Barings Bank
From Invertopedia, the encyclopedia of how things fail
Barings was the oldest merchant bank in the City of London, founded in 1762[1]. Nick Leeson, who ran its small futures unit in Singapore, hid his losing trades in an account numbered 88888 and told London he was making money[1]. By February 27, 1995 the hidden losses had reached £827 million, about $1.4 billion and more than twice the group's recorded capital[3][4]. The 233-year-old bank went into administration on February 26, 1995 and the Dutch group ING bought it for £1 a week later[1][5].
Contents
The bet
Barings' managers in London believed the Singapore desk made its money from low-risk arbitrage, buying Nikkei futures on one exchange and selling them on another, with fully matched trades and no real risk to the bank[1]. Leeson was seen inside Barings as a "star performer"[1].
In reality Leeson had no authority to hold positions overnight or to trade options for the bank[1]. He was holding large bets: long Nikkei futures, short Japanese government bond futures, and options that paid only if the Nikkei stayed calm[3]. Because he also ran the back office that settled and recorded the trades, he could keep the losses out of sight[1][3].
What happened
| 1762 | Barings is founded as a partnership in London.[1][2] |
|---|---|
| Mar 1992 | Nick Leeson moves to Singapore after almost three years in back-office jobs at Barings in London. From late 1992 he is General Manager and Head Trader of Baring Futures (Singapore).[1] |
| Jul 1992 | Account 88888 is opened, shortly after Leeson arrives. His unauthorised trades go through it.[1] |
| Dec 31, 1994 | Losses hidden in 88888 reach about £208 million. Barings' draft accounts for 1994 show a pre-tax profit of £102 million.[1][3] |
| Jan 17, 1995 | An earthquake hits Kobe, Japan, the morning after Leeson sells a straddle that bets the Japanese market will stay still.[2][4] |
| Jan – Feb 1995 | According to Price Waterhouse, London sends about £550 million to Singapore to meet payments on Leeson's contracts.[5] |
| Feb 23, 1995 | The losses are discovered. Leeson leaves Singapore, leaving a note that says "I'm sorry."[1][2][4] |
| Feb 26, 1995 | On a Sunday, the High Court in London appoints administrators to run Barings plc.[1][3] |
| Mar 5, 1995 | ING buys Barings for £1 and plans to put in £660 million to restore it.[2][5] |
| Dec 1995 | In Singapore, Leeson pleads guilty to two charges, including deceiving Barings' auditors, and is sentenced to six and a half years in prison.[4][6] |
The kill shot
The man placing the bets also kept the books. Nobody else in Singapore could see what he was doing, and nobody in London made him stop running both jobs.
The Board of Banking Supervision, which investigated for the Bank of England, called Leeson being left in charge of both front office and back office "a most serious failing"[1]. The group treasurer flagged it as unsatisfactory in February 1994, and an internal audit later that year recommended splitting the roles[1]. By February 1995 nothing had been done, and most of the managers who read the audit said they thought it was someone else's job[1].
Money kept flowing the other way. London met Singapore's requests for margin cash without any effective query and without checking them against client records[1]. Just before the collapse, the funding sent to the Singapore unit was twice the capital of the whole group[3]. The board's conclusion was that the losses came from unauthorised and concealed trading, and that they went unnoticed because of "a serious failure of controls and managerial confusion within Barings"[1].
Red flags ignored
- One person, both sides of the trade. Leeson ran trading and settlements for the whole time, and the fix recommended by Barings' own internal audit was never carried out.[1]
- Profits that were too good. Arbitrage between two exchanges is meant to earn thin margins, yet the Singapore desk looked like one of the group's best earners.[3]
- Cash going out, profits coming in. A desk that was said to be making money kept asking London for more and more cash, and London kept paying.[1][3]
- An exchange asked about 88888. On January 11, 1995 the Singapore exchange SIMEX wrote to the unit about account 88888 and margin questions. The letter was not passed on to London at the time.[1]
- Nobody clearly in charge. Leeson's reporting lines ran to several managers in different cities, and none of them properly checked his trading.[1][5]
The cost
£827 million of hidden losses by February 27, 1995, and £927 million once the open positions were closed out[3]. Barings' recorded capital was about £350 million[3]. ING paid £1 for the bank and planned to put in £660 million[5]. About 1,200 people lost their jobs[4].
Leeson served his sentence in Singapore's Changi Prison and was released after four years and four months[2].
The inversion
Never let the person making the bet also keep the score. Split trading from settlement, and when a desk keeps asking for cash while reporting profits, check the cash before you believe the profits.
What survived
The business, under new owners. ING says its UK wholesale banking arm traces its history back to Barings' founding in 1762, and it describes the 1995 deal as "a symbolic £1"[7].
The lessons. The Board of Banking Supervision's report, published on July 18, 1995, ran to 354 pages and closed with a section on the lessons for banks, for the Bank of England and for UK regulation[1].
References
- ^ “Report of the Board of Banking Supervision Inquiry into the Circumstances of the Collapse of Barings (HC 673)”. Board of Banking Supervision, Bank of England, July 18, 1995 (via GOV.UK). The primary record: founding in 1762, administrators on February 26, 1995, Leeson's posting and roles, account 88888 opened July 1992, £208 million by end-1994 and about £830 million by February 27, 1995, the "star performer" and arbitrage belief, no authority for overnight positions or options, the front and back office finding, the internal audit, the unchecked margin funding, the SIMEX letter not passed to London, discovery on February 23, the conclusions and the lessons section.
- ^ “On this day: the collapse of Barings Bank”. City A.M. (Eliot Wilson), February 26, 2026. Founding in 1762, the Kobe earthquake on January 17, 1995, the "I'm sorry" note, ING's £1 purchase on March 5, and release after four years and four months.
- ^ “Implications of the Barings Collapse for Bank Supervisors”. Reserve Bank of Australia Bulletin, November 1995. Summary of the Board's report: £827 million by February 27, £927 million with close-out costs, £350 million group capital, the £102 million draft profit, Leeson's positions, control of front and back office, over 60 percent of worldwide derivatives revenue credited to Leeson's desk, and funding twice group capital.
- ^ “Nick Leeson: rogue trader”. Crime+Investigation (UK). The £827 million loss ($1.4 billion), the January 16 straddle and Kobe earthquake, the February 23 flight, about 1,200 jobs lost, the guilty plea and six-and-a-half-year sentence.
- ^ “Britain Probes Causes of Barings Collapse”. The Christian Science Monitor, March 8, 1995. The 233-year-old bank, ING's £1 purchase on March 5 and £660 million injection, the £550 million sent to Singapore, and Leeson's three bosses in London.
- ^ “December 2, 1995: Whiz-kid trader Nick Leeson jailed”. Gulf News, Today in History (December 2, 1995). Guilty plea to two charges, nine more counts taken into consideration, six and a half years including six months for deceiving Barings' auditors.
- ^ “ING's £1 deal: 30 years of UK growth”. ING, March 5, 2025. The "symbolic £1" purchase and ING's UK wholesale bank tracing its history to Barings.