Barings Collapse: The Backstory

GROUP ASSIGNMENT: DUE APRIL 2016

QUESTIONS:

Based on other related sources and the two articles enclosed, in your own words (15-20 pages written work):

1) What are Ethics? Generally, why do people act unethically?

2) Justify why is there a special need for ethical conduct in professions including those in the accounting and auditing related field?

3) Discuss how the Barings collapse serves as an example of failed internal controls and governance within organization.

1st Article - Barings Collapse

(Posted by RiskLearn on Sep 14, 2012 in Case Studies)

Barings Collapse: The Backstory

Nick Leeson was a poster child in many ways for the “Big Bang”, the deregulation of the banking sector in the city of London that brought so many opportunities to the gifted and talented.  Leeson came from humble beginnings, the son of a plasterer from Watford. He left school with minimal qualifications and joined as a clerk with Coutts, the bank to the queen. From here he moved to Barings eventually via a few different banks. From the back office he managed to get to the trading floor. There were few indications that this man would be responsible for the Barings Collapse, one of the most famous financial disaster stories of our times.

He proved himself to be a star trader and eventually he was moved to Singapore to act as manager to the Barings operations on the SIMEX floor in Singapore. Again in this role he performed very well. In 1993 he singlehandedly contributed 10% of the bank’s profits, which was worth about 10 million sterling. This meant that he earned a £130,000 bonus on to top his base salary of £50,000. The strategy that was making them money at this time was what is known as a “switching” strategy. The play here was very simple – trading futures on the Nikkei 225 as the underlying. The Nikkei 225 was traded as a future on both the SIMEX and the Osaka markets. There were always known to be differences between the two markets which could be arbitraged. The idea was to exploit the differences between the 2 markets, and execute in the cheaper market on client orders. This would then allow Barings to net a profit as they execute in the cheaper market but quote the client the price in the more expensive market. The underlying idea was of course to always be long one and short the other.

Barings Collapse: The Genesis

His ability for generating profits essentially earned him the trust of the top brass back in London who thought what he was doing was pretty normal. Leeson went on to take control of the back office as well. Coming from a settlements background Leeson knew exactly how the back office worked. He used this to basically start hiding losses. This is where he created the infamous error 88888 account. An error account per se is quite normal, it is used by brokers to book small intraday errors which are then settled at the end of the day.