Errors that let Leeson ruin bank

Confidential documents show catalogue of incompetence and negligence at Barings
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The Independent Online
Confidential documents handed to investigators of the Barings collapse reveal a catalogue of errors and omissions as senior management failed to act on repeated warning signals about Nick Leeson's disastrous derivatives speculation in Singapore.

Despite expressions of concern at the highest levels of the bank, and several visits to the Singapore office to clarify concerns, management at Barings failed to take action in time to stop the huge loss-making trading that brought the bank down last month.

The documents - prepared by investigators acting for the administrators of the failed bank, and obtained by the Independent - conclude that Barings' top executives omitted over a long period to ensure that the hundreds of millions of pounds sent out to fund the Singapore trading actually matched client accounts or the bank's own positions as declared by Mr Leeson.

The documentary evidence suggests that Barings was brought down by a combination of endemic incompetence and negligence within the bank. It will fuel fierce questioning of Eddie George, the Governor of the Bank of England, when he appears tomorrow before the House Treasury Committee to answer questions about the Barings collapse.

Peter Baring and Andrew Tuckey, the chairman and deputy chairman of Barings, yesterday became the first executives to resign over the collapse, accepting formal responsibility for the failure of the bank's risk and control systems.

A number of other senior executives, including some closely involved in Barings' risk control committee, and others who were directly responsible in London for Mr Leeson's activities, are expected to leave once the Bank of England has completed its investigation.

The documents, marked strictly private and confidential, and drawn up after Baring's collapse, describe how:

tThere was no complete reconciliation of Barings' books to ensure that the funds sent out to Singapore matched client requests or house positions.

tMr Leeson systematically shredded documents relating to his trading activities.

tMr Leeson lied to the external auditors and falsified trading reports to the Singapore exchange authorities.

tMr Leeson dodged meetings with senior Barings executives seeking clarification of his activities.

tA series of high-level meetings at Barings going back as far as October 1994 failed to produce action, despite warnings in an internal audit from August 1994 calling for Mr Leeson immediately to stop supervising accounting at the Singapore office.

tBarings advanced a total of £760m, more than twice the bank's capital, to the Singapore office to fund Mr Leeson's derivatives speculation.

tFloor traders in the Singapore office knew "that much of the apparently profitable arbitrage business was in fact a fiction". A bogus account was used "to manufacture profit".

tBarings Singapore had been writing options on its own account since 1992 although it had no authority to do so.

The internal documents show that the total unreconciled amount on Barings' books grew from £22m at 31 December 1993 to £306m on 24 February this year. As early as November 1994, the Financial Products Group, which covered Mr Leeson's activities, called meetings about the Singapore office because of concerns "they were not getting sufficiently detailed answers to their questions from Financial Control".

Tony Hawes, the group treasurer, suggested at that time that another visit to Singapore "was probably required". But despite the commissioning of further reports, this visit failed to occur, and in January Mr Hawes reiterated the importance of a visit. "Mr Hawes' concerns were relayed to Ian Hopkins (Head of Group Treasury and Risk) in a note dated 11 January 1995. "In the meantime, it had been suggested in London [a named Barings executive] should go to Singapore in a combined Treasury and Risk role but he had, in the event, declined to move," the report states. "Hawes, who was by then becoming increasingly concerned at the unreconciled position in Singapore, decided to make a visit on 6 February and this coincided with a recognition from Bax [the head of Singapore office] that the Settlements' responsibility [of Leeson] should be split."

According to one of the documents, Mr Leeson covered up the true extent of the Barings' position by netting off one client's position against anothers. Before the bank's collapse he fed false information into the Simex accounting system.

The report also states: "Leeson had give standing instructions to the staff to shred the blue copy of A/c 88888(his secret error account) and to give him the top copy." He is also said to have falsified information supplied to the bank's external auditor, Coopers & Lybrand.

Last October, as concerns mounted in London at the extent of Mr Leeson's trading, Mr Hawes was sent to Singapore to talk to Mr Leeson about his futures trading activity. According to the report, "at the last minute, Leeson made arrangements to be in London".