Bankers’ Trust

Nicholas W. Leeson, the trader and speculator who lost $1.4 billion of his employer’s money, had a nickname at 233 [...]

May 1 1995 by Joel Kurtzman

Nicholas W. Leeson, the trader and speculator who lost $1.4 billion of his employer’s money, had a nickname at 233 year-old Barings Bank. They called him the “Wunderkind from Watford.” Watford is a gloomy, gray, working-class neighborhood outside London.

For some in the bank, Leeson was a hero. As recently as last year, he earned millions of pounds in profits for the bank and huge bonuses for his colleagues. His record as a trader showed him to be a canny man with nerves of steel who was always willing to place a bet. He was about to be named to the firm’s prestigious 18-member management committee for the derivatives group.

Barings fiasco than a trader making a wrong-albeit huge-bet. And it wasn’t simply a lack of financial controls.

Far more important than Barings’ purported lax system of financial controls was its management’s poor judgment. “Leeson was in charge of both settlement and trading,” says John Shank, a professor of accounting at the Amos Tuck School of Business at Dartmouth College. “That’s just bad.”

Some reports have suggested that Leeson may have lied to Barings about his derivative bets. “If he was telling everyone that for every long position he was short somewhere else to arbitrage his risk, the bank should have seen that by looking at the back end of all his trades,” Shank points out. “But no one did that. This doesn’t necessarily mean the controls weren’t there; it means no one was paying attention.”

Shank’s view-that Barings’ problems resulted from poor judgment rather than poor controls-is corroborated by events just now coming to light in the investigations in Singapore and Britain. In recently released evidence, it appears the Wunderkind from Watford probably informed his bosses both in London and Singapore about the size and substance of most of his bets in the Asian markets. Just before the bank went bust, Barings executives told the Singapore financial authorities they were aware the bank had a $22 billion position in Japanese government-bond futures and another $7 billion position in futures based on Japanese stocks. “Leeson’s trading arbitrage between the Japanese and Singapore markets had large margin calls-as much as $800 million-that the people back home in London had to make good on. So they had to know what he was doing,” Shank says.

If they knew about the bank’s highly leveraged position, then why didn’t they force Leeson to change it? “Probably greed,” Shank hazards. “It certainly wasn’t ignorance.”

There are other reasons for the fiasco. “Most of Barings is owned by a foundation,” says Charles Handy, Britain‘s leading management and business theorist and author of “The Age of Paradox” and other books. “Foundations are not very demanding owners. So there really was nothing like shareholder accountability at Barings Bank. No one was looking over anyone’s shoulder. It had a weak governance system.”

And then there was class. “Class is still very important in Britain,” says Laurance Allen, former North American and Asian publisher of The Financial Times, the influential British financial daily. Allen, a well-bred, well-connected Brit, was a product of that country’s elite public schools system.

“The aristocrats who ran the bank would come in at mid-morning, hang up their coats, and have a civilized cup of tea,” Allen says. “Then they would dial up their friends in the City. In their minds, it was up to working-class people such as Leeson to do the dirty work. Many of the bank’s upper echelon arrived at their jobs through family connections and probably did not even understand what Leeson was doing. Hence the nickname, the Wunderkind from Watford-part awe, part put-down of a working-class guy. They admired Leeson the same way they admire the mechanic who tunes the Rolls. But they would never want to watch the mechanic as he worked.”

That’s a harsh statement. But how else can you explain a disaster of such proportions? “It wasn’t just Leeson who brought down Barings,” says Shank of Dartmouth. “And it wasn’t that the bank had no controls. Leeson is just the scapegoat for a much bigger set of problems.”

Joel Kurtzman, former editor of the Harvard Business Review, is an international business consultant and author. He is the director of the International Trade Program at The Manhattan Institute.