Could derivatives trading ruin the global economy?

The big scammersHow Nick Leeson broke Barings Bank

In the spring of 1992, Leeson, who had shown himself ambitious and capable, was sent to Singapore. He was supposed to set up a new operation in the former crown colony: trading in derivatives on the local Simex exchange. According to the will of the headquarters in London, Barings Futures Singapore should operate as lean and inexpensive as possible. So they made a fatal mistake: unlike usual, the responsibilities for trading decisions and their subsequent processing were not separated. Nick Leeson, who was just 25 years old, soon took on both functions, head trader and head of the back office. In reality that meant: He controlled himself.

The boy from the provinces had arrived where he wanted to be. "When I first stepped on the trading floor, I could smell the money," writes Leeson. He got his license as a trader in Singapore without any problems - partly because he did not mention that the stock exchange regulator in England had refused his license because of an unpaid overdraft.

It was the first time that he secretly buried a mistake that could have cost him his career. This was to become a method with increasingly criminal means.

If you believe Leeson himself, the beginning of his path to becoming a rogue trader was a merciful act. One evening one of his young employees stood in front of him, tearful, and asked for his forgiveness. In the hustle and bustle she had mixed up a customer order and bought 20 futures contracts. Leeson could have solved the problem honestly: buy back the 20 contracts that were accidentally sold in the market and also buy the 20 contracts that the customer had ordered. The clean solution, however, would have resulted in a loss of £ 20,000 for his employer because the price of the paper had meanwhile increased.

Leeson decided otherwise. He remembered that shortly after the start in Singapore he had set up a so-called error account, which was then not used. He had it put on as number 88888 - he wasn't superstitious, but an accumulation of the Chinese lucky number eight couldn't hurt. On July 17, 1992, Leeson buried the unsuccessful transaction on this forgotten "five-eight account" with the help of booking tricks. The loss was still there - but so well hidden from the eyes of London that only someone who looked very closely would discover it. But nobody did that.

That's how Leeson got a taste for it. By the end of 1992 he had already posted 30 trading errors on 88888. Initially, he brought the balance to zero at the end of each month by offsetting losses from his own commission income. It was clear to him that things would only go well as long as the deficit was small and his income was large. Otherwise, "I would have to find another way to hide it."

It didn't take long for the losses to get over his head. Leeson had to increase the stake and began to secretly sell options - papers that give the buyer the right to purchase such as shares at a specified time and price. The seller bears the risk that these shares may have become more expensive by then. For this he receives a bonus.

The article was published inFinancial crimes: the biggest scammers, criminals and speculators in economic history. The magazine can be ordered in the Capital subscription shop