Barings Bank Case
Barings Bank Case
1. What was Nick Leeson’s strategy to earn trading profits on derivatives? Nick Leeson’s strategy to earn trading profits on derivatives was to trade futures on the Nikkei 225 stock index and the Japanese government bonds. This strategy would have either provided huge gains or huge losses. This went completely against what Barings was expecting him to do. He opened a secret trading account to avoid being caught.
2. What went wrong that caused his strategy to fail? Leeson oversaw trading and back office functions meaning there ws no checks and balances. That’s a big mistake. Also Leeson experience in trading was limited, from the beginning he was loosing money and he continued to loose money throughout the years. According to the article, “By mid February 1995, he had accumulated an enormous position—half the open interest in the Nikkei future and 85% of the open interest in the JGB [Japanese Government Bond] future. The market was aware of this and probably traded against him. “ Instead of admitting to his mistakes Leeson continued to dig a deeper hole. He traded based on emotion versus taking calculated risks.
3.Why did Nick Leeson establish a bogus error account (88888) when a legitimate account (99002) already existed?
Leeson created this account to try to cover his tracks and not be noticed. If things went bad he could deny that account being his.
4.Why did Barings and its auditors not discover that the error account was used by Leeson for unauthorized trading? Leeson had the background and experience in the paperwork department and new the system in and out. Baring’s computer system was not the best and was incapable of monitoring the bank’s trading. Leeson used his bck office knowledge to conceal the problem and he had the authority to as well.
5.Why was Barings Bank willing to transfer large cash sums to Barings Futures Singapore? Barings Bank was willing to transfer large cash sums to Barings Futures Singapore because Leeson was respected and trusted and he was close to top management. He was allowed more leeway than any other counterparts in other firms.
6.Why did the attempt by the Bank of England to organize a bailout for Barings fail? Barings was declared insolvent. They were unable to meet SIMEX’s margin call, and this resulted in Dutch Bank “ING” purchasing Barings and taking on all it’s liabilities.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 18 October 2016
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