TAILIEUCHUNG - Lecture Financial derivatives - Lecture 13: Baring Bank

Barings Bank was established in London in 1763 as a merchant bank, which allowed it to accept deposits and provide financial services to its clients as well as trade on its own account, assuming risk by buying and selling common real estate and financial assets. In early 1980, Barings set up brokerage operations in Japan. With its success in Japan, Barings decided to expand to Hong Kong, Singapore, Indonesia and several other Asian countries. | Lecture # 13 "Bankers who hire money hungry geniuses should not always express surprise and amazement when some of them turn around with brilliant, creative, and illegal means of making money." “The quotation is from a speech by the financial thriller writer on the Psychology of Risk, Speculation and Fraud, at a conference on EMU in Amsterdam. Baring Bank Barings Bank collapsed when one of the Singapore based employees of London's Barings Bank, Nick Leeson, lost £827 million (US$ billion) - primarily on futures contract speculation. Leeson's actions led the oldest merchant bank to default on its debts. The bank's collapse is considered a pivotal turning point in the history of banking and has become a textbook example of accounting fraud. Internal auditing The way that Barings Bank's activities in Singapore were organized between 1992 and 1995 enabled Leeson to operate effectively without supervision from Barings Bank's head office in London. Leeson acted both as head of settlement operations (charged with ensuring accurate accounting) and as floor manager for Barings' trading on Singapore International Monetary Exchange (SIMEX). Normally the positions would have been held by two employees. This concentration of functions placed Leeson in the position of reporting to an office inside the bank which he himself held. Several observers, including Leeson, placed much of the blame on the bank's own deficient internal auditing and risk management practices. Corruption Because of the absence of oversight, Leeson was able to make seemingly small gambles in the futures market at Barings Futures Singapores (BFS) and cover for his shortfalls by reporting losses as gains to Barings in London. Specifically, Leeson altered the branch's error account, subsequently known by its account number 88888 as the "five-eights account," to prevent the London office from receiving the standard daily reports on trading, price, and status. .

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