now-nonexistent mystery client and the equally nonexistent need to post margin deposits for arbitrage, Leeson was pressed to explain away his continuing need for more cash from London.

The subterfuge and spiraling losses were driving Leeson to the brink of insanity. “I may have looked calm to everyone else on the floor,” he said, “but I felt that my obsession for sweets was a giveaway. At least they kept me off my nails. I didn’t like the look of my nails anymore. They were chewed and beginning to go red at the rims.”

Throughout the summer of 1994, the Nikkei continued to fall. Leeson was still executing some trades on behalf of his clients, but by now, he was mostly making speculative trades on his own behalf. At this moment, he transformed himself from the office manager to an outright speculator. His trading strategy was pure and simple: stay long the Nikkei futures contracts. Leeson contended it was “the only way to make back the losses.” He was holding out hope that the market would go higher, enough to bring him back in the black. “A bounce had to be coming soon,” he said.

Other floor traders didn’t quite share his optimism, and they even warned SIMEX officials that Leeson was something of a gunslinger who needed to be watched. Leeson camouflaged himself well with the façade that he was trading for the big mystery client. He even started to support the Nikkei futures price by buying more contracts every time the price fell. Naturally, he explained to the Baring Securities trader in Tokyo that it was an order on behalf of his mystery client.

Leeson then started to branch out into other futures contracts, which included JGB futures. JGB stands for Japanese Government Bond, and the SIMEX exchange trades futures contracts on JGBs, just like the CME trades futures contracts on U.S. Treasury bonds. Leeson reasoned that if Japanese stock prices were going up, then bond prices would fall. That is, after all, a well-established correlation in the financial markets—that the bond and the stock markets tend to move in opposing directions. So before Leeson’s position got too large in Nikkei futures contracts, he added a short position in JGB futures contracts to essentially bet the market in the same direction. That is, by staying short JGB futures, he could benefit similarly from a rise in the Nikkei stock index. Leeson, once again, found that fate was still not in his favor. At year end, the 88888 account loss was up to £80 million.

The situation had worsened so much that the only thing he could do was buy more futures contracts in order to support the market and prevent it from moving lower. Leeson had moved from using customer funds to selling options straddles to inventing a strategy called switching to outright trading. And being long in a declining market meant only one thing: he needed more money from London. That left him entirely dependent on a woman named Brenda Granger, the head of futures and options settlements in London, for that money. And the home office was growing increasingly inquisitive as to why Leeson needed a seemingly unrelenting cash infusion.

The entire time he was propping up the Nikkei futures market, he was also selling options straddles valued at around £150 million. The risk was tremendous, and if the market moved significantly in either direction, he’d be dead in the water. He had to do whatever he could to keep the market stable, he reasoned, which meant increasing his position in the Nikkei futures even further. By February 1995, he owned 50 percent of the open interest in Nikkei futures and was short an unbelievable 85 percent of the JGB futures traded on the SIMEX exchange.

His trading positions made for quite the public image for this young trader. He could literally move the markets at his whim, despite the fact that he was still considered a novice, just by stepping into the pits and buying. Swiss Bank went so far as to produce a research paper offering five different potential explanations as to why Baring Securities was holding such massive Nikkei futures positions. Word was getting around everywhere too, and he was approached by a collection of news organizations that included the Nihon Keizai Shimbun newspaper, Bloomberg, the Associated Press, Dow Jones, and Reuters, all asking about the size of his positions, to which Leeson replied, “We’re fine. I don’t know which way the client’s going to play it.”

The game was very close to being over for Nick Leeson. “Everyone knew that I was long, and they were looking for me to sell my position and cane the market. The locals were scared of me; they were on to a good selling run, but I could single-handedly turn the market and push it back way above their selling.” But what those locals didn’t know was that Leeson’s hands were tied by a rope he’d woven for himself. If he sold even a little bit, he’d drive down the price on his remaining position. He couldn’t win.

*   *   *

By this point, Leeson was quite adept at moving money around and fooling the London office. However, he still had auditors to worry about, and there was a huge hole in the balance sheet that had ballooned to over £170 million by the end of 1994. Anyone who looked even somewhat closely at the accounting reports could discover that a substantial sum of money was not in Baring’s coffers. As Leeson himself said, “This was getting absurd, but obviously nobody was looking at the accounting packages we were sending them.” But rather than acknowledge his problems and come clean, he chose to stick his head in the metaphorical sand: “I stopped looking at the 88888 account balance. I knew that it was large, but I was just intent on surviving each day.”

In fact, the amount that would be missing on the accounting statement on December 31, 1994 totaled ¥7.78 billion (Japanese Yen). It was the same amount it would take to bring the 88888 account back to zero, and it was the same amount that was sitting at the SIMEX exchange for margin deposits on his futures positions. Falling back on the mantra about desperate times calling for desperate measures, Leeson needed to show in the internal records that Baring Securities had not only pledged the requisite ¥7.78 billion, but also that someone owed that money back to Barings. If an internal auditor happened to check the records, an account receivable equal to ¥7.78 billion would probably pass the scrutiny. On the Baring Securities’ books, Leeson booked a ¥7.78 billion OTC trade between his firm and Spear, Leeds & Kellogg, a broker-dealer based in New York.

Questions were still piling up in London, and Brenda Granger called Leeson directly. “We need to talk,” she told him. “Nobody in Singapore can answer any questions without you there.” Leeson would blame that on inexperience, citing the fact that his staff was very young, but also fiercely loyal.

Baring Brothers management was growing increasingly suspicious of the apparent reconciliation errors, but nobody investigated the matter too thoroughly. The truth of the matter was executives didn’t really understand what they were looking for, or for that matter, what they were looking at. James Bax, who was in charge of Baring Securities’ Singapore operations, told Ron Baker that it was just a misunderstanding. “It’s just a nontransaction,” he said. “It’s an error. It is a back-office glitch. Don’t worry about it.”

Simon Jones, however, wasn’t quite so easily convinced, and he confronted Leeson directly about the inconsistencies. Leeson backpedaled a little, saying, “They’re just banging on about an intra-day funding limit.” He left it at that, and apparently Jones was pacified for the time being.

On January 17, 1995, things went from bad to worse at precisely 5:46 am . Leeson started out the day in the hole £200 million, and he had a large gamble in the form of a March Nikkei options straddle. It was a major bet that the Nikkei index would not drop below 19,000 before March 10 of that year. It was, at least in his mind, a pretty safe bet. Such a precipitous drop would require something akin to an act of God himself. And that’s exactly what Leeson got.

The earth began to shake at 5:46 am  on that January morning, and the ensuing earthquake that registered a whopping 7.2 on the Richter scale was centered near Kobe, Japan. In its wake, it left three thousand people dead and twenty-five thousand buildings completely destroyed. It was the worst earthquake to strike Japan since the great Kyoto earthquake of 1923. And it sent the Japanese financial markets into a free fall.

Leeson knew he had to do something to keep the index from falling below 19,000 and preserve his long position in Nikkei futures, his short position in JGB futures, and his short options straddle in Nikkei futures. He stepped into the trading pits and began buying contracts at a feverish pace. His efforts worked, as the Nikkei index came slowly crawling back again. He was suddenly even making money from the contracts that he bought when it hit rock bottom. But then, news of the massive earthquake had reached across the globe. Friends and relatives began frantically calling Japan, desperate for news of their loved ones. The phone lines were down, and chaos once again took over. Another wave of panicked selling hit the market, and the Nikkei dropped over 1,175 points. “I’d never seen it move so fast,” Leeson recalled. “Every five minutes I was waiting for a bounce which never happened.”

By the close of trading that day, he was down ¥7 billion, or £50 million. It was a product of both the drop in the Nikkei and the rally in JGB futures. He was losing on both ends of his bets simultaneously. Leeson got a call from one of the Baring Securities traders in Tokyo who demanded to know, in no uncertain terms, what in the hell was going on. Leeson fell back on his imaginary mystery client and said, “I don’t know what’s happening. This guy is crazy.”

At home that evening, Leeson floated the idea to his wife that he should resign from his job, and that they should move out of Singapore. He wanted to get out while he knew he could, but he didn’t mention that part to her. In her blissful ignorance, Lisa replied that they would be better off waiting until he got his bonus check, because that money would “set us up for life.”

Meanwhile, in London the auditors were still poring over Leeson’s records. A woman named Pang Mui Mui was the accountant from Coopers & Lybrand who had been assigned the task of going through Singapore’s records. One of her main questions centered on the ¥7.78 billion OTC trade between Baring Securities and Spear, Leeds & Kellogg booked by Leeson that previous December. Leeson told her that it had been a SIMEX mistake—that Barings had paid the money out, and it was still owed back to them. “I’m getting the money back,” he assured her.

Coopers & Lybrand wanted a more thorough explanation, citing a need for documentation for the supposed trade, and Leeson received an e-mail from the Barings group treasurer, Tony Hawes, asking about the transaction. Leeson was then supposed to speak with Simon about it, but his boss postponed the meeting. “Put it off until tomorrow, will you?” Simon told the young trader. “I’ve got to go and play squash.” It was a quintessential moment of pre-Big Bang banking, and one that gave Leeson a window of opportunity to save his own hide.

Leeson spent the rest of the day rifling through his desk drawers, searching for any correspondence from Spear, Leeds & Kellogg. He stumbled upon an original letter that had been signed by Richard Hogan, a managing director there. He had a signature. Now he just needed a confirmation letter.

He typed up a confirmation letter regarding the OTC trade on plain paper, then cut the Spear, Leeds & Kellogg letterhead and Hogan’s signature off the original letter, putting them on the plain-paper letter he’d typed. When he went off to make a realistic-looking copy, “I stood at the photocopier for over an hour, trying to get the letters to look normal.”

The confirmation letter itself wasn’t the only piece of the documentation he needed; he also needed an approval letter from Ron Baker authorizing the trade. That was easily accomplished by writing it out on Baring letterhead and closing it with a forged signature. He’d seen Ron’s signature enough times to know more or less what it looked like.

There was still one more component he needed, and that was the trickiest of all. He needed a money wire confirmation from Citibank indicating that ¥7.78 billion had been transferred from the Citibank account to the Baring account. He left the office and called a junior clerk on his cell phone, asking the clerk to book a money transfer in the amount of ¥7.78 billion from the Citibank account to the Baring house account. After checking the balance, the clerk told him that it wouldn’t go through because there wasn’t enough money in the account to cover it. He told her that was fine, just go ahead and request the transfer, then reverse it immediately after. What Leeson knew was that the moment the transfer was requested, Citibank would send a fax confirmation of the transfer, and it wouldn’t show that it had been canceled. So he waited patiently next to the fax machine for the confirmation to come through. When it did, he had all of the documentation he needed to show the auditors.

Leeson returned home and faxed the fake documentation to Coopers & Lybrand. Interestingly enough, nobody paid any attention to the fact that the fax header read “From Nick and Lisa,” indicating that it was sent from his home fax and not from the Spear, Leeds & Kellogg offices in New York, but again, nobody seemed to notice. Or if they did, nobody seemed to care. They had the documents they needed, and the case was closed. The auditors accepted the documentation as valid, and on February 3, 1995, Coopers & Lybrand issued its report for Baring Securities’ 1994 audit. Everything was above board and clear as far as they were concerned. But the matter was far from closed in London.

Tony Hawes still had doubts about the trade. “What’s bothering me is where you got all the money to actually pay Spear, Leeds & Kellogg. I mean, it’s the equivalent of seventy-eight-million pounds. It just doesn’t add up, you know?” he said to Leeson. Leeson was in no mood to further defend himself, so he dodged the question altogether. “I’ve got to dash,” he told Hawes. “I’m running late, and we’ve got company for dinner.” He would later admit that he had masterfully played on Hawes’s traditionalist sentiments. “I knew Tony would understand an excuse like company for dinner in a way in which he’d never understand having to dash off and do some work.”

But the questions persisted, with meetings galore in London about the suspicious trade. All of Leeson’s superiors were asking about it, desperate for clarification as to where the money had come from. “The SLK matter continued to rumble on in London after it’d been cleared in Singapore,” Leeson recalled. Time was running out.

By February 1995, it was clear that there wasn’t much sand left in the hourglass of Leeson’s career. He had taken approximately £850 million from the Baring Brothers’ treasury to cover both his margin deposits and his accumulated losses. On February 15, his wife called a moving company, telling them that they needed storage space. Leeson had sold his Rover sports car and was leasing a Mercedes so as to keep up appearances and keep down costs.

The next day, February 16, the London office received a call from a senior director at Schroders, another London merchant bank. The caller was curious about a rumor that had begun circulating regarding Barings’ imminent default in Singapore. Soon after, another call arrived from the Jardine Fleming investment bank in Hong Kong; the caller was asking about the same rumor.

There was a moment when the rumors looked like they might be nothing more than just that. Leeson had built up a long position of about thirty thousand March Nikkei futures contracts, and the tide was momentarily in his favor. After he sold out of 1,100 of those contracts, he was able to book a profit of £15 million. “Suddenly it looked like I had a chance,” he recalled later. But his total loss still stood at over £200 million. It was going to take a lot more luck with his other futures contracts to cover that mountain.

Leeson’s phone was ringing constantly. One caller was an Associated Press reporter, asking him about his very large position in March Nikkei futures, to which he replied, “I don’t know what the client is going to do.” Other calls were coming in from the London office, expressing concern over the size of his positions. Leeson continued to bob and weave, like a fighter refusing to give up despite blood pouring out.

Despite the financial avalanche he’d wrought, Leeson was still anticipating a bonus from his employer. He had in his mind a number around £450,000; Baring Brothers was actually planning to pay him £700,000. But there was a large string attached to that bonus promise: Leeson would have to reduce his holdings. That was essentially an order from the powers in London, who were still under the impression that the mystery client was carrying the outrageous positions, which was requiring Baring Brothers to put up all of the margin.

Back in London, the investigation into the odd Spear, Leeds & Kellogg trade was ongoing, and the truth of what had really happened—in addition to Leeson’s unauthorized and illegal funds transfers—was getting closer and closer to being brought to light. Leeson needed another £45 million for a new margin call from the SIMEX. When he requested the funds, he told the office he’d explain why he needed it later. He never did.

By now, Leeson was completely unreachable; nobody could contact him. Worries began to grow about what he was doing and what happened to him. A fax arrived in London requesting that £45 million in funds, despite the fact that Leeson had been ordered to reduce his position size.

Back in Singapore, the market was dropping even further, and Leeson’s losses were continuing to mount. The Nikkei index hovered just above 18,000 and threatened to head lower. Leeson bought another fifteen thousand contracts to stave off another drop. He felt that the index would have gone down as low as 17,500 had he not bought the contracts.

On Wednesday, February 22, the Nikkei was still at 18,000, and Leeson had another £30 million margin call to meet. The next day on the trading floor, everyone was shouting directly at Leeson, who had bought every Nikkei futures contract that anyone on the floor had to sell. It was another attempt to prop up the sagging market, but it was a futile attempt. The index closed down 330 points at the end of the trading day.

The London office was still fixated on what it called “the hole in the balance sheet” created by the ¥7.78 billion transfer, and began to take notice of what other traders on the floor already knew. Leeson was so deep into his position that there was no way out of it. The time had come, as Leeson said, to run.

On Friday, February 24, Leeson was long 61,039 Nikkei 225 contracts valued at approximately £11 billion, in addition to his short position of 28,034 JGB futures contracts. In total, he owned 49 percent of the entire March 1995 Nikkei futures contracts and 24 percent of the June 1995 contracts. There was no way to sustain his holdings and unwind the positions with any kind of profit. The Nikkei closed that day at 17,885. He gathered his things and walked off the trading floor. He went to his desk and penned a short note, addressed to nobody in particular.

The note read simply, “I’m sorry.”

By 11:30 pm  that night, Nick and Lisa Leeson were gone from Singapore. They checked into a hotel in the Malaysian capital of Kuala Lumpur, Leeson instructing his wife to pay for everything in cash and to not sign anything. Around the world, the news began to surface that Barings had lost more than £600 million, and the firm’s employees were in stunned shock. Leeson and his wife were holed up in the Malaysian resort town of Kota Kinabalu for a week, staying mostly in their room and living off room service. After being on the run for a week, they were ready to try their luck and return to London.

They left for the airport at 7:00 am , buying economy-class plane tickets to Frankfurt and paying with cash. When they landed in Germany, the police were waiting for Leeson. He was detained in Frankfurt, where he awaited extradition. Singapore authorities requested that he be returned to them to face trial, but Leeson held out hope that his home country of England would fight to keep him. He felt he stood a better chance of leniency in an English court.

Once the news about Leeson broke, the Nikkei futures market crashed. Everyone knew that Leeson had massive futures holdings, and they all knew too that Baring Securities would have to dispose of the position quickly. The market opened down 880 points on the following Monday, closing the trading day at 16,960. And because traders also knew Baring Securities was short JGB futures, those contracts went up fifty points. Employees of Baring Securities were officially banned from the SIMEX trading floor.

At Leeson’s office, Singapore authorities were busy searching his desk, confiscating everything, including stationery with fake letterheads and a fraudulent ticket listing an £80 million deposit at Citibank in the name of Baring Securities.

*   *   *

While Leeson was fleeing to Kuala Lumpur, Peter Baring received a phone call at his home in Notting Hill, notifying him of the situation. It was 7:15 pm , and Baring, unlike his American counterparts, had long since called it a day at the office. Alarmed by a call at such an hour, he said, “It must be serious if you’re calling me at this hour.” The Baring executive on the other end lamented that it appeared “one of our barrow-boys has gone AWOL.”

At 8:30 pm  that same evening, the Baring Brothers’ directors met at their London headquarters and immediately informed the Bank of England of what had happened. The mood in the room was incredulous. “We’re a bank with a crest, not a trademark,” one executive exclaimed. But that crest couldn’t alter the reality that the losses stood at £385 million at the time. The firm had £308 million in equity, plus debt capital of £101 million. It was enough to survive, assuming it received a capital injection. But it was still susceptible to any decline in the Nikkei average. If that number dropped, the losses would be magnified.

There were two major issues that required immediate attention. First, the firm needed to raise capital in the form of a bailout. Secondly, it would need to find a buyer for its futures positions. The former, it was hoped, would come from the London banking community as a whole, much like the 1890 bailout. The latter issue was slightly more difficult, though it was hoped a hedge fund would emerge to buy the futures positions—a hedge fund that was willing to bet heavily on a rise in the Nikkei.

With the support of the Bank of England, Baring executives estimated they needed a bailout fund amounting to £400 million, and began canvassing the City to get commitments from the other banks. After knocking on the doors of N. M. Rothschild & Sons, Schroders, Barclays, National Westminster, Morgan Grenfell, Deutsche Bank, among others, they soon had the commitments to meet their immediate financial need. Then came the call from Baring Futures in Singapore. As it turned out, there was also a massive short options position that was just discovered. It meant the deficit was £200 million higher. The bank now needed £600 million to stay afloat.

Other City banks, however, were discovering things about Baring Brothers that made them uneasy. After reviewing Barings’ books, it was discovered that Barings was still planning to pay out bonuses for 1994, an amount that was approximately £84 million. That money, the other banks were horrified to learn, would be coming from the bailout money they were providing. They were basically bailing out the bank and lining the pockets of some of the people who had been responsible for this mess in the first place.

That distaste added to the fact that the other City banks—including the Bank of England—were having a difficult time coming up with the money to cover the required £600 million in the first place. The £400 million had been hard enough; £600 million was proving next to impossible.

The more the other bank executives contemplated the situation, the harder it was to believe how any financial institution could get itself into such a mess. Questions swirled about how Barings’ managers could be so incompetent as to allow losses to accumulate as they did, not to mention depositing over £700 million in margin at their Singapore office. That amount alone was more than the bank was worth in the first place. How did the bank’s executives allow a massive sum to be sent to a small subsidiary on the other side of the world to finance positions they didn’t even know existed?

All of the questions surrounding the Baring Securities fiasco caused the interest in a Barings bailout to collapse as quickly as it had grown. Support evaporated, and the bank collapsed after it was unable to find a buyer for the futures and options positions. In the end, the bank that had financed such projects as the Louisiana Purchase and the Panama Canal, a bank that had been around since 1762—making it older than the United States—ceased to exist. It was sold for £1 to the Dutch bank International Netherlands Group (ING).

*   *   *

When the dust had settled, Singapore authorities filed twelve charges against Nick Leeson: four charges of forgery, two of amending prices, and six of implementing cross-trades in order to reduce his margin. Those charges were less than what he faced in London—where his character had already suffered an irrecoverable assassination—but he still wanted to return to his home country, telling authorities he wanted to be closer to his family.

In reality, Leeson knew he would face a hostile crowd in Singapore, where he was assured of being found guilty, just as he would be in London. He feared that he would be “thrown to the wolves” in Singapore, a country well known for harsh punishments that included the act of caning for even minor infractions. He literally begged for a trial in London. But the British Serious Fraud Office, after investigating the case to determine whether or not it would seek extradition to London, declined to pursue it. “The SFO does not have evidence which warrants an extradition application being made for Mr. Leeson,” the office announced. Leeson’s worst fears were realized. He was going to stand trial in Singapore.

Rather than face a circus-style trial, Leeson pleaded guilty in Singapore District Court to one charge of cheating the Singapore International Monetary Exchange and one charge of cheating the accounting firm of Coopers & Lybrand. He was sentenced to six-and-a-half years in prison, a sentence he began serving in November of 1995.

To some, Leeson was a victim, a working-class lad who became a whiz kid and was forced to take the fall for the failings of the upper-class Barings bank. But to many more, he was the face of all that was wrong with the Big Bang. He had grown greedy, putting his own interests above everything else. His ego did not allow for him to admit mistakes, which eventually led to the destruction of one of the country’s oldest and most well-respected financial institutions.

Leeson served four and a half years of his sentence in the Singapore Tanah Merah prison. He was granted early release on July 3, 1999. He wrote a book about his experiences at Baring Securities entitled Rogue Trader , which was later made into a movie.

In 2005, he got a job as a bookkeeper for Galway United Football Club, a small soccer team in western Ireland. He’s also spent the ensuing years as a speaker at conferences and other gatherings, and has a website that promotes his services. In 2013, he joined an Irish debt-restructuring firm called GDP Partnership. The company works with indebted people who find themselves underwater to help renegotiate their mortgage debts. When asked why the company would hire someone like Mr. Leeson, the answer was quite simple.

“He does have a wealth of business experience with distress based on his personal difficulties.”