When Nick Leeson joined the Barings group and went to work as a clerk at SIMEX in Singapore who would have thought he would single-handedly break the bank?
In 1994 Leeson’s department made profits of $30.7 million which was one-fifth of the group’s profit. Although the bank set up a Group Treasury and Risk function to manage its risk exposure better, Leeson was allowed to adopt a new strategy of buying and selling options on the Nikkei 225 index. He was in effect betting that the market would not have any sharp movements. Up or down. Who was to know what was about to hit Japan?
On 17th January it happened. An earthquake hit the country, causing great damage and loss of life. This led to the collapse of the Nikkei, exposing Barings to huge losses.
What was Leeson’s response? Invest heavily in buying Nikkei futures in an attempt to support the price. It’s like a punter on the horses doubling his stake each time he loses – ‘double-or-quits’ approach. This strategy inevitably failed, he lost £860 million resulting in Barings being sold to ING for £1.
Leeson sent his boss a fax: ‘Sincere apologies for the predicament I have left you in’ (I must try that one).
So what went wrong? Was it the use of derivatives that brought the bank down? Well derivatives were used but they are not to blame. It was the lack of risk controls that were the real problem. Banning the use of derivatives is like banning motor cycles because they kill more people than cars. It’s not the instrument that causes the problem but the person in control.
Were lessons of Leeson learned at Northern Rock?
No comments:
Post a Comment