Any experienced or professional trader can tell you that trading can be a very profitable business. But there's a great deal of risk involved, which means the chances of losing your money is just as great. It's even harder to deal with when someone else loses your money—especially if they work for a big bank. That was what happened with Nick Leeson.
Leeson was a rising young trader at England's Barings Bank in 1995 until he lost $1.3 billion of the bank's money in risky derivatives and unauthorized derivatives trades. The venerable bank collapsed, and Leeson spent four years in a Singapore prison. Keep reading to learn more about Leeson and how he went from a rising star to a rogue trader.
Key Takeaways
- Nick Leeson lost $1.3 billion of his employer's money, making risky trades in derivatives.
- His crimes bankrupted Barings, causing its collapse after 230 years in business.
- His actions forced banks to reassess their internal controls and trade auditing procedures.
- Leeson's record trading loss held until 2008 when a French trader blew through $8 billion.
- He pled guilty in 1995 and was sentenced to 6 ½ years by a Singapore court but was released in 1999.
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Early Life and Education
Nicholas William Leeson was born on Feb. 25, 1967, in Watford, Hertfordshire, England, to a plasterer father and nurse mother. Instead of attending college after secondary school, Leeson became a clerk at Coutts Bank. He continued to advance in the financial services industry, working in various positions for companies like Morgan Stanley and Barings Bank.
He became a star derivatives trader at the age of 27 in the Singapore office of Barings Bank, one of Britain's oldest merchant banks. He rose through the ranks, winding up as general manager of the company's Singapore trading division. His job primarily involved arbitrage trading on the Nikkei 250, Tokyo's main index, on behalf of Barings clients.
Losses and a Doubling Strategy
Leeson's career with Barings took off, with him advancing from the trading floor to managing Baring's new Singapore futures operations. A trading superstar, Leeson significantly increased his employer's profits, bringing in millions in the futures market.
Unbeknownst to Barings, there were significant losses. According to Leeson, they were attributed to his coworker's error. In an attempt to recover those losses, he made unauthorized and risky trades with customers' money. He hid the losses by falsifying records in a little-used errors account called 88888.
He began relying on a risky doubling strategy. Every time he lost money on a trade, he placed a new bet at double the amount of the loss in hopes of recouping it. He dug deeper into the banks' reserves to keep it going, ultimately driving the losses up to $1.3 billion. Within three months, Leeson purchased more than 20,000 futures contracts, which accounted for more than one-third of the bank's total losses.
His desperate attempts to make good on his losses came to a crashing halt in early 1995, when the Kobe earthquake hit Japan and the Nikkei fell sharply. He based his entire strategy on a bet that the Nikkei would rise. For the next few days, he kept betting on a quick turnaround but lost even more of Barings' money.
Leeson's confession read “I’m Sorry."
The Crimes
With his plans unraveling and detection imminent, Leeson fled Singapore to avoid prosecution, leaving behind a written confession. He was arrested in Frankfurt and later extradited to Singapore to be tried for his crimes. Charged with 11 crimes, he faced more than 14 years in a Singapore prison.
Leeson's initial trading losses were just under $200 million. But that skyrocketed to $1 billion (approximately twice the amount of Barings' available capital) when he made even riskier bets on the direction of futures, hoping to reduce or erase his losses.
Had he followed his employer's rules, the bulk of his trades would have been cash neutral. Traders who use this strategy manage investment portfolios without adding any additional capital. Profits or losses, however, belong to the client. Barings' only compensation would have been a commission. Traders were only supposed to make a limited number of proprietary trades on behalf of the bank.
In December 1995, Leeson pled guilty to two counts of deceiving bank auditors, including forging bank documents. He was convicted and sentenced to 6½ years in a Singapore prison. He served four years and returned to the United Kingdom after being granted early medical release because of a colon cancer diagnosis.
The Dutch bank ING bought Barings in 1995 for £1, saving it from ruins.
Leeson's Legacy
Nick Leeson is considered to be the single rogue trader who lost $1.3 billion, causing the collapse of a 230-year-old bank. He held the world title for losses stemming from unauthorized trades but was eclipsed in 2008 by a trader for Société Générale named Jerome Kerviel, who lost more than €4.9 billion (more than $7 billion) in a series of unauthorized and falsified trades.
Leeson's case spurred greater attention to internal controls and more careful auditing of trades. One observation was that a trader desperate to recover from losses tends to risk more money to become whole.
Published Works
Leeson defied the odds and, eventually, thrived. His memoir (aptly called Rogue Trader) detailed his life as a trader, including his rise and fall and his employer's resulting collapse. In 1999, a movie was released with the same title starring Ewan McGregor.
In 2005, he authored his second book, Back from the Brink: Coping with Stress. It chronicles a series of conversations with psychologist Ivan Terrell and provides strategies for dealing with financial woes, personal trials, illness, and addiction.
Personal Life
Leeson returned to the U.K. after his release. Later, he moved to Ireland, remarried, and joined the celebrity speaker's circuit, where he specialized in speaking about shady financial practices. In 2001, Leeson enrolled at a university to complete his psychology degree, and in 2004 welcomed a baby with his wife.
His rehabilitation appeared complete in 2005, when he was named commercial manager of Galway Football club, rising to the rank of chief executive officer (CEO) of the club before leaving in 2011.
Today, he is a global business speaker, advising corporate clients on risks, governance structures, and compliance.
Why Did Nick Leeson Create Account 88888?
Nick Leeson created the 88888 to initially hide losses resulting from his coworker's error.
How Much Money Did Nick Leeson Lose?
Nick Leeson's unscrupulous trades resulted in approximately $1.3 billion in losses. He initially lost less than $200 million. However, in an attempt to recover those losses, he exponentially increased them.
Where Is Nick Leeson Today?
Nick Leeson is an international business speaker, conducting conferences and consulting companies and academic institutions on various topics such as risk, compliance, corporate governance, and mental health.
The Bottom Line
History will recount Nick Leeson as the person who singlehandedly took down England's largest bank. His financial savviness helped his rise to power, yet his fraud and deceitfulness destroyed it. However, because of him, banks are better equipped with internal controls to thwart similar threats. From his experience, he now helps corporations and higher academic institutions recognize risks and examine governance structures.
