I N S T I T U T O

P O L I T E C N I C O
B R A G A N C A

D E

BANKING INDUSTRY
MELTDOWN: THE ETHICAL
AND FINANCIAL RISKS OF
DERIVATIVES
5 M A Y 2 0 1 6

A P O S T O L
S T E F A N ,
S A R B U
O X A N A , P E R E U
S V E T L A N

Overview
Introduction
Derivatives Defended
Barings Bank
UBS
Ethical Issues with Derivatives

I N S T I T U T O
P O L I T E C N I C O
D E
B R A G A N C A

Derivatives
Derivatives are financial
instruments with values
that change relative to
underlying
variables, such as assets,
events, or prices.
I N S T I T U T O
P O L I T E C N I C O
D E
B R A G A N C A

BARINGS BANK.

Nick Leeson

STOCK MARKETS
Brilliant trader

BARINGSMELTDOWN
Barings Bank

Barings Bank, which had been in operation in the

United Kingdom for 233 years, ceased to exist in
1995 when a futures trader named Nick Leeson lost
approximately $1.4 billion in company assets. He
then generated losses in the first two months of
1995 when the Nikkei dropped more than 15
percent. Barings was purchased by ING, a Dutch
bank for 1 (approximately $1)

BARINGS FUTURES
Leesons strategy

The key to Leesons strategy in the 1980s

was the knowledge that one stock market
was slower in processing trades than the
other. To hide any bad bets, Leeson
created an error account for his
losses. Because no one could see the losses
hidden by this account, Leeson was widely
regarded as a brilliant trader.

WHAT IS UBS?
United Bank of Switzerland

UBS

is a

In

2000,

UBS acquired PaineWebber

Group Inc

company It is the world s largest

largest wealth management firm for

manager of private

private clients

wealth assets and

the second largest bank in Europe with

overall invested assets of approximately

$3.167

trillion

In

diversified global financial services

HOW THEY TRIED

TO DEAL WITH THE
PROBLEM?

WHAT IS THEIR
PROBLEM?
to become the world s

rebranding

As a result of the

UBS took a

$1

billion write

which doled out an aid

package of approximately

with the retirement of the PaineWebber

..

UBS appealed to the Swiss

government

down for the loss of goodwill associated

brand

2008,

to the ailing bank

$59.2
,

In exchange

$27.7

agreed to forgo nearly

million in

pay to the company s top three

executives

billion

UBS

01

02

Ethical Issues

Derivatives

ETHICAL
ISSUES WITH
DERIVATIVES

Derivatives (especially
swaps) expose investors to
counter-party risk.

Derivatives are used in

sales transactions where
there is an opportunity of
great financial rewards.

E X P L A N A T I O N

03
The Good Part of Derivatives
Some experts believe derivatives have significant benefits as
well. Although it is always the case with derivatives that
someone loses while someone else gains, under normal
circumstances, derivatives should not adversely affect the
economic system because it is not a zero-sum game
derivatives theoretically allow for absolute economic growth.
INSTITUTO POLITECNICO DE BRAGANCA

DISCUSSION
RISKS

What are the ethical risks associated with

derivatives?

DECISION

What is the difference between making a bad

business decision associated with derivatives
and engaging in unethical conduct using
derivatives?

INVESTMENT

What kinds of investment decisions drove

Barings Bank, UBS, Bear Stearns, and Lehman
Brothers to financial disasters?

CULTURE

How can an ethical corporate culture with

adequate internal controls, including ethics and
compliance policies, prevent future disasters in
financial companies?.