IF we are to believe Nick Leeson, the collapse of Barings Bank began with an act of charity. He had recruited a young Chinese trader, Kim Wong, to the Barings operation in Singapore. Leeson would have preferred someone with more experience but his boss was a bottom line watcher and Kim Wong's services could be had for £4,000 per annum.
On Friday, July 17th, 1994 Kim Wong was trading in the pit of the Singapore International Monetary Exchange (SIMEX). It was an exceptionally busy day and the air conditioning had broken down. Traders were shrieking buy and sell orders in the cardiac arrest atmosphere known as open outcry. Leeson would have liked to supervise Kim Wong but his telephone never stopped ringing. He noted, however, that she appeared to be coping well. The bell to signal the end of trading rang at 2.15pm. There was a loud cheer. The market had soared by 400 points, everybody had done good business and would earn fat commissions.
Leeson went to his office to reconcile the buy and sell orders of the Barings traders. There was one sale note for which there was no balancing purchase. The note bore the initials of Kim Wong. Leeson eventually realised that the girl had sold though her customer had ordered her to buy. Barings would have to make good her mistake at a cost of £20,000.
He went to his boss, Simon Jones, and told him what had happened. The man who had not wanted to pay more than £4,000 per annum said Sack the cow. She"ll never work on SIMEX again."
Leeson went to the Hard Rock Cafe where the Barings traders would be found. "I walked into the restaurant set upon bawling Kim out and telling her to fuck off out of there so I could get drunk." But, he recounts, as he stormed across the floor he almost collided with a tiny girl hurrying towards him in tears. It was Kim Wong. "Nick, I'm sorry about that trade. I just lost my head and got confused by every thing." Leeson, who says he intended to bawl her out, replied "It's fine. We've all made mistakes, and much worse than that. I'll just book it into the error account and nobody will mind. They won't even see it".
They won't even see it. Barings head office in London had asked Leeson to set up a special "error account" to deal with discrepancies in trading which were too trivial for London to be bothered with. The account was numbered 88888, because 8 is a lucky number for the Chinese. Kim Wong's mistake was booked into 88888. The mistake did not magically cease to be a mistake but, crucially, the lodging to an error account bought Leeson time in which to rectify it. Or so he thought.
His mood towards Kim Wong swung again when she told him that, after a week with Barings she could not manage the pressures of SIMEX trading and resigned. "`Great I cursed her again. I need never have hidden those forty contracts. She could have been sacked and that would have been that'."
Rogue Trader has many moments of self serving. Nick Leeson acknowledges his deception and fraud but says Barings management should have tumbled to him long before it did. They should, of course, but that scarcely alters the moral issue. Leeson, son of a Watford plasterer, is particularly good on the Barings blue bloods. The firm was founded in 1763. It funded the construction of the Panama Canal and the purchase from France of Louisiana by the new United States of America. In 1886, Barings floated Guinness on the London Stock Exchange. Mounted police had to be called to stop the punters from invading Barings with their application forms.
The family bloodline had been much diluted by the time Nick Leeson joined in the 1980s. The chairman, Peter Baring, languidly informed the Bank of England in 1993 that Barings had concluded "that it was not actually terribly difficult to make money at the securities business". Not actually terribly difficult. You can almost taste the Earl Grey and the thinly cut cucumber sandwiches.
The Queen of England was a customer of Barings. She had £40 million on deposit, poor thing. By the time he finished, Nick Leeson had lost £600 million not bad for a plasterer's son.
It almost defies explanation why Barings in London kept sending Leeson millions to meet his margin calls at SIMEX. (In the rich jargon of stock broking, margin calls are rather like deposits to guarantee a buyer can meet his obligations.) Leeson's theory is plausible enough. His superiors did not understand futures and options trading. But, being his superiors, they could not admit knowing less than he did. So he could successfully bluff them until his losses spiralled so far out of control they could no longer be concealed.
It is plausible, too, that Leeson's analysis of his developing problem is accurate. He lost his ability to read the market because of his overriding need for the market to move in particular directions for him to trade out of his losses. It is impossible to prove his claim that competitors were bugging his phone to learn in advance what positions he was taking.
Though the language of derivative trading is daunting for the layman, Leeson explains it fairly clearly. Rogue Trader is not, how ever, a book for exotic traders in the Nikkei Index or pork belly futures. Leeson tells a very human story, too, and tells it sometimes in the vivid colour of a born writer. The publisher's blurb "His Own Amazing Story" is for once amply justified.
But I just cannot decide how much of Nick Leeson to believe.