Rogue Trader: I Brought Down Barings Bank and Shook the Financial World.

• Author: Pressman, Steven

In February 1995 Barings Bank, a staid British merchant bank, collapsed. Barings had financed the U.S. Louisiana Purchase from France in 1803, and by the early nineteenth century had become banker to the royal family. It had just reported record profits for 1994.

The proximate cause of the Baring bankruptcy was that a futures trader, Nick Leeson, had purchased options contracts tied to the Japanese stock and bond markets for the Bank. When the Japanese stock and bond markets tumbled in 1994, Leeson bought more options in an attempt to prop up the market and recoup his losses. But stock prices continued to fall, interest rates continued to rise, and bond prices continued to fall. As a result, Leeson eventually lost more than $1 billion.

Because Leeson was not authorized to make trades of this magnitude for the Bank, he had to disguise his trades from his superiors. In one particularly egregious instance of fraud, Leeson faxed Coopers & Lybrand, who was auditing Barings' Singapore office, a phony letter stating that 7.78 billion yen ($80 million) was owed to Barings Bank by Spear, Leeds & Kellogg, and would be paid shortly. For his part in the fraud, Leeson is currently serving a six-and-a-half year prison term in Tanah Merah prison, Changi, Singapore.

But the question on everyone's mind, and the more important question, is not about proximate causes but about systemic causes: how could a young man from a small town in England, and without a college degree, deceive his employers and bring down one of the oldest and most conservative financial institutions in the world? This book provides one side of the story - an inside story, and indeed a very biased inside story.

It all started when Barings Future Trading in Singapore hired Nick Leeson. Leeson had just spent a year or so in Jakarta, Indonesia at the Far East branch of Barings. To call it an office would be much too charitable. According to Leeson, he worked out of a hotel room and the bank's accounts were a total mess. Barings bought stock for its customers (primarily other banks), but had not been paid because certificate denominations were wrong and documentation about the trade was wrong. Through perseverance Leeson straightened out these problems, and then went around collecting the money owed to Barings.

Leeson also points out (in a subtle attempt to demonstrate his honesty) that more than [pounds]100 million worth of bearer bonds were just lying around the hotel room in Jakarta...