It has been clear ever since the first internal documents started leaking soon after the crash that Leeson had never made as much money as Barings thought. But it has taken last week's publication of the official inquiry by the Bank of England to confirm the startling fact that the man Barings itself believed was "a turbo arbitrageur" never actually made any money from his trading operations during his three years in Singapore.
The figures are worth recounting. In 1993, his first full year of trading, Leeson incurred losses of pounds 21m; in the first half of 1994 pounds 93m; in the second half of the year pounds 92m; and in the first two months of 1995 pounds 619m. Yet he continued to report to Barings that he was making money. In 1994, his actual (but disguised) losses exceeded the entire reported profits of the bank. By the end of February 1995, they had bust the bank.
Yet, while Leeson was trading in complex-sounding derivative instruments, the trading methods and tactics he adopted were, according to the Bank's report, "very simple". Others would call them naive in the extreme - so naive that the rest of the market could see him coming a mile off. Being merciless souls, when the market started moving further against Leeson, they simply ate him for lunch.
In fact, just about the only significant talent that Leeson seems to have brought to his trading activity was a well-developed talent to deceive - an ability to mask his feelings and the forensic skills to cover up his tracks. The latter, as we now know, was not difficult as Barings' management controls were lamentable.
The picture the Bank's report paints is of a deeply conservative merchant bank which believed - quite erroneously, and almost up to the last minute - that Leeson was pursuing a risk-free trading strategy. In fact, he was doing anything but. He was speculating wildly, and completely without authorisation, in massive amounts on movements in the Japanese stock and bond markets.
The instruments he was using were futures contracts on both the main Tokyo stock market index and Japanese government bonds. He was also trading in options on these futures contracts. The positions he took were large.
But, while the strategy sounds complicated, in essence it was simplicity itself. Most of his trading was a bet either on the direction or the volatility of the Tokyo stock and bond markets. In his futures positions, he was betting that the Tokyo stock market would rise and the bond market would fall.
But unlike others who play the futures and options market, he did nothing to hedge his position - to lay off his potential losses if the markets did move the wrong way. In effect, Leeson was accepting unlimited liability, the very same principle that has cost so many investors at Lloyd's so much money.
What did for Leeson - and Barings - in the end was the fallout from the Kobe earthquake at the end of January. Until then, his position was still loss-making, but not yet bank-threatening. The earthquake led to both a sharp fall in the Tokyo market, a rise in the bond markets and a sharp increase in the markets' volatility - precisely the three trends Leeson least wanted. Both his futures and options contracts went into free-fall.
As his position deteriorated, Leeson then did what traders who are caught with positions that have gone seriously wrong often do. Instead of biting the bullet and accepting the loss (which of course none of his superiors knew about), he doubled up his bets - and then doubled them again in an effort to recover his losses. The markets continued to move the wrong way, with predictably catastrophic results.
Meanwhile, the bank's senior management continued blithely to believe that Leeson had discovered a new "money machine", a strategy which generated huge profits without apparently incurring any risk. That in itself is remarkable attitude for an allegedly sophisticated financial institution to adopt. There never has been (and never will be) a "money machine". It is the first, some would say the only, lesson in finance.
But the truly incredible part is that the bank was prepared to advance a total of pounds 742m in loans and other funds (more than double the bank's total capital) to finance Leeson's trading. It did so without apparently even bothering to check whether the money was in fact being used for the purposes they believed it was.
The details of what Leeson did make fascinating reading. In many ways, Barings' speculation on Far East markets is an object lesson in how not to manage money. Almost every mistake Leeson made was one that ordinary investors should do their best to avoid. Understand the positions you are taking and the instruments you are dealing in, only take risks you can live with; don't fool yourself or anyone else about the true state of your losses, never bet more than you can afford and never take on unlimited liability.
Barings, knowingly or not, broke every one of these rules. That is why the bank is now bust, and why its "lone star" trader has found his way into the record books as one of the most spectacularly unsuccessful traders in history.Reuse content