An Analysis of the Collapse of Baring's Bank and the Actions of Nick Leeson Essay

THE COLLAPSE OF BARINGS BANKGROUP IVThis story begins with a former back office clerk being promoted to a derivatives trader for Barings Banks Singapore Branch and ends with the collapse of a 232-year old banking empire. As we began researching this assignment, we all asked the same question, How does a 28 year old trader bring about the collapse of a 232-year old banking empire? To understand how this debacle came about, one must have a basic understanding of the nature of a derivative and what they are designed to do. Initially, derivatives were designed to provide an investortrader with a type of insurance against unexpected movements in prices which could devastate an investment portfolio. These derivatives take the form of futures and optionsA future is an agreement for the future delivery of a certain commodityfinancial instrument at a price set at the time of the contract.An option gives the purchaser the right, but not the obligation, to buysella certain quantity of a specific asset at a fixed price at, or before, a future date.In this instance, Nick Leeson, a 28 year old trader at Barings Bank, made a bet that the Nikkei 225 would not drop below 19,000. During the morning of January 17, 1995, the city of Kobe, Japan was hit with a major earthquake. As a result, the Nikkei 225 plunged 7 in a week. Unbeknownst to senior management, Lesson had no hedge to protect the bank against an unexpected event such as this. The losses resulting from these transactions resulted in the loss of almost a billion dollars and wiped out the capital of Barings Bank. This event occurred through a mixture of corporate greed and a lack of internal controls.One of the most unusual aspects of this case was the fact that Barings Bank allowed Nick Leeson to settle his own trades. At most banks, trading and settlement are handled by two people. Allowing one person to handle both sides...

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