Barings knew of Leeson account
Thursday 06 July 1995
Senior Barings executives were alerted to Nick Leeson's secret derivatives trading account more than six weeks before the merchant bank collapsed, according to documentary evidence acquired by Bank of England investigators. The Singapore exchange, Simex, wrote on 11 January to Barings' top management in Singapore questioning the status and contents of account 88888.
This was the account, based on a fictitious customer, allegedly used by Nick Leeson, the Singapore-based Barings trader, to conduct the massive speculation that brought the bank down in late February under nearly pounds 900m of losses.
Despite this query, the existence of account 88888 was not discussed at meetings in London of Barings' risk control unit, the Asset and Liability Committee, in January and February.
Bank of England investigators, who meet tomorrow to finalise the report with a view to handing it to the Treasury next week, have focused on this apparent lack of internal communication during the vital period between 11 January and the first admission to the Bank of England on 24 February of the gravity of the situation. Top executives in London have denied all knowledge of this account.
Evidence presented to the inquiry also shows that Barings was already technically bankrupt by the end of 1994. Nick Leeson, who is in prison in Germany awaiting decision on an extradition request from Singapore, had allegedly been writing options to raise cash for his derivatives speculation. The mark to market loss on these options by late 1994 was already $400m.
The Bank of England is also expected to report that Nick Leeson had been trading on this secret account 88888 since as far back as mid-1992.
The Simex letter questioning the status of this account was directed to Simon Jones, the now-dismissed chief operating officer for Asia for Baring Securities. Simex wanted confirmation that this was a customer account, and to know why there was an $80m shortfall between the margins posted on behalf of customer 88888 and margins actually held in the account. Mr Jones's reply to Simex of 25 January sought to allay concerns, explaining that the shortfall could be accounted for by adding the house trading account into the calculation.
Nick Leeson allegedly acted as his own customer on account 88888, which was entirely separate from the monitoring of Barings' house trading positions. The broking fees and commissions earned on these allegedly fictitious customer trades were booked to Barings. In 1994 Barings' futures operations benefited to the tune of pounds 25m from paper revenues apparently declared by Nick Leeson through the secret account. A key weakness identified by the Bank of England investigators is that Barings' securities supervision in London did not distinguish between the numerous customer trades in Singapore. The inquiry also learned that the Contac software system feeding trading information daily from Singapore to London had been doctored to drop automatically any reference to account 88888.
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