Nick Leeson's Double Life

Nick Leeson's Double Life

In 1999, director/screenwriter James Drearden released the movie Rogue Trader, which encapsulates the true life of futures trader Nick Leeson and his role in the downfall of Barings Bank. Ewan McGregor stars at Nick Leeson, an ambitious young British stock trader while Anna Friel plays his wife Lisa. Drearden's focus is on Leeson's activities at the Singapore Stock Exchange but he also constructs a love story subplot that adds little to the central plot. Critics of the movie Rogue Trader find Drearden's attempt to be provide little insight to actual events and a "Major Disappointment."

James Drearden portrays Nick Leeson as a rebel, a character that gets drunk in pubs and discos who bears his bum to flight attendants. This depiction of Leeson is far from the truth. Although he is certainly foolish, Leeson was the poster child for western capitalism. He grew up in Watford, England as the son of a plasterer; who then landed a job in London in a low-key position and grew to become Baring's Bank star trader in Singapore. Leeson joined Barings in 1989 when the old financial institutions started a new way of thinking, when they replaced hiring upper class recruits to those of less privileged background. These new traders were called "barrow boys," which was to indicate the "aspiring yuppie elements prevalent in the financial in the financial centers of the world."

Barings main intention in Singapore was "to trade derivatives in a low risk, but very profitable arbitrage strategy." There is no actual tangible worth, but instead their value comes from "separating the risk portion from the underlying security and trading this derived element as a separate entity." There are two categories that derivatives fall in: options and futures. Option contracts allow the holder to buy or sell an underlying asset by a specified date at a specified price, while a future contract requires the seller to deliver a specific asset to the buyer on a specified date for a predetermined price. The trading or derivatives is extremely risky and Barings prepared no insurance plans for the uncertain business. Barings believed Leeson had the knack for speculating the price changes in the Far Eastern markets, and was therefore sent to Singapore. He was seeking profits through price differences in the prices of the Nikkei-225 future contracts that were listed on the Osaka Securities Exchange and the SIMEX. Leeson was betting on the rise of the Nikkei index, but he lost.

Before his luck ran out, he had made more than 10 million pounds for Barings, which was about 10% of Barings's total profits for 1993. Leeson created these profits through unauthorized activities, when he took proprietary position on SIMEX on both futures and option contracts. The bankruptcy of Barings Bank was due to one of its division, Barings Futures in Singapore, which was headed by Nick Leeson. Leeson was allowed to be in charge of both the front and back office. In 1994, a mistake by one of the inexperienced trader in Leeson's team began a chain of events that led to his demise. As depicted in the movie as well, the woman lost about 20,000 pounds and Leeson created an error account, the infamous 88888 account, to cover up the loss. The viewers are to believe that Leeson created this account to protect the jobs of all the staff that worked under him, which makes the character of Leeson an admirable and likeable guy. However, the 88888 account grew to become a loss of $2.2 billion.

Even as the Error Account grew, Leeson was still viewed as the wonder boy, the arbitrageur who was able to turn a profit and contribute to half of the entire firm's 1994 profits. But in 1994, Leeson lost $296 million dollars for Barings, although his superiors believed he made them a profit of $46 million. Leeson was able to fool Barings through something called cross trading. Cross trading is a transaction that is done on the floor of the Exchange by a member who is buyer and seller. Leeson entered into a high number of cross trading between several Barings accounts: '88888', '98007' (Barings London- JGB Arbitrage), '92000' (Barings Securities Japan - Nikkei and JGB Arbitrage), and '98008' (Barings London - Euroyen Arbitrage). "After executing these cross-trades, Leeson instructed the settlements staff to break down the total number of contracts into several trades, and to change the trade price thereon to cause profits to be credited to 'switching' accounts referred to above and losses to be charged to account '88888'."

Barings believed that the profits Leeson was generating came through the inter-exchange arbitrage activity involving 'switching' between SIMEX and the Japanese Exchange. Leeson requested money from London to cover his purchases of more futures and options. By February 23, 1995, BSLL sent him $600 million with little question, believing part of the money was considered loans to clients. Leeson did not work within his specified authority, which is another reason for how the losses became great. He did not have the authority to trade in options, only on behalf his clients. He continued unauthorized trading in future and options on the '88888' account. The Barings Securities London (BSLL) was not aware of the '88888' account since did not show up on files from Singapore to London. However, SIMEX was aware of the account but they were misinformed of the true nature, instead they believed the account was a customer account. Leeson could not hide the account from SIMEX, but he could from the BSLL

From the beginning when Leeson came to Singapore, he suffered losses. He suffered about $64,000 right away and by the end of 1992, the '88888' account was more then $3.2 million. But in mid-1993, the numbers grew in his favor and decreased his loss to only $40,000. Leeson was determined to continue trading until his numbers were positive. In the movie Rogue Trader, Leeson described what he was doing was gambling, which is true in the sense that

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