Famous Risk Takers: Nick Leeson

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Nick Leeson didn’t intend to bring down Barings, the UK’s oldest merchant bank, but that’s just what he did. In his early years with the bank he made not just a good impression on his bosses, but a lot of money for the bank – up to £10M.  By 1992 he was appointed as Managing Director of Barings Singapore office.

However in 1992 Leeson’s luck started to turn bad.  When one of his team members lost £20,000 on a trade, Leeson tried to recover the money by making unauthorised trades.  He lost more money and in order to hide the fact that he had lost money on unauthorised share dealing, Leeson hid his losses by putting the losses into another account.  This made it look like he was making profits when in fact the opposite was true.

Usually traders who make unauthorised trades are discovered quickly and fired almost as quickly, before they can do too much damage.  But not in this case.  Leeson was able to get away with his illegal activities for several reasons:

  • He was allowed to make and settle his own trades – this was a fundamental flaw in financial control. Had this not been the case, he would not have been able to make these trades;
  • The account he hid his losses in was not monitored by anyone. Had someone been reviewing this account they would have noticed the increasing losses much sooner, and;
  • The “profits” Leeson was making meant Barings’ people earned great bonuses while he was in charge. That made people less likely to question Leeson, even where it seemed clear things were not in order.

Leeson’s trades cause Barings’ downfall

Leeson continued to make ever more risky trades, all the time hoping that his gamble would pay off and he would be able to cover his original losses.  What started out as a £20,000 loss turned into a loss of £2M by the end of 1992.  These losses mushroomed to £23M in 1993, £208M by the end of 1994 and £827M ($1.4Bn) by January 1995, when his losses were finally discovered.

Leeson wasn’t around to face the music though.  He fled the country, leaving a brief note saying simply, “I’m sorry”.  He probably wasn’t as sorry as the bank’s owners.  Leeson was arrested in Germany on his way back to Britain.  He was sent to prison and served six years for fraud.

What can you learn from this?

There are probably three things that you should take away from this:

  • That once people make a mistake, they can go to extraordinary lengths to “correct” them, often causing further damage
  • That effective monitoring is essential if you are to avoid risks from ruining your project, and;
  • That it’s no good blaming the members of your team if you fail to put sufficient process controls in place. People will often do what the system will let them get away with, whether their intentions are honest or not.