BACKGROUND OF THE PROBLEM : PRESENT FACTS ABOUT BARINGS AND LEESON · Barings bank crash in 1995 : Lack of compliance, control procedures and unauthorized activities of Nick Leeson, trader of Britian’s oldest financial institutions. · Management of a derivatives operation. · Baring Futures Singapore (BFS), a Singaporean registered company, was an indirect subsidiary of BSL. BFS was originally formed to allow Barings to trade on the Singapore International Monetary Exchange. At the time of collapse BFS employed 25 staff. BSL’s other significant Singaporean subsidiary was Baring Securities (Singapore0 Pte Limited (BSS) which employed some 115 staff. BSS’s principal activity was securities trading. · Nicholas Leeson, Chief Trader and General Manager of Barings Inc Singapore. Main job was to buy and sell futures contracts on the Nikkei-225 and JGB over the Osaka Securities Exchanges (OSE), Tokyo Stock Exchanges (TSE), and Singapore International Monetary Exchange (SIMEX), taking the slight price differential listed on these exchanges. Since the margin was small, the volumes traded tend to be large. · Leeson came from a working class family, with no more education beyond high school. He work his way up from junior clerk position. Was erratic as a student, work hard and play hard. · Only a small amount of money, called a margin is needed to establish a position. Without prudent management, a firm may find itself facing financial obligations way beyond it means. · Managers who are based overseas often have local reporting lines (typically of an administrative nature) as well as reporting lines to a product manager (who may be based at the business' head office or a regional office.) · Leeson reported to Barings' management in Singapore for BFS's office infrastructure, in particular to Mr James Bax, Regional Manager South Asia and Director of BFS, and to Mr Simon Jones, Regional Operations Manager South Asia, also Director of BFS and Chief Operating Officer of BSS. Jones and the heads of the support functions in Singapore also had reporting lines to the Group-wide support functions in London. · Whilst there was some debate about Leeson's precise reporting lines from 1 Jan 1994, for product profitability, Leeson reported to Mr Ron Baker, Director of BB&CO and Head of the Financial Products Group (FPG) of BIB, via Ms Mary Walz, one of Ron Baker's London based managers and also Director of BB&CO and Global Head of Equity Financial Products, BIB. THE EVENT : DESCRIBE THE EVENT THAT ALLEGEDLY BANKRUPTED THE FIRM · Activities of Nick Leeson’s Japanese and Singapore future exchanges led to the downfall of Barings. · Barings could not meet the enormous trading obligations Leeson established in the name of the bank. · Feb 27, 1995 when Barings when into receivership, the outstanding position created by Leeson for futures positions on Japanese equities and interest rate = US$27 billion, on Nikkei 225 equity contract = US$7 billion : Japanese Equities on the Tokyo Stock Exchange’s Nikkei-225 Stock Index , on Japanese government bond (JGB) = US$20 billion : Japanese Stock Index (Nikkei-Index and Options). · Leeson’s transactions were over a very short span of time and simultaneous. Most positions were hedge to minimize risk.
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