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2024/05
What Nick Leeson's failure at Barings Bank can teach you!
Barings Bank was established in 1763. However, this 233-year-old prestigious British aristocratic bank, which managed assets worth over £27 billion globally, was brought down by a mere 28-year-old young man, Nick Leeson.
On February 26, 1995, the Bank of England announced that Barings Bank would cease trading activities and apply for liquidation.
Ten days later, this bank was acquired by the Dutch ING Group for the symbolic price of £1. This marked the complete collapse of Barings Bank.
The Collapse of Barings Bank
In the 1990s, Nick Leeson joined Barings Bank and was considered an expert in futures and options settlement.
By 1992, two traders under Leeson had consecutively made mistakes, resulting in losses of over £8 million. Leeson did not report the errors to his superiors to protect his subordinates and his position. Instead, he used account 88888 to cover up the truth.
One day, in an attempt to secure the largest client on the Nikkei Index market, Philippe Boniver, Leeson made a risky trade.
He promised Philippe an impossible price and transferred the client’s risk onto himself, resulting in huge losses. Leeson continued hiding these mistakes and aimed to earn back the losses with no way out.
Like an addiction, Leeson’s errors in account 88888 increased over time. During each internal audit, Leeson would get the auditors drunk to muddle through.
Due to the pressure of massive losses, Leeson lost his ability to analyze the market and was always led by it.
By 1995, Leeson’s losses had reached £160 million, and account 88888 was overdrawn by £50 million. On January 17, 1995, the Kobe earthquake in Japan caused significant fluctuations in the Nikkei Index.
Leeson desperately bought Nikkei Index futures to support the market single-handedly, but the price plummeted, and this effort failed utterly.
By February 23 of the same year, the losses Leeson brought to Barings Bank had reached £860 million, directly leading to the bank’s demise.
Lessons from Nick Leeson's Failures
It is clear that while successful experiences might be attributed to survivor bias, failures certainly have their inevitable reasons. Mistakes are a gold mine, and the essence of speculation is recognizing and correcting errors.
We have discussed the reasons for Barings Bank’s collapse, focusing on the bank’s internal mismanagement and lack of strict risk control.
This article will analyze the psychological aspects of Nick Leeson’s trading behavior to provide investors with insights.
1.Gambler's Mentality
When Leeson accumulated over 60,000 long positions on the Nikkei Index (equivalent to about $10 billion) in February 1995, he had utterly lost the calmness and objectivity necessary for a trader. He could no longer observe the market accurately and often believed he could control it.
2.Countertrend Operations
A successful strategist seeks victory before engaging in battle. Fundamentally, Japan’s economy had declined since 1990, lacking the basis for a bull market.
Leeson, however, opened long positions against the trend, with open contract values totaling $27 billion, including $7 billion in Nikkei Index futures, which is a critical mistake in strategy.
Acting against a strong trend is akin to stopping a car with one’s bare hands or a moth flying into the flame.
3.Poor Timing
Astute traders always wait for one side’s strength to be completely exhausted before reaping the benefits. Engaging prematurely when the opponent’s strength is not yet waning is unwise.
Leeson’s long positions cost around 18,000. A year after Singaporean authorities arrested Leeson, the Nikkei Index began a strong unilateral rebound, reaching a high of 22,750.
However, by then, Leeson was already serving his sentence in prison, and Barings Bank couldn’t wait for this sunny moment.
4.Lack of Discipline
Speculation mentor Jesse Livermore once said, “If a man makes a mistake, the only thing he should do is correct it; he should not make the mistake again.”
The Nikkei Index fell from August 1994 to January 1995, breaking through multiple key support lines. When faced with immense risks, Leeson failed to strictly adhere to discipline and close out losing positions promptly, ultimately leading to his downfall.
