Nick Leeson

at Barings Bank in Singapore

So famous that he became a
movie:
Rogue Trader (1999)

Bo Sj
VT 2014
 Barings Bank
1992, Nicholas Leeson, clerk, moved
from London to Barings Futures
Singapore (BFS).
To head the Singapore International
Monetary Exchange (SIMEX)
Trade in options and futures on
NIKKEI-225, mainly 10 year Jap. Gov.
Bond, 3-mths euroyen.

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 Leesons Job
In 1992, took SIMEX exam.
Became a floor trader in Singapore.
And, the General manager and the Head
trader for BFS.
But, Trading and Back office are normally
split in two units to keep separate records.
N.L.s task was to look for arbitrage
between Osaka and Singapore Exchanges.
NIKKEI-225 and Jap. Gov. futures. No
risk-taking was allowed.

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 But, Nick Leeson
He did speculate, against instructions!
He placed bets on the direction of
price movements on the Tokyo Stock
Exchange.
Did well at first, soon looses
mounted
1992: - $2m, 1993: -$21m
1994: -$185m 1995: -$619m, early
Jan. and then

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 Wait there is more
In 1994 he began selling (equity)
straddles (short), speculating in a
lower stock volatility on
NIKKEI-225.
In early January 1995, he was
short in 37,000 calls and 33,000
puts.
Plus long in 1000 futures. Now..
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 In January 17 1995 A
Major Earthquake in Kobe
Markets explode in volatility and N.L.
looses even more and now het bets
even harder (he has nothing to lose),
so by February 23 he holds:
61,000 March futures contracts 49% of open
interest.
+ 24% of all June contracts.
+ 88% of all Jap. Gov. Bond futures.
+ Large amounts of euroyen contracts, betting on
lower Japanese interest rates.
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 Margin Calls All Over
In Feb 1995 Leeson has to spend
$740m in Margin calls.
Barings in London gets suspicious,
they hear rumors about an
extremely big speculator on the
Asian Markets.

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 London Calling
In the last days of February 1995,
Baring sends an inspector.
Leeson and his wife decide to leave
Singapore for Germany.
The total loss was almost 2.10 times
Barings Equity value.
Baring was bought and recapitalized
by ING, The Netherlands.
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 Lessons of Leeson?
Bad management, Leeson was
sitting on two chairs. Trading
and back office.
Better regulations ? Maybe
What has changed - not much,
mostly details says Leeson.

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 Final Words
They have learned nothing
according to Nick Leeson
The scandals have changed from
derivatives to accounting.
The nature of man? Moral Hazard
is the problem - not derivatives
as such.
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Some sentenced individuals in
trading scandal

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 Toshihide Iguchi 1995
Institution: Daiwa Bank
Activity: US Treasury Bonds
Loss : $1.1bn
Sentence: 4 years
Star trader who forged 30,000 trading
slipes. Hide the losses of $1.1b over a
decade.
 Nick Leeson 1995
Institution: Barings Bank
Activity: Nikkei Index Futures
Loss: $1.4bn
Sentence: 4 years
Positioned in Singapore, made money at
first, but later losses. His hidden losses of
827 brought down the bank.
 Yasuo Hamanaka 1996
Institution: Sumito Corporation
Activity: Copper
Loss: $2.6bn
Sentence: 8 years
Controlled a relatively large part of the
market for copper (5%). Tried to manipulate
copper prices. Hide losses for some time.
 John Rusak 2002
Institution: Allied Irish Banks
Activity: FX options
Loss: $691m
Sentence: 7.5 years
Solid performer, spent five years cover up
his losses.
Vince Ficarra, Luke Duffy, David Bullen and
Gianni Gray 2003
Institution: National Bank of Australia
Activity: FX Options, Loss: $268m
Sentences:
Ficarra 44 months
Luke Duffy: 29 months
Bullen 28 months
Gray: 16 months
Broke trading limits 800 times, and inflated profits minutes
before the end of the year to get bigger bonuses. Bullen and
Ficarra were sentenced first.
 Chen Jiulin 2005
Institution: China Aviation Oil
Activity: Jet Fuel Futures
Loss: $550m
Sentence: 4 years + 3 months
 Matthew Taylor 2007
Institution: Goldman Sachs
Activity: S&P 500 futures
Loss: $118m
Sentence: ? Pending?
 Jerome Kerviel 2008
Institution: Socit Gnrale
Activity: European stock index futures
Loss: $7.2bn
Sentence: 5 years of which 2 years are
suspended, to be served starting fall 2014?
The first court sentenced him to pay-back, but
this was upheld by a higher court in 2014.
 Kweku Adoboli 2012
Institution: UBS (UK)
Activity: Exchange Traded Funds (ETF)
Loss: $2.3bn
Sentence: 7 years
Used his knowledge about back office routines to
cover his losses from 2008. Worked 16 hours a day,
slep under his desk. Hunted by the back office he
went home and sent a mail to his boss confessing his
losses. He was close to recup some of the losses but
sold off one day to early.
 Also, not fully covered here
Boris Picano-Nacci, 2008: 751m Equity
derivatives, ongoing investigation?
Orange County, $1.7b, 1994.
Metallgesellschaft, $1.3b, 1993

Substantial amounts of money but

how and why did it get wrong?
Gold Prices go up and Gold Mines go
under? An example

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 Gold and Derivatives
Gold mining companies Ashanti in
Ghana and Cambior in Canada.
1999 September gold prices went
up, but these firms made big losses
and almost got into default!
How could that be?

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 Miners have long positions!

Typically, mining companies hedge at least

30-40% of future sales.
Some mining companies used 15-20 years
derivative contracts.
15-20 years is a long time!
Critique: Many investors might are not
prepared to mandate companies that sell
vast proportions of ore reserve at low
prices.
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 What happened in 1999?
In Jan/Feb 1999 gold prices fell.
Miners thought that prices would stay low for
the rest of the year.
They saw losses from their positions, that
could be compensated by incomes from selling
out-of-the money call options on Gold.
Since, they assumed that gold prices would
stay low, it seemed safe and would reduce, or
off-set expected losses.
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 Earnings from derivatives?
In these firms derivatives trading was seen
as a source of income.
Thus, they mixed speculation and hedging
When they foresaw low prices, they thought
that selling options - and cash in on premiums
would lead to better earnings.
But, they did more than selling the plain
vanilla options

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 They did some Exotic Options

The Escalating Ounce: The number

of ounces that the writer might have
to deliver raises with the gold price.
The Parisian: The price at which the
firm can be asked to sell falls with
increasing market prices of gold.
The outcome was catastrophical.

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