Infectious Greed by Frank Partnoy

Author:Frank Partnoy
Language: eng
Format: epub
Publisher: PublicAffairs

Nicholas William Leeson was an unlikely rogue derivatives trader. He failed A-level mathematics in high school in Watford, a cheerless suburb of London.38 He did not attend college or business school. Friends described him as “just a normal bloke who likes all the ordinary things like football.”39 With his mediocre record, he was fortunate to find a job as a low-level financial clerk. After a few years, Barings hired him. It was 1989, just before Allen Wheat joined First Boston and set up his derivatives firm, CSFP, in London.

Barings was a prestigious bank, the oldest in England, and it served clients ranging from the queen to prominent British industrial companies. Leeson began at the bottom, processing trade records, and his early career in London was undistinguished. Barings shipped him to Singapore to help with the back-office settlement of the firm’s derivatives trades there. The Singapore office was lightly staffed, and Leeson also took over a routine, low-margin trading operation, designed to profit from small price differences between Nikkei 225 futures contracts (recall that these are financial instruments based on the value of the Japanese stock-market index), which were traded in both Singapore and Osaka, Japan. If the prices in Singapore were lower, Leeson would buy there and sell in Osaka (and vice versa). This arbitrage trading was not very risky, or very sophisticated. Salomon Brothers had done the trades years earlier, and now First Boston, and other banks, already had begun selling much riskier trades based on the Nikkei 225 index. It didn’t seem necessary to supervise Leeson very closely, and Barings did not.

When one of Leeson’s clerks made a small error on twenty futures contracts (selling futures—when he had instructed her to buy), he tried gambling in the futures markets to make up the $30,000 loss.40 It worked. When no one at Barings questioned why he had made these trades, he began speculating more often. Unfortunately, he was not a very good trader, and the more he strayed from the low-risk arbitrage strategy, the more money he lost. Over time, Leeson became more aggressive, trading “in size,” and even selling options, betting that Japanese markets would remain within a narrow range. He lost these bets, too. By the end of 1994, he was $285 million in the hole.

Leeson hid his losses by entering losing trades into an error account, labeled #88888, which was not connected to the rest of the Barings computer network. As with those of Joseph Jett at Kidder Peabody, Nick Leeson’s losses were hidden for a time because of a flawed accounting system. It also helped that Leeson’s supervisors permitted him to act both as trader and as back-office manager, so that he could control both the execution of trades and the processing of trade records.

The senior managers at Barings didn’t see the $285 million of losses. Instead, their accounting reports showed that the back-office boy in the Singapore office had somehow made $30 million in 1994, nearly 20 percent of the bank’s total profit.41 Leeson’s

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