Nick Leeson

 

Nick Leeson was a high-flying financial trader whose unorthodox, speculative and sometimes fraudulent deals caused the complete collapse of his employer, Barings Bank, in 1995. In a series of complicated and extremely risky deals, he began to lose more and more money, just as a gambler does in a casino – only this time, he was dealing in millions, not thousands, and using the bank’s money rather than his own.

 

Meteoric rise

 

Leeson was born on February 25, 1967. The son of a plasterer, he grew up in Watford, Hertfordshire, an area north of London. His father took little interest in his son, but his mother recognised his intelligence and drive, and she made sure that he received a good education. She even typed out the application for his first job, at the prestigious Coutts Bank in London, where he was employed as a school leaver at the age of eighteen.

In his new job, Leeson showed himself to be remarkably adept at understanding the complex world of finance, and he was soon promoted, earning a high salary. At the same time, his friends from school were working as builders and mechanics.

Leeson had a lot of money to spend, and was enjoying a life of ease, when, unfortunately, disaster struck. His mother who had been diagnosed with cancer, but was expected to live for another decade. However, she died suddenly. Leeson’s mother had been the centre of family life and still had young daughters that needed to be looked after. Leeson promised himself that he would take care of the family, and he was spurred on by the memory of her support to progress further in his career.

 

Risky ventures

 

By the early 1990s, Leeson had landed a job as manager of a new operation in futures markets on the Singapore International Monetary Exchange with Barings Bank. Barings was oldest investment bank in London, whose history went back to the time of the Napoleonic wars. Leeson was part of a new wave of quick-witted, young, working-class men who became stock market traders in the volatile financial climate of the 1980s, making – and his case, losing – fortunes for the banks and businesses that employed them.

Leeson’s speciality was trading in derivatives, that is, speculating on assets rather than buying and selling assets themselves. Derivatives consist mainly of options, futures and swaps, all of them involving speculation on the prices of assets rising or falling in the future, and all of them risky ventures. Options or futures are contracts in which one party agrees to pay another an agreed fee for the right to buy or sell. So, for example, a person who owns stock in a company may pay a fee to another at an agreed, fixed rate, so that if the value of the stock goes down, the other party must buy the stock at that rate. The person selling may gain an advantage in that, if the value of the stock goes down, he can sell without losing too much money; the person buying may end up better off by getting a good price on the stock. Swaps are agreements based on cash flows, in which businesses agree loans with each other, balancing out interest rates to each other’s advantage.

 

Gambling millions

 

These complex business deals are essentially a form of gambling on assets: however, the assets themselves are not necessarily based on solid material goods or commodities, but may be in the form of changeable financial arrangements such as equities, bonds, interest or exchange rates, and indices (the stock market or consumer price index). Thus, the situation is one in which gamblers are gambling on the future behaviour of the financial markets, which is to a large extent unknown, with no back-up in the form of saleable goods. Moreover, the deals are so complicated and move so fast, that very few people on the boards of companies and banks understand exactly what is going on at any one time, and the traders are left very much to their own devices.

To play this game, which involves enormous sums of money, traders need tremendous confidence, nerve and skill. Enter Nick Leeson. Although he was still only in his twenties, he impressed his superiors not only with his confidence, but with his knowledge of the financial markets.

From 1992 on, Leeson began to make deals that were not authorised by his superiors, but because he was making so much money for the bank – his deals accounted for ten per cent of the bank’s income at one time – his employers failed to keep a track of what he was doing. He was both Chief Trader at the bank and also responsible for settling his accounts, jobs that are usually separate in most establishments. In this way, he was able to hide losses on bad trades: at first, these involved only a few thousand pounds here and there, but by the end of 1994, he had lost over two hundred million pounds.

 

The bubble bursts

 

To recoup the situation, Leeson placed what is called a ‘short straddle’ deal involving ‘call and put’ options on the Singapore and Tokyo stock exchanges. This complex deal was basically a bet that the Japanese stock market would not go up or down overnight. Unfortunately for him – and for Barings – an unforeseen disaster occurred, in the shape of the Kobe earthquake, which happened early on the morning of January 17, 1995. Undeterred, Leeson began to bet on the likelihood of the markets recovering, gambling on the possibility that the Nikkei Stock Average would go up rapidly. However, it did not. Leeson ran up a phenomenal bill of over 800 million pounds, which was twice the amount that the bank allocated for trading purposes. Realising that the game was up, Leeson decided not to confess, but instead ran away, leaving a note to say he was sorry.

Now on the run, Leeson went first to Malaysia, then to Brunei, and then to Germany, where he was arrested. He was extradited and taken to Singapore, where he was charged with fraud. As it transpired, he had obtained authorisation for his ‘short straddle deal’ but had hidden his previous losses from his superiors, and he made deals that were far too speculative, involving sums that he, and the bank, did not have at their disposal. He was charged, brought to trial and convicted of fraud. The judge sentenced him to six and a half years in a Singaporean jail, in conditions that were far from civilised. While he was serving his term, he was diagnosed with colon cancer and was released in 1999.

 

Back from the brink

 

Although Leeson had undoubtedly acted in a reckless manner as a trader, there were many who felt that Barings Bank was also to blame for the debacle. The bank had failed to keep any checks on their employee, allowing him all sorts of privileges because he had initially earned them so much money, including being allowed to settle his accounts himself, rather than having involvement from auditors and others who would have noticed what was going on and put a stop to it.

Not only the bank, but the whole financial systems of options, futures, swaps and so on was also criticised, since it encouraged gambling on extremely volatile markets in a way that was far too risky and could lead – as it did in the case of Barings – to the complete collapse of financial institutions that employed hundreds of people and dealt with thousands of investors’ savings. It was also pointed out that although Leeson earned a high salary, he did not personally profit from these financial dealings. Instead, he was only trying to make as much money as he could for the bank, albeit in a way that was extremely risky.

The next phase of Leeson’s career began when he returned to Great Britain and published an autobiography, Rogue Trader. In it, he described his humble beginnings, his rise to become Chief Trader at Barings, his eventual fall from grace and the nightmare of his prison term in Singapore. He also recounted how, under the strain of all this, his marriage fell apart. During the time that he was in jail in Singapore his first wife, Lisa, had stood by him. She had even taken a job as an air hostess so that she could visit him regularly in jail. However, it then emerged that, unbeknown to her, Leeson had had a number of affairs with geisha girls while on visits to the far east. After these revelations, Lisa divorced him. Shortly afterwards, Leeson developed colon cancer, losing a great deal of weight, and undergoing chemotherapy, during which period most of his hair fell out.

However, Leeson was not a quitter, and after these awful disasters, he confounded all expectations by surviving his cancer and remarrying. His new wife, Leona Tormay, was an Irish beautician who already had two children. The couple then had a baby boy together.

Leeson went on to forge a new career for himself as an after-dinner speaker and became the commercial manager of Galway Football Club in the west of Ireland. In 2005, he wrote a book entitled Back from the Brink: Coping with Stress, in which he described how he fought his way back from the total breakdown of his world.