On February 26th, 1995, one of the oldest banks of the United Kingdom was declared bankrupt. It could not meet its enormous margin obligations. Nick Leeson, one of the bank's traders in their Singapore division, had lost $1.4 billion (US) on derivatives trading. The banks reported capital was only about $6 million. The bank assumed he was exploiting low-risk derivative opportunities on the Singapore Money Exchange (SIMEX). In actuality, he was buying and selling different amounts of these contracts on both SIMEX and the OSAKA exchange. Any Control and Risk Management policies and procedures, which are critical in managing a derivatives operation, were absent. Senior management had a very laissez-faire approach and Mr. Leeson was given control over both the trading and back office functions.
On January 17, 1995, an earthquake in Japan caused the SIMEX Index to drop sharply and Leeson's losses mounted quickly. He took more and more unauthorized risks until eventually in February of 1995; he had leveraged his position to $7 billion. Even though the margins called were only a small portion of the notional value, his position on the SIMEX was too great not to be discovered. His position was eight times bigger than the next largest position on the SIMEX. In March of 1995, Leeson's obligations on his positions toppled over the $1 billion mark and the bank was unable to meet their margin calls and Barings Bank, a 232 year old institution, was purchased by the Dutch bank, ING for one pound sterling, just over $1 US dollar. .
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II) Introduction.
The History of Barings Bank.
The Barings bank was founded in 1763 in London, U.K . The legendary bank traced its roots to Johann Baring, who moved from Germany to England and died in 1748, leaving four sons. The dominant founding brother was Sir Francis Baring (1740-1810). He embraced Adam Smith's then-revolutionary free-market economic theories and underwrote some of the foundations of modern trade.
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