On Feb. 26, 1995, Barings Bank collapsed after a 28-year-old trader, Nick Leeson, lost $1.3 billion in unauthorized trades placed from the firm's Singapore office. I was editor of FOW at the time, and we had the only known picture of Nick Leeson, which I had commissioned a photographer to take some months earlier as he was a regular contact of ours.
I remember vividly when the story broke 25 years today. I woke to the news on the radio that Barings had collapsed despite a Bank of England meeting over the weekend to try to save it.
I turned to my husband and said, “That’s funny. We know the man who runs futures in Singapore.”
By the time I got in to the office, there was more news breaking and the role of Nick Leeson and the futures part of the bank’s business became clearer. I started getting calls from all sorts of media organisations asking for comment, and then one of them found out we had a photo. This was in the days when digital was only just starting, so our photo was a slide and I didn’t know how I was supposed to get a copy of it to so many newspapers that were calling for it. In the end, I struck a deal with the picture desk at the Daily Express, who came into the office along with picture editors from The Sun, The Guardian, The Standard and others, and watched as he scanned the photo in a machine I had never seen before, and was then able to "sell" it to the papers.
Along with lawyers, we may have been some of the few people who actually made money from Barings’ collapse!
For a while, I was a regular pundit on the BBC – Newsnight, BBC World Service Business, Radio 4, and so on. It taught me a lot about how to speak to journalists; about the importance of make-up under camera lights; and about trying to explain quite complex issues to people who only have a passing understanding and interest. To the mainstream press and general public, the story in the U.K. was focused on the fact that Barings was "The Queen’s Bank." People wanted to know how a bank of such standing and cultural significance could simply run out of money.
But the key point that began to emerge quite quickly was the lack of understanding and oversight at the senior management level within Barings. Leeson called for more and more money to try and get himself out of his losing position, and he got away with it because his bosses simply didn’t understand futures. They paid little attention to what he was doing, given his previous successes, but the Kobe earthquake in Japan quickly put an end to his run of good luck buying and selling futures contracts on the Nikkei 225 index.
Management was not joining the dots. They had put Leeson in a position where he was in charge of both trading and the back office so could hide the situation in the infamous error account 88888 without oversight, and they had not set aside enough capital for such a situation. As then-chairman of the U.S. Commodity Futures Trading Commission Mary Shapiro said at the time: “The first three lessons [from Barings’ collapse] are: management controls, management controls and management controls.”
There were many lessons banks and FCMs learned from a risk management and internal controls point of view. At a broader industry level, there were also lessons learned about the importance of information-sharing among exchanges and regulators. People made assumptions about Leeson’s position without looking at whether he had an offsetting position in another market, for example. Even then, the industry was already a global one and closely interconnected.
The work of FIA in supporting and facilitating dialogue between regulators and exchanges was key as the post-mortem analysis of Barings got under way. In the immediate aftermath of the bank’s collapse, FIA convened a blue-ribbon task force to address the crisis. The Global Task Force on Financial Integrity represented all areas of the industry including exchanges, customers, FCMs, from as many countries as possible.
One of the critical weaknesses identified in the aftermath was the lack of coordination and communication among exchanges, even though the firms they supervised were increasingly international. As a result, a subcommittee of the FIA taskforce drew up a Memorandum of Understanding to establish a protocol for information-sharing among exchanges, and 48 exchanges and clearing organisations signed the MOU at FIA’s Boca conference in 1996. Chicago Mercantile Exchange subsequently became the secretariat for the MOU process, and since then signing the MOU has been a condition of FIA membership for exchanges. More broadly, FIA’s response to the Barings crisis laid the groundwork for what should be done in an emergency. It established a model for collective action and communication between the futures industry and its regulators on a global basis, based on a spirit of partnership and a shared interest in maintaining financial integrity in all the markets in which we do business.
Notwithstanding the positive steps that came from the post-collapse review, the view of many both then and now remains that tighter controls should have prevented Leeson from ever building up such a large loss-making position. In the words of Christopher Sharples, then chairman of the Securities & Futures Authority in London: “Nick Leeson pulled the trigger, but Barings gave him the gun, the ammunition – and then more ammunition.”
Leeson’s is one of a number of losses by so-called rogue traders that have come to light in the two and a half decades since. And many of the more recent events are in fact quite larger. In light of this, the findings of a Board of Banking Supervision Inquiry at the Bank of England in July 1995, are still worth repeating: "The failings of Barings were not a consequence of the complexity of the business, but were primarily a failure on the part of a number of individuals to do their jobs properly."