Nick Leeson Barings Bank

Topics: Nick Leeson, Barings Bank, Derivative Pages: 19 (5242 words) Published: May 10, 2012
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

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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

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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.

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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...

References: Barings Bank. 2004. Wikipedia. Available: http://en.wikipedia.org/wiki/Barings_Bank. Blau, Joel. 1999. Illusions of Prosperity: America 's Working Families in an Age of Economic Insecurity. New York: Oxford University Press. Brennan, T. Corey, Thomas J. Figueira, Julia Heskel, and Rachel Hall Sternberg. 2001. Wisdom from the Ancients: Enduring Business Lessons from Alexander the Great, Julius Caesar, and the Illustrious Leaders of Ancient Greece and Rome. Cambridge, MA: Perseus Books. Broadhurst, Arlene Idol and Grant Ledgerwood. 2000. Environment Ethics and the Corporation. Houndsmills: Macmillan. Costa, John Dalla. 1998. The Ethical Imperative: Why Moral Leadership Is Good Business. Reading, MA: Perseus Books. Earley, P. Christopher. 1997. Face, Harmony, and Social Structure: An Analysis of Organizational Behaviour across Cultures. New York: Oxford University Press. Gapper, John, Nicholas Denton, and Peter Marsh. 1995. The Barings Crisis: Chairman 's Fraud Allegations Challenged. Financial Times, 1 March, 2. Lall, Ashish and Ming-Hua Liu. 1997. Liberalization of Financial and Capital Markets Singapore Is Almost There. Law and Policy in International Business, 28(3), 619-647. Lemke, Tim. 2002. Allfirst Cites Trading Fraud; Says Fired Employee Lost $750 Million in Past Year. The Washington Times, 7 February, C09. "The Lesson from Barings ' Straits." 1995. Business Week, 13 March, 30. Prentice, Robert. 2002. Whither Securities Regulation? Some Behavioural Observations regarding Proposals for Its Future. Duke Law Journal, 51(5), 1397.
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Commodities Trading: Nick Leeson, Internal Controls and the Collapse of Barings Bank __________________________________________________________________________________________
Reinicke, Wolfgang H. 1998. Public Policy: Governing without Government? Washington, DC: The Brookings Institution. Tait, Nikki. 1995. The Barings Crisis: Failure Is Blamed on Management in London. Financial Times, 6 March, 2. Taylor, Ian. 1999. Crime in Context: A Critical Criminology of Market Societies. Boulder, CO: Westview Press.
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