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Nick Leeson at Barings Bank in Singapore So famous that he became a movie: ” Rogue Trader” (1999)

Nick Leeson at Barings Bank in Singapore So famous that he became a movie: ” Rogue Trader” (1999). Bo Sjö VT 2014. Barings Bank. 1992, Nicholas Leeson, clerk, moved from London to Barings Futures Singapore (BFS). To head the Singapore International Monetary Exchange (SIMEX)

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Nick Leeson at Barings Bank in Singapore So famous that he became a movie: ” Rogue Trader” (1999)

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  1. Nick Leeson at Barings Bank in SingaporeSo famous that he became a movie:”Rogue Trader” (1999) Bo Sjö VT 2014

  2. Barings Bank • 1992, Nicholas Leeson, clerk, moved from London to Barings Futures Singapore (BFS). • To head the Singapore International Monetary Exchange (SIMEX) • Trade in options and futures on NIKKEI-225, mainly 10 year Jap. Gov. Bond, 3-mths euroyen.

  3. Leeson’s Job • In 1992, took SIMEX exam. • Became a floor trader in Singapore. • And, the General manager and the Head trader for BFS. • But, Trading and Back office are normally split in two units to keep separate records. • N.L.’s task was to look for arbitrage between Osaka and Singapore Exchanges. NIKKEI-225 and Jap. Gov. futures. No risk-taking was allowed.

  4. But, Nick Leeson • He did speculate, against instructions! • He placed bets on the direction of price movements on the Tokyo Stock Exchange. • Did well at first, soon looses mounted… • 1992: - $2m, 1993: -$21m • 1994: -$185m 1995: -$619m, early Jan. and then …

  5. Wait there is more… • In 1994 he began selling (equity) straddles (short), speculating in a lower stock volatility on NIKKEI-225. • In early January 1995, he was short in 37,000 calls and 33,000 puts. • Plus long in 1000 futures. Now..

  6. In January 17 1995 – A Major Earthquake in Kobe • Markets explode in volatility and N.L. looses even more and now het bets even harder (he has nothing to lose), so by February 23 he holds: • 61,000 March futures contracts 49% of open interest. • + 24% of all June contracts. • + 88% of all Jap. Gov. Bond futures. • + Large amounts of euroyen contracts, betting on lower Japanese interest rates.

  7. Margin Calls All Over • In Feb 1995 Leeson has to spend $740m in Margin calls. • Barings in London gets suspicious, they hear rumors about an extremely big speculator on the Asian Markets.

  8. London Calling • In the last days of February 1995, Baring sends an inspector. • Leeson and his wife decide to leave Singapore for Germany. • The total loss was almost 2.10 times Baring’s Equity value. • Baring was bought and recapitalized by ING, The Netherlands.

  9. Lessons of Leeson? • Bad management, Leeson was sitting on two chairs. Trading and back office. • Better regulations ? Maybe • What has changed - not much, mostly details says Leeson.

  10. Final Words • ”They have learned nothing” according to Nick Leeson • The scandals have changed from derivatives to accounting. • The nature of man? Moral Hazard is the problem - not derivatives as such.

  11. Some sentenced individuals in trading scandal

  12. Toshihide Iguchi 1995 • Institution: Daiwa Bank • Activity: US Treasury Bonds • Loss : $1.1bn • Sentence: 4 years • ”Star trader” who forged 30,000 trading slipes. Hide the losses of $1.1b over a decade.

  13. Nick Leeson 1995 • Institution: Barings Bank • Activity: Nikkei Index Futures • Loss: $1.4bn • Sentence: 4 years • Positioned in Singapore, made money at first, but later losses. His hidden losses of £827 brought down the bank.

  14. Yasuo Hamanaka 1996 • Institution: Sumito Corporation • Activity: Copper • Loss: $2.6bn • Sentence: 8 years • Controlled a relatively large part of the market for copper (5%). Tried to manipulate copper prices. Hide losses for some time.

  15. John Rusak 2002 • Institution: Allied Irish Banks • Activity: FX options • Loss: $691m • Sentence: 7.5 years • ”Solid performer”, spent five years cover up his losses.

  16. Vince Ficarra, Luke Duffy, David Bullen and Gianni Gray 2003 • Institution: National Bank of Australia • Activity: FX Options, Loss: $268m • Sentences: • Ficarra 44 months • Luke Duffy: 29 months • Bullen 28 months • Gray: 16 months • Broke trading limits 800 times, and inflated profits minutes before the end of the year to get bigger bonuses. Bullen and Ficarra were sentenced first.

  17. Chen Jiulin 2005 • Institution: China Aviation Oil • Activity: Jet Fuel Futures • Loss: $550m • Sentence: 4 years + 3 months

  18. Matthew Taylor 2007 • Institution: Goldman Sachs • Activity: S&P 500 futures • Loss: $118m • Sentence: ? Pending?

  19. Jerome Kerviel 2008 • Institution: Société Générale • Activity: European stock index futures • Loss: $7.2bn • Sentence: 5 years of which 2 years are suspended, to be served starting fall 2014? • The first court sentenced him to pay-back, but this was upheld by a higher court in 2014.

  20. Kweku Adoboli 2012 • Institution: UBS (UK) • Activity: Exchange Traded Funds (ETF) • Loss: $2.3bn • Sentence: 7 years • Used his knowledge about back office routines to cover his losses from 2008. Worked 16 hours a day, slep under his desk. Hunted by the back office he went home and sent a mail to his boss confessing his losses. He was close to recup some of the losses but sold off one day to early.

  21. Also, not fully covered here • Boris Picano-Nacci, 2008: €751m Equity derivatives, ongoing investigation? • Orange County, $1.7b, 1994. • Metallgesellschaft, $1.3b, 1993 • Substantial amounts of money but how and why did it get wrong?

  22. Gold Prices go up and Gold Mines go under? An example

  23. Gold and Derivatives • Gold mining companies Ashanti in Ghana and Cambior in Canada. • 1999 September gold prices went up, but these firms made big losses and almost got into default! • How could that be?

  24. Miners have long positions! • Typically, mining companies hedge at least 30-40% of future sales. • Some mining companies used 15-20 years derivative contracts. • 15-20 years is a long time! • Critique: Many investors might are not prepared to mandate companies that sell vast proportions of ore reserve at low prices.

  25. What happened in 1999? • In Jan/Feb 1999 gold prices fell. • Miners thought that prices would stay low for the rest of the year. • They saw losses from their positions, that could be compensated by incomes from selling out-of-the money call options on Gold. • Since, they assumed that gold prices would stay low, it seemed safe and would reduce, or off-set expected losses.

  26. Earnings from derivatives? • In these firms derivatives trading was seen as a source of income. • Thus, they mixed speculation and hedging • When they foresaw low prices, they thought that selling options - and cash in on premiums would lead to better earnings. • But, they did more than selling the plain ”vanilla options”

  27. They did some Exotic Options • The Escalating Ounce: The number of ounces that the writer might have to deliver raises with the gold price. • The Parisian: The price at which the firm can be asked to sell falls with increasing market prices of gold. • The outcome was catastrophical.

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