Most of the facts are not in dispute: a bank that prided itself (probably erroneously) on its conservatism allowed itself to advance more than twice its entire capital to fund the trading activities of a 28-year-old rookie trader in Singapore. Senior management thought they were financing an essentially risk-free arbitrage strategy devised by someone whom a Barings man in the report memorably called "a turbo arbitrageur". The bank's chairman, Peter Baring, thought the earnings from Leeson's activities were "pleasantly surprising".
In reality, Leeson was speculating wildly, but also rather amateurishly, on movements in the Tokyo stock and bond markets. He used futures, and options on those futures, to trade the markets, but did nothing to hedge his positions or cap his potential losses. It is still not clear whether even he knew quite what he was doing.
Foolishly allowed by his superiors to run both the front and back offices of his little operation in Singapore, Leeson simply cooked his books, the report concludes, so that nobody in London was aware that he was in fact running up huge losses on his positions.
In 1993, the losses were still moderate by later standards: but by the end of 1994, they had risen to more than pounds 200m. Even so, had the trouble been spotted then, Barings could still have been saved. Closing out the positions would have been an expensive and public humiliation, but there is no doubt that it could have lived to fight another day, as it did after its last great crisis 100 years ago.
But then, in the first two months of 1995, the whole fantastic position simply spiralled out of control. The Kobe earthquake unsettled both the Tokyo stock and bond markets. Leeson's positions in futures and options unravelled. The more he tried to rescue the position, piling new bets on top of the old, the worse it got. In seven weeks, Leeson lost a staggering pounds 600m, the bank was bust and new Dutch owners had arrived to take it over.
One thing we still don't know is why Leeson did what he did. How did he first conceive the idea of taking these unauthorised positions? When did he first realise that he could conceal them without anybody else finding out? Did he have any allies inside or outside the bank? Was he rumbled by anybody before the final disaster struck? Last week's report mostly does not even to try to answer these questions.
That is not entirely surprising. Leeson himself refused to talk to the inquiry team; and so, though for different reasons, did many of the principals in Singapore. The authorities there are pursuing their own inquiry and refused co-operation with the Bank's, leaving the latter distinctly miffed.
From his cell in Frankfurt, Leeson is busy trying to bargain his way back for a trial in the UK, when he says he will be able to give the true story of how it all happened.
In his appeals to the press and Prime Minister, Leeson has made much of the fact that he was acting to try and protect his colleagues' bonuses. As the table shows, it is not hard to see why; had the bank had to recognise Leeson's trading losses, even in 1994, they would have been sufficient to wipe out almost the entire profits of the bank. With them would have gone the pounds 100m bonus pool for that year.
Barings allocated half its profits every year in the form of bonuses to its directors and employees. Leeson himself stood to receive pounds 450,000 in 1994. It would have been the first really big financial reward he received for his trading exploits: the previous year he had received a bonus of pounds 130,000, large but not spectacular for someone said to be making millions for his employers.
It is hard to avoid the conclusion that the remuneration system - and the attitude that it bred - was an important factor in the whole affair. This is why nobody at the top of Barings - dim maybe, but surely not that dim - seriously stopped to ask even the most obvious questions about what was happening in Singapore until just days before the dreadful denouement. Most of the warning signs were either ignored or acted on with a shameful lack of urgency.
Nobody, at least until it was too late, felt the need to try and find out how, in defiance of all conventional wisdom, Leeson was making so much money from an allegedly risk-free activity. What Leeson asked for, commented one of Barings finance people bluntly, he largely got.
Barings had no active shareholders outside its own directors and employees. The bulk of the shares were held by a charitable foundation. Any business that pays out half its profits every year as bonus, has no outside owners with any clout, and is too focused on reported results to bother to ask why money seems to grow on trees, is an inherently unstable one.
In the old days, City merchant banks gloried in their robust attitude to taking on risks. Profit was profit, and if it originated in faraway places from sources that probably didn't bear excessive scrutiny, no matter. In today's more sophisticated, capital-intensive markets, there is nowhere so comforting to hide. Reality is dawning that it takes more brains, and more capital, to play the game than before. The Leeson business really does mark the end of a certain way of doing things. Small wonder that the City's other merchant banks are suddenly falling like flies into the hands of foreigners.
BARINGS PROFITS IN 1994 (pounds m)
As reported After Leeson's losses
Profit before bonus and tax 204.8 19.8
Assumed bonus (50%) (102.4) (9.9)
Pre-tax profit 102.4 9.9
Tax 39.4 (39.4)
Profit after tax 63.0 (29.5)Reuse content