It is somehow surreal to hear the applause of the audience--a room full of financial sector professionals--on the introduction of Nick Leeson. After all, his crimes resulted into the downfall of his employer, Barings Bank, with various financial implications for his colleagues and the partners of the group.
Leeson comes from a modest background, growing up in Watford, England. He was hired as a settlement clerk at Coutts, a private bank, at the age of 18. “I always thought I was gonna go to university and I was probably going to read law, I probably should have,” Leeson told the Cross-Border Distribution Conference on Thursday 25 May.
After spending some educative years at Morgan Stanley, he started at Barings Bank in 1991, a “very steady 233-year-old merchant bank that was going through a bit of an identity crisis.” Leeson explained that the bank employing 2,500 people “had one risk manager, one compliance officer, [and] I think they were the same person.”
Thanks to his work ethic, he believes, he managed to be transferred at the age of 25 to Singapore to run the futures and options department (F&O).
Leeson borrowed the motto “knowledge is nothing without understanding” from the Wall Street Journal to explain the failure of the bank. He argued that some colleagues may have had the best education but were unable to “understand how the business fits together.” In addition, he reported that his colleagues were either not willing nor trying to understand what was going on “and that is wrong.”
From the first day, I put the trade into the five-8 account, I expected a knock on the door, every single minute of every day, every time somebody rang up, that was it, I was going to be exposed
Leeson noted that he had “never” been challenged by other traders or senior managers. He explained that the F&O operation is a “cash rich business” in which “you take more money from your clients than you give [it] to the exchange. “So, the fact that they sent me £650m to cover my illegal positions, which were cash rich, is just nonsensical throughout the three-year period,” said Leeson.
“We can’t deal with Barings anymore”
On some abnormally high Nikkei futures positions and the obvious concerns of clients regarding the financial state of the bank, a former employee of Barings reported to Yuri Bender of the Financial Times, the reported words of Lord Andrew Fraser, the then CEO of Barings Securities who allegedly said with a “classic British understatement: this is terribly dissatisfactory, isn’t it?”
“My illegal position in the five-8 account was huge [and] was getting bigger all the time,” Leeson said. “It was an error account originally,” he added. “From the first day, I put the trade into the five-8 account, I expected a knock on the door, every single minute of every day, every time somebody rang up, that was it, I was going to be exposed.”
He explained that his positions were hit by several events, including the earthquake in Kobe. Yet, the management channelled “£650m” to cover his mark-to-market losses. Even the Singapore International Monetary Exchange (Simex), the local financial regulator, “[was] worried about how a small bank [with] a capital base of only £250m, got me £650m during that period,” said Leeson. “You know, I [had] a position at the Simex that went unreconciled for nearly a three-year period [and] the discrepancy was getting bigger and bigger by the day.”
“Simex sent a letter to the CEO of Barings in Singapore [who] knew nothing about F&O department,” Leeson alleged. “So, he gave the letter to the executive who ran the operations department [locally], he knew nothing about F&O. So, he gave the letter to me,” according to Leeson. “So, it was me responding to the Simex about my illegal positions.”
It appears that nobody--including internal auditors, the external auditors and the regulator--identified the discrepancies in the trades and accounts reconciliations until 23 February 1995 when he fled Singapore as he could “reasonably not provide an explanation to an illegal account.”
Catch me if you can
On the back of losses totalling $1.4bn, according to Leeson, he fled Singapore on 23 February 1995 without a plan. An international manhunt started and covered a list of countries he visited, such as Malaysia, Brunei, Thailand, Abu Dhabi and Germany.
After flying to Kuala Lumpur and then to Kota Kinabalu, where he almost killed himself during a white water-rafting ride and a discussion with some colleagues on the state of the affair, he understood that he had to “get to a Western environment as quickly as possible,” said Leeson. “So you’re then turning on the TV and yeah, there’s pictures of me everywhere.” He added, “how I got past the border, I don’t know.”
It is not all fun and excitement: “prison was tough in Singapore”
“You’re locked up for 23 hours a day, you sleep on the floor, the floor is very rough, and uneven. Everybody’s a triad gang member,” he explained. As a triad gang member “you're either a fighter or you’re a general, there’s not a great deal in between.” To his surprise, he was elevated to the rank of general as “I was this uber criminal that stole millions of Singaporean dollars, so they thought I was great.”
Diagnosed with colon cancer, he went through an operation that left him with 39 staples and had to recover in dire conditions. He thinks that the circumstances made him “stronger, tougher and more resilient.”
A financial scandal tends to start out of small errors that balloon out of proportion. “You know what you are doing [is wrong],” said Leeson. Instead of reporting them to management, he doubled down, hoping to “get to the same level and nobody would [notice].”
“And if you continue, which I did during that time, you have to be fully accountable and responsible for your actions.” However, his fear of failure resulted into a situation in which “admitting to what was going on was very, very difficult.”
Leeson managed to attract the sympathy of the public. Indeed, he concluded by promoting the vertu of honesty. “I’m far too honest, these days. I tell my wife far too much.” Listening to the reaction of conference attendees, it appears that the public has elected to give Leeson a second chance.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .