The Fall of sanngs sank The story of Barings Bank shows how overconfidence, coupled with poor internal control, can even bring down an historic financial institution. Below we provide a few teaching points. Nick Leeson seemed to have all the characteristics of an overconfident trader. As described in the chapter, excessive trading, lack of diversification, and too much risk were obviously present. Self-attribution bias seemed to play a major role. One commentator notes that Leeson “got overconfident after initial trades were successful and] when he started to lose money, got way too aggressive trying to make it up.
When Leeson was asked about his actions, he explained that “l was determined to win back the losses [… ] I was well down, but increasingly sure that my doubling up and doubling up would pay off… “, thereby overestimating his abilities by thinking he could outperform the market even after severe losses. A case study into the affair concluded that it was overconfidence that led Nick Leeson to bet his reputation.
But, as Saul Hansell of The New York Times stated, “It isn’t Just rogue traders loose annons stretching internal rules on trading desks who have destroyed their investors’ wealth.
Money managers who play by the rules can get caught up short, too, when they fall to overconfidence about their mastery of the markets. ” He further wrote that, “It is no secret that traders, as a class, are a young, independent and cocky bunch. The sheer size of the money they are Juggling can lead toa master-of-the- universe attitude.
The Fall of Barings sank Barings Bank was founded in 1762 as the “John and Francis Baring Company’ by Sir Francis Baring.
This bank was the oldest merchant bank in London, financed the Napoleonic Wars, and was the Queen of England’s own bank. In 1996, one man, Nick Leeson, managed to bring down Barings Bank, one of the oldest and most conservative financial institutions in the world, through his illicit trading activity. In 1989, Leeson Joined Barings Bank. After being transferred to Jakarta, Indonesia to sort through a back-office mess involving EIOO million of share certificates, Leeson solidified his reputation within Barings when he successfully rectified the situation in 0 months.
Lesson also knew how to account for derivatives, even if he did not fully understand the complexities of their pricing. Therefore, in 1992, when Barings opened a new office in Singapore to trade on the expanding Singapore Mercantile Exchange (SIMEX), Leeson became an obvious candidate to manage it. Senior management at Barings Bank assumed that Leeson would turn the Singapore office into a highly profitable endeavor and therefore gave him extensive responsibility. As eliminated the necessary checks and balances usually found within trading rganizations.
Soon he was Barings Banks star Singapore trader, bringing in substantial profits from trading on the Singapore exchange. By 1993, Leeson had made more than Elo million, about 10% of Barings’s total profit for that year. In 1994, he delivered over half of the E52. 9 million in revenue for his division on his own, making many proclaim him as the “miracle worker. ” In his autobiography Rogue Trader, Leeson said the culture at Barings was simple: “We were all driven to make profits, profits, and more profits I was the rising star. Aided by his lack of upervision, the 28-year-old Nick Lesson promptly started unauthorized speculation in futures on the Nikkei 225 stock index and Japanese government bonds. SIMEX regulators were aware of Leeson’s cross-trading activities, and his breach of their exchange regulations, but did not act decisively to stop him. Leeson’s large trading volumes were quickly becoming important for the exchange, and being a lightly regulated market was central to SIMEX’s strategy to woo trade from neighboring Osaka. Using futures contracts, Leeson speculated that the Nikkei would rise.
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