Slide 1:By S.KANGEYAN B.GURURAJ First penny dropped & Million dropped


Slide 2:Discipline Knowledge


Introduction :Introduction February 26, 1995 Baring Brothers & Co. collapsed, reducing in value from $500 million to $1.60 Hero 28 year-old rogue trader, Nicholas Leeson By secretly traded futures contracts on both the Nikkei 225 and on JGB’s (Japanese Government Bonds)‏ The damage $1.4 billion dollars lost


Slide 4:Watford – Barings Barings Bank Why Singapore ? Arbitrager/ Switching Cross trade Proprietary trading Osaka imposed regulations Why & how this lucky 88888 A/c?


Baring’s Official Strategy :Baring’s Official Strategy Long on the OSE, short twice the number of contracts on SIMEX. Official trading strategy was to take advantage of temporary price differences between the SIMEX and OSE Nikkei 225 contracts. This arbitrage called 'switching', It required Leeson to buy the cheaper contract and to sell simultaneously the more expensive one, reversing the trade when the price difference had narrowed or disappeared.


What Leeson Did Was… :What Leeson Did Was… But Leeson was not short on SIMEX He was long approximately the number of contracts he was supposed to be short. These unauthorised trades which he hid in an account named “Error Account 88888”. Also to execute all his unauthorised trades in, Japanese Government Bond Euroyen futures Nikkei 225 options


LEESONS POSITIONS :LEESONS POSITIONS


Fantasy versus Fact: Leeson's Positions as at End February 1995 :Fantasy versus Fact: Leeson's Positions as at End February 1995


Selling Options :Selling Options a. Sell Call b. Sell Put c. Sell Straddle strike price strike price strike price Profit Profit Profit


Leeson’s Trading Strategy :Leeson’s Trading Strategy Leeson sold straddles, Leeson earned premium income from selling well over 37,000 straddles over a fourteen month period. Such trades are very profitable provided the Nikkei 225 (if the Tokyo market had risen) or the put (if the Nikkei had fallen). As losses mounted he took on larger positions – Rogue Trader Take advantage of the big position that Barings had to bet against the firm PLAN B - Tried to sustain market by: Buying massive amounts of Nikkei stock index futures Selling Japanese government bond futures, betting that interest rates would rise Adds up to MASSIVE MARGIN CALLS for Baring’s


Leeson’s Plan After Kobes :Leeson’s Plan After Kobes When the Nikkei dropped 1000 points, Leeson, tried single- handedly to reverse the negative post-Kobe sentiment that swamped the Japanese stock market. On 27 January, account '88888' showed a long position of 27,158 March 1995 contracts. Over the next three weeks, Leeson doubled this long position to reach a high on 22nd February of 55,206 March 1995 contracts and 5640 June 1995 contracts. Leeson placed bets on the direction of price movements on the Tokyo stock exchange Focus: Count on the Nikkei index to rise Felt that “the Nikkei had fallen too much and expected it to rebound eventually” If it did rebound he would have made a profit on: The increased stock value An increase in interest rates


LEESONS POSITIONS :LEESONS POSITIONS


LEESON’S SWITCHING :LEESON’S SWITCHING


How was Leeson able to deceive everyone around him? …. :How was Leeson able to deceive everyone around him? …. Cross trade '98007' (Barings London - JGB Arbitrage) and account '98008' (Barings London - Euro yen Arbitrage). And with 88888 Big trade from Philippe In charge of both back & front office Used client funds to bail them F & O works in funny ways in Singapore both US$ and Japanese yen London people are so vague they gave the money James Bax, RM Raised????? No proper Management


Where Did It Go Wrong? :Where Did It Go Wrong? WEAK BALANCE Mostly gambled on direction of markets. A major part of Leeson’s trading strategy involved the purchase of futures on Nikkei-225 futures contracts His only “hedge” was in holding a short position on JGB’s. He only made a one-sided bet.


The Failure of Internal Controls :The Failure of Internal Controls No clearly laid down reporting lines Several managers responsible for monitoring Leeson’s performance did not do their job No segregation of front and back office activities No comprehensive review of Leeson’s funding requirements


Nick After Life With Barings :Nick After Life With Barings Barings Bank collapses Barclays sought to acquire the company but then an additional $300M in losses was added Nick Leeson fled out of London Eventually caught by Interpol in Germany Sentenced 6 and ½ years of prison in Singapore Helped launch PaddyPower.com in summer of 2000, an online betting service


Conclusion :Conclusion Communication of false information Exclusion 88888 Payment of Margin on unauthorized trade Overnight positions False Manipulation by Nick in month end. Bank of England – Allowed more than 25% of share capital Financing the trading margins of thing customers Improper segregation of client funds & financial requirement Higher official and employee are also cause for collapse


Moral of the Story :Moral of the Story Something too good to be true probably is just that INVESTIGATE!!! Baring’s Bank was also bailed once before Bad loans in late 19th Century Financial institutions began noticing that operations will need a dramatic change Top management became targets


Slide 20:Don’t say sky is falling... And Sorry is just not enough sometimes…


Slide 21:Questions?