Nick Leeson's Double Life

Topics: Nick Leeson, Futures contract, Stock exchange Pages: 5 (1622 words) Published: May 1, 2007
Nick Leeson's Double Life
In 1999, director/screenwriter James Drearden released the movie Rogue Trader, which encapsulates the true life of futures trader Nick Leeson and his role in the downfall of Barings Bank. Ewan McGregor stars at Nick Leeson, an ambitious young British stock trader while Anna Friel plays his wife Lisa. Drearden's focus is on Leeson's activities at the Singapore Stock Exchange but he also constructs a love story subplot that adds little to the central plot. Critics of the movie Rogue Trader find Drearden's attempt to be provide little insight to actual events and a "Major Disappointment."

James Drearden portrays Nick Leeson as a rebel, a character that gets drunk in pubs and discos who bears his bum to flight attendants. This depiction of Leeson is far from the truth. Although he is certainly foolish, Leeson was the poster child for western capitalism. He grew up in Watford, England as the son of a plasterer; who then landed a job in London in a low-key position and grew to become Baring's Bank star trader in Singapore. Leeson joined Barings in 1989 when the old financial institutions started a new way of thinking, when they replaced hiring upper class recruits to those of less privileged background. These new traders were called "barrow boys," which was to indicate the "aspiring yuppie elements prevalent in the financial in the financial centers of the world." Barings main intention in Singapore was "to trade derivatives in a low risk, but very profitable arbitrage strategy." There is no actual tangible worth, but instead their value comes from "separating the risk portion from the underlying security and trading this derived element as a separate entity." There are two categories that derivatives fall in: options and futures. Option contracts allow the holder to buy or sell an underlying asset by a specified date at a specified price, while a future contract requires the seller to deliver a specific asset to the buyer on a specified date for a predetermined price. The trading or derivatives is extremely risky and Barings prepared no insurance plans for the uncertain business. Barings believed Leeson had the knack for speculating the price changes in the Far Eastern markets, and was therefore sent to Singapore. He was seeking profits through price differences in the prices of the Nikkei-225 future contracts that were listed on the Osaka Securities Exchange and the SIMEX. Leeson was betting on the rise of the Nikkei index, but he lost.

Before his luck ran out, he had made more than 10 million pounds for Barings, which was about 10% of Barings's total profits for 1993. Leeson created these profits through unauthorized activities, when he took proprietary position on SIMEX on both futures and option contracts. The bankruptcy of Barings Bank was due to one of its division, Barings Futures in Singapore, which was headed by Nick Leeson. Leeson was allowed to be in charge of both the front and back office. In 1994, a mistake by one of the inexperienced trader in Leeson's team began a chain of events that led to his demise. As depicted in the movie as well, the woman lost about 20,000 pounds and Leeson created an error account, the infamous 88888 account, to cover up the loss. The viewers are to believe that Leeson created this account to protect the jobs of all the staff that worked under him, which makes the character of Leeson an admirable and likeable guy. However, the 88888 account grew to become a loss of $2.2 billion.

Even as the Error Account grew, Leeson was still viewed as the wonder boy, the arbitrageur who was able to turn a profit and contribute to half of the entire firm's 1994 profits. But in 1994, Leeson lost $296 million dollars for Barings, although his superiors believed he made them a profit of $46 million. Leeson was able to fool Barings through something called cross trading. Cross trading is a transaction that is done on the floor of the...

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