Niclas Leeson Essay

Submitted By seabass01
Words: 786
Pages: 4

Nicholas Leeson was born 1967 in England and started working in 1989 for the famous and oldest British Investment Bank Baring Brothers & Co (BB&Co). BB&Cp was founded in 1762 in London and was with the Rothschild Bank one of the most important Banks in the 19th century in the world. But in 1995 the Bank was rather small and only ranked 474th in the world banking market. At the time Nicholas Leeson started to work BB&Co, BB&Co founded a subsidiary Barings Securities. He was sent to Hongkong to lead a team which task it was to solve accounting problems for the subsidiary. In 1992 he was promoted to the General Manager of the Baring Securities in Singapore. His task was the hiring of traders and the control of the different trades. Yet he wasn´t allowed to trade by himself. After he passed the trading certificate for the Singapore Stock Exchange he was allowed to trade by himself. So now his task within Baring Securities was to control trades and do trading by himself. Soon after that he started with the first unauthorized trades. Leeson traded Future contracts on the Nikkei 225. He created a secret error account named 88888. Leeson´s idea was that the Nikkei 225 would be rising since it fell about 50% from 1989 to 1994 and the intrest rate was very low. So Leeson sold options and hoped the Nikkei 225 would rise at the same time he was short Japanese Government Bonds, so if the interest rate was rising and the economy would be weak he lost money with his options on the Nikkei 225 but would have offset his losses on the Nikkei 225 with the options on the Japanese Government Bonds. But prices in Japanese Government Bonds kept rising and the Nikkei 225 was performing poor. So Leeson had big losses which he entered in his secret error account 88888. To offset the losses he sold more and more futures on the Nikkei 225 to earn a premium immediately. With these earning he could offset his losses at the ending future contracts. So in July 1992 he had sold and bought 2051 Nikkei 225 futures and lost about 64,000 $. By the end of the year his losses were close to 3.2$ million. In 1993 he was performing well and reduced his losses to 40,000$ in July 1993 but unfortunately he kept trading. In December 1993 his losses were about at 30$ million. To hide these losses he sold futures worth 35$ million. In 1994 the Nikkei 225 just fell under the bench mark of 20,000 and Leeson´s losses were at 330$ million. As an earth quake hit Japan in 1995 the Nikkei 225 fell to about 18,000 by this time Leeson had about 55,399 unhedged Nikkei Futures. As the interest rate wasn´t rising he did lose with the futures on the Japanese Governtment Bonds as well. Friday 24th of February the HQ in London