Although books and biographies have been written about the fall of England’s largest and most prestigious bank, the following will give a synopsis of the tragedy that was filled with deceit, possible conspiracy, and definitely unethical behavior. On February 25, 1995, Barings Bank announced to the world that it was insolvent to meet its losses accumulated on the SIMEX, Singapore International Monetary Exchange, by a trader named Nick Leeson. As amazing as it sounds, Nick Leeson had lost the bank 869 million pounds in less than three years. How is it possible? Who is responsible? Why did it happen?
The story started in July 1992 when a twenty five year old futures and options trader, Nick Leeson was sent to Singapore to be a “telephone clerk” for Barings’ newly established Baring Futures (Singapore) Ltd. However Leeson was not simply an order taker, he was the Floor Manager as well as the Head of Settlement Operations. To completely understand the duties of each position are complex but each position is suppose, “to keep an eye” on the other. Barings’ management claimed in court that Leeson was only hired as a “Telephone Clerk,” but his ability to demand more money from the London office and to manipulate accounts showed otherwise.
Nick Leeson was primarily trading Nikkei 225 futures on the SIMEX and Osaka exchange by using a trading strategy called arbitrage. There is nothing illegal about that, he was simply trying to take advantage of the spread in trading prices between the two exchanges. He set up the relevant accounts for Barings’ customers and an error account for any mistakes that might be made. Errors are a common facet of the trading business but most often these errors are negligible to the trading (Broker Dealer) firm’s bottom line. Oddly, Leeson numbered this error account 88888 rather than utilizing a standard account number beginning with the number 9.
Although the home office was not concerned with this, a new error account was established with the number 99002. However, Leeson never closed the original error account, 88888, because he was in fact using the error account for his own trading purposes. This was relatively easy for Leeson since the Monetary Authority of Singapore refuses outside regulators permission to inspect the operations of subsidiary banks working on the SIMEX and because the Baring home office had left Leeson and the Singapore group to do their own reconciliation (matching trades and accounts).
Leeson had complete control of the daily operations, but how did he get access to so much money? Although discovered after the Bank’s collapse, Gordon Bowser, the Derivatives Manager in London, had given full discretion to Leeson to ask for whatever funds he needed to cover margin calls for clients without having to provide any details. A margin call is when you leverage your cash to a point where the exchange requires more capital to insure your solvency to cover your outstanding positions.
By having this open doorway to capital, Leeson could create false margin calls and errors in order to fund and support his 88888 account. By the Fall of 1993, Barings’ top executives considered Leeson a trading genius because he was reporting incredible profits. In reality, Leeson was taking the trading losses in his secret error account and thereby improving his reported performance. Leeson was promoted to Assistant Director and General Manager and was even given discretion to the time and price of all trades.
According to his own testimony, Leeson had already lost 25 million pounds by the end of 1993. The real destruction of Barings came when the Bank decided to consolidate their entire capital under one roof rather than keep it separate between Bankers and Brokers. This solo-consolidation allowed Leeson to use more of the firm’s capital. Instead of being limited to 25%, Leeson had leveraged 44. 6% of the firm’s consolidated capital by the end of 1993. In 1994, Leeson would attempt to earn back the money by partaking in even more aggressive trading activities in the 88888 account.
He would take the losses from 25 million pounds to over 800 million by the end the year. With Leeson’s trading activities utilizing some much of Barings’ capital, the bank decided to pay more attention his activities and to do some its own reconciling. Unfortunately, it was not until February 1995 that Barings sent Tony Railton to Singapore to reconcile all client accounts with margin calls. It took only ten days from Railton’s arrival for Barings to realize that they were insolvent. Barings Bank conceded to the world their demise two days later on the 25th of February.
Leeson was caught at the airport and sentenced to 6 years in Changi jail. He was released after serving only 4 years due to colon cancer. Since his release in July 1999, he has been giving seminars and speaking publicly about his activities during his employment with Barings. However, he will receive nothing from these public appearances, his book, Rogue Trader, or the movie “Rogue Trader. ” All money received will be put towards paying off a 100 million pound plus interest and costs injunction placed against him by the creditors of Barings Bank.
After the collapse, the Dutch Bank ING, the Internationale Netherlanden Groep, bought Barings Bank for 660 million pounds. Today, the Bank goes by the name ING Barings. Obviously, Leeson acted in an unethical manner, but is he the only one to blame? Many people have argued that the Barings’ executives should also be held accountable because of their poor management and lack of responsibility to the stakeholders of the company. Sources: Fay, Stephen. The Collapse of Barings. Richard Cohen Books, London. 1996. Leeson, Nick. Rogue Trader. Little, Brown and Company, London. 1996. British Airways
After years of being a government run business, British Airways was privatized in 1983. Several years later, after the market was opened to competition, Richard Branson entered the fray. Branson, well known as one of Britain’s premier entrepreneurs, founded Virgin Atlantic Airways. The airline was new territory for the successful Branson, as he was best known for founding Virgin Records over a decade earlier. Although Virgin in the late eighties and early nineties had only eight planes and British Airways had 230, British Airways presumably found the high profile start-up a threat.
Apparently, British Airways employees engaged in quite questionable practices to ensure its small rival would have even less of the market share. Richard Branson of Virgin filed a libel lawsuit against the airline giant in Great Britain due to some of these unseemly business practices. In court, evidence of British Airways’ unethical behavior was presented. Allegedly, the company broke into Virgin’s computers for information on their passengers. British Airways also hired a Public Relations specialist, Brian Basham, to find and release negative information about Branson and Virgin to the media.
British Airways employees also engaged in “poaching”-they contacted or approached Virgin customers and falsely claimed their flights on Virgin had been cancelled or over-booked. Then agents asked if the passengers would be interested in flying on British Airways, instead? Other allegations surfaced as well, such as break-ins at the homes of Virgin employees. Please see: http://www. businesswire. com/webbox/bw. 081997/455117. htm, As more information came out, British Airways decided to settle out of court. In early 1993, British Airways paid Richard Branson 2.
5 million to settle the “libel” portion of the suit. This was to compensate Virgin for the damage to its reputation. The executives admitted they had engaged in a campaign against Virgin, but did not reveal the extent of their campaign. (Dwyer, Paula. “BRITISH AIR-NOT CRICKET, “Business Week On-line, January 25, 1993. ) Virgin again filed suit against British Airways in Britain in 1993 to review the “poaching” charge. Unfortunately, the top managers at British Airways have never fully disclosed their unfair business practices. (Coleman, Brian.
“Virgin Group Sues British Airways Over ‘Dirty Tricks,’ Wall Street Journal, May 7, 1993) Later in 1993, Branson later filed suit against British Airways in the United States, alleging an anti-trust situation. In total, Branson’s lawsuit filed in the United States consisted of six different charges. Virgin claimed damages in the amount of one billion dollars. During 1997, the court dismissed three of the six charges and allowed Virgin more time to gather additional information. In November of 1999, all remaining charges against British Airways were dismissed because Virgin had not met its burden of proof in the claims.
For more information, see http://press. britishairways. com/cgi-bin/view_article_month In 1997, Virgin filed against British Airways with the European Union Court, and Virgin won. British Airways was forced to pay 6. 8 million in fines for unfair business practices. Virgin accused British Airways of compensating British travel agents through extra commissions to book passengers on British Airways instead of Virgin. In fact, the European Union warned British Airways its incentives were illegal, prior to Branson’s lawsuit, and the company chose to ignore the warning.
Regardless of the truth ever emerging, the tactics of British Airways had little affect on stakeholders. In 1993, the company’s stock fell over ten percent. By the end of 1993 the stock value jumped to more than recover any of those losses. In addition to temporary stockholder losses, the company lost money in the form of various fines and legal costs. These fines were quite small in comparison with British Airways’ revenue of over 8. 6 billion dollars. Please see: http://www. hemscott. com/EQUITIES/company/cd01593. htm The succession plan of management did not change despite suspicion of active involvement in the tactics.
During the initial lawsuit, John L. King was President and Chairman of British Airways. He fulfilled his plan to name Sir Colin Marshall as his replacement as Chairman upon his scheduled retirement in July of 1993. Witnesses in trial proceedings actually stated that tactics they had used were known and approved of by management. Marshall continues to sit on the Board today. British Airways lost some of its credibility and damaged some of its future partnerships. When the facts came out, the general public viewed the airline with disdain.
The allegations of the unethical practices and the ensuing lawsuits endangered potential partnerships with American Airlines. Eventually, though the partnership culminated. Also, British Airways had to withdraw a bid for a substantial portion of US Airways at one point as well because the United States government would not approve of the deal. Several years later, British Airways formed a partnership with US Airways.
See http://flug-revue. com/FRHeft/fr9609e. htm; (Dwyer, Paula. “BRITISH AIR-NOT CRICKET, “Business Week On-line, January 25, 1993. )Today, the companies have what is now known as a friendly rivalry. Several years ago, Martyn Gregory and Nick Rufford wrote a book called “Dirty Tricks: The Inside Story of British Airways Secret War Against Richard Branson’s Virgin Atlantic” which told the story about the unfair, unethical, and illegal tactics of British Airways against Virgin. Unfortunately, this book went out of print within weeks of its first publication, and is still extremely difficult to find. Both companies are thriving in today’s healthy business climate. Additional resources: www. virgin-atlantic. com www. british-airways. com.