Nick Leeson Barings Bank

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  • Topic: Nick Leeson, Barings Bank, Derivative
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  • Published : May 10, 2012
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Commodities Trading: Nick Leeson, Internal Controls and the Collapse of Barings Bank __________________________________________________________________________________________

Commodities Trading: Nick Leeson, Internal Controls and the Collapse of Barings Bank

By Sam Bhugaloo

Page 1 of 21

Commodities Trading: Nick Leeson, Internal Controls and the Collapse of Barings Bank __________________________________________________________________________________________

Table of Content

Introduction.................................................................................................................................3 Background and Overview… ......................................................................………… ........ .....4 Barings Bank...............................................................................................................................5 Internal Controls at Barings Bank.............................................................................................13 Lessons Learned and Steps Taken to Preclude Recurrences . ..................................................15 Conclusion ................................................................................................................................18 References.................................................................................................................................20

Page 2 of 21

Commodities Trading: Nick Leeson, Internal Controls and the Collapse of Barings Bank __________________________________________________________________________________________

Introduction Even in an era where “cooking the books” and “Enronised” have entered the vernacular, it seems unbelievable that a global institution with an unimpeachable reputation collapsed into bankruptcy as the result of the ethical improprieties of a single employee, Nicholas (“Nick”) Leeson. Leeson was directly responsible for causing the collapse of Britain's Barings Bank by concealing $1.4 billion in losses in 1995 (Lemke, 2002). This paper provides an overview of the events leading up to the collapse of Barings Bank in 1995, a discussion of Nick Leeson and commodities trading, and an assessment of the adequacy of internal controls at Barings Bank. An analysis of the lessons learned and steps taken to preclude recurrences of such events in the future is followed by a summary of the research in the conclusion.

Page 3 of 21

Commodities Trading: Nick Leeson, Internal Controls and the Collapse of Barings Bank __________________________________________________________________________________________

Background and Overview One meaning of globalization refers to "paper entrepreneurialism" and to the explosive growth of international financial markets: “Dwarfing the growth of trade in manufactured goods, these financial markets draw on the $20 trillion of swaps, options, and other derivatives that circulate around the world.” 1 In these markets, investors speculate on minute spreads in global interest rates, as well as in foreign currency exchanges that currently trade $2.5 trillion a day. According to Blau, technological innovations in banking have helped to fuel this growth in speculative capacity. For example, when Chemical Bank purchased Chase Manhattan, it also acquired the $130 million centre in Bournemouth, England that Chase had built to process transactions from around the world. A satellite network connected this 323,000-square foot facility to offices in New York, Hong Kong, Luxembourg, and Tokyo; the telecommunications lines to London could transmit the equivalent of the city's telephone directory in 90 seconds. The total value of all transactions it handled reached trillions of dollars a year and the money naturally tended to go where more of it could be made in the fastest manner possible. “In essence, the financial markets are now so interlocked it is estimated that political and economic changes elsewhere...
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