On Christmas Eve in 1994, Barings Bank held an annual meeting in London, attended by the bank's key business leaders. At this time, their attention was focused on a 28-year-old boy named Nick Leeson, the general manager of the transaction department of BNP Paribas' Singapore branch.
Because of his outstanding performance, he was named the star trader of the year. The two hundred and fifty members on the field expressed their appreciation for him and regarded Li Sen as a hero. However, no one would have thought that only two months later, this hero surrounded by people would single-handedly overthrow the century-old Barings Bank. In 1763, Francis Baring founded Barings Bank in the UK. He can be said to be a living fossil in the banking industry. Moreover, the temperament of this bank has been different since its birth. It never provides deposit and withdrawal services for ordinary customers, but specializes in providing corporate financing and investment management services for institutional customers such as government units and social groups. Due to its good trust, Barings Bank has become the first choice for many big customers.
When the US government was about to purchase Louisiana from the French, Barings Bank provided full financial support. When Britain and Napoleon were fighting in Europe, Barings Bank was also a strong financial backer for the British government. Later, in order to thank Barings Bank for saving their lives, the British royal family successively granted the Barings family five noble titles. Since then, Barings Bank has maintained contact with the British upper class. Queen Elizabeth II also became their loyal customer.
In 1987, the bank established Barings Securities. Originally, this was a pioneering strategy to keep up with the changes in the financial market, but some traditional bankers of Barings Bank looked down on this subsidiary. On the one hand, most of these senior executives were from aristocratic families and looked down on Barings Securities, which was mostly populist. On the other hand, they sneered at the securities firms' behavior of making huge profits through speculation and often ridiculed them as nouveau riche.
In 1992, when Japanese stock prices fell, Barings Securities Chairman Seth immediately called the London headquarters, hoping that the head office could provide him with more funds to buy at the bottom. However, the vice chairman of Barings Bank rejected his request on the grounds that the risk was too great, which made Seth resign in anger. Seth's resignation touched the sensitive nerve of Barings Securities, and the core managers who had suffered discrimination left one after another, resulting in a huge gap in its management. Although the London head office quickly took over Barings Securities, their unfamiliarity and ignorance of the securities business led to huge loopholes in the management system of Barings Securities.
Leeson, the devil trader who brought down Barings Bank, came to Paris Securities at this time. In the eyes of old-school bankers in London, Leeson is a typical loser trader. He was born in an ordinary working-class family in North London. His father did not make much money and his mother died early. So the 18-year-old Leeson became the backbone of the family. He first worked in the clearing department of Morgan Bank. His daily work was to stay in a cramped small room and sort out countless documents. Because of his hard work and flexible mind, Leeson soon got an annual salary of about 80,000 US dollars, which was enough to be a miracle. His story was widely circulated in his hometown, but the current achievements were not enough for him to realize his dream of living in a villa and driving a luxury car. Only by becoming a futures and options trader and fighting at the front desk of the exchange can you earn unlimited wealth. And the next stage for him was Barings Bank.
In 1992, Barings Bank established a futures and options department in its Singapore branch. Leeson was chosen by the person in charge because of his previous work experience, and he was appointed as the general manager of the trading department of the Singapore branch with the title of settlement expert. However, due to the discrimination, mentality and carelessness of the top management towards the brokerage business, there were some magical operations in the personnel arrangement. While becoming the head of the front desk trading, Leeson also accidentally became the head of the back-end risk control. However, in the first year after starting the new job, Leeson was still doing his job. He had been doing low-risk futures trading and option arbitrage trading, and also brought a lot of income to the department he was in. Due to the underdeveloped information technology at that time, most of the buy and sell orders in the exchange were conveyed by shouting, gestures and small notes, which inevitably led to mistakes by traders. If the mistake led to a profit, it was an unexpected gain. If the mistake led to a loss, the error should be temporarily recorded in the error account, and the loss should be recovered when the appropriate market appears.
At that time, Li Sen and the London headquarters shared an account named 99905. After a long time, London became impatient and asked if they could set up an account by themselves and solve problems by themselves in the future. So the 99905 account was taken back by the London headquarters. In order to ensure the normal operation of the business, Li Sen had to open another account. To this end, he chose the lucky number eight in Chinese culture as the account number, so a string of 88888 error accounts was born. However, Li Sen’s lucky account was not used for a few days, and the headquarters called again, saying that we have changed the computer and he will help us deal with more errors. You can continue to use the 99905 account now. I thought it was just a simple notification, but I didn’t expect the other party to come up with another question, asking why there are so many errors in Singapore? In a panic, Li Sen hurriedly explained that the daily trading volume of the Singapore Exchange has risen sharply from 3,000 times to 20,000 times, and the scene is also quite chaotic. However, in order to show his ability, Li Sen added, please rest assured, I can keep it. In fact, this statement exposed that the head office leaders of Bahrain Bank were completely unaware of the operation of the Singapore branch. In addition, when the head office reopened the 99905 account, it did not ask Leeson to delete the auspicious account with five eights.
Leeson originally thought that he would never use this account again, but then something happened that made him take the first step towards hell. On July 17, 1992, Fuji Bank, a major client of Barings Securities, asked to buy 20 contracts, but because the trader misread the gesture, it ended up selling 20 contracts. Since the contract price had been rising that day, it would cost more money to buy the contracts back. According to calculations, this mistake would cause the company to lose 20,000 pounds. His subordinates made a mistake. As a supervisor, Leeson would definitely be implicated. In order to protect his reputation, Leeson suddenly thought that he could use the five eights to conceal this mistake. As long as there is a chance to recover the loss, there is no need to report to the head office. Since there is such an account that allows Leeson to only report good news and not bad news in the head office, they can only see that Leeson is constantly bringing huge profits to the company. So recognition, praise and rewards made Leeson addicted. In the future, whenever he encounters a loss, he will transfer it to the five eights account. Since he also holds a risk control position, no one in Singapore can supervise his behavior.
But the truth cannot be hidden. Although Li Sen was able to handle the Singapore branch, he could not handle the audit sent by London, and could not get away with it and hide the past losses. At first, Li Sen would use his commissions and bonuses to fill the company's holes, but as the mistakes became more and more, the losses became bigger and bigger. Relying on the little money in his hand alone is simply a drop in the bucket. So, Li Sen decided to make up for the losses through cross-market transactions. The so-called cross-market transaction is actually a trading strategy for options, a trading strategy with unlimited profit but fixed loss. Isn't this the current option of Binance? If he wins on the delivery date, he will get more than six times the profit of normal transactions. If he loses, the principal will be lost. This is the current European option of Binance, but fortunately, Li Sen blocked the market trend. When the time came to July 1993, Li Sen actually earned back all the losses in the five eight accounts with his own strength. To be honest, this is really awesome. The reason why he was able to achieve such an achievement is partly due to luck, but also has a lot to do with his hard work. In the exchange, the regulation requires that each trader should not trade more than 100 contracts. However, Li Sen alone held 1,900 contracts. However, the goddess of luck would not always be with Li Sen.
For a while, the Singapore market was very hot, and the stock index changed rapidly. It was normal that Li Sen did not expect such an outrageous market. But what was desperate was that at this critical time point, the large screen used by the exchange for clearing records also malfunctioned, causing many trading instructions to become blind selections. And because they could not be recorded temporarily, they were piled up. After the fault was eliminated, Li Sen was completely dumbfounded when he saw the clearing results. In front of him were more than 500 loss contracts with a loss of nearly 1.7 million US dollars. Li Sen, feeling dizzy, slumped in his chair. The huge loss once again pulled him back to the quagmire of filling the hole. All the previous honors instantly became distant memories. The more he tried to make money back, the less the market would be transferred to his will. As the losses continued to accumulate, by July 1994, the losses that Li Sen wanted to make up had reached an astonishing 50 million pounds, but no matter how large the losses were, they were just Arabic numerals. Li Sen was already numb, numb to the losses, but he had to fill this hole as soon as possible. Because the London headquarters would send people to check the accounts from time to time. If he is found out, he will not only lose all his wealth and honor, but also be punished by law. He will no longer be a role model for his family. The hope of the whole village is doomed to spend the rest of his life in mediocrity. In order to reverse the situation as soon as possible, he decided to take another risk.
At that time, Japan's economy was gradually recovering from its decline. He was very confident that Japan's economy would start to grow in the second half of the year. So he resolutely raised the leverage to 25 times and began to speculate on the Nikkei stock index. As long as the prediction was successful, Leeson could earn a seven-digit bonus. But on the other hand, Leeson would lose the lifeblood of the Singapore branch of Barings Bank, so he had to take a gamble on his success or failure. Unfortunately, life is often unsatisfactory. Seeing the continued decline of the Nikkei index and the ever-increasing losses, Leeson felt that the whole world was alienating him. But on the other hand, because he hid the actual losses in the five eight accounts, the head office still believed that Leeson had been making money for Barings Bank. In order to commend his outstanding contribution, the headquarters also recommended him as a star trader at the annual meeting in 1994. Faced with the cheers of the crowd, Leeson had to bite the bullet and force a smile. If the fluctuations in the secondary market are man-made disasters, then Leeson will face natural disasters next.
On January 17, 1995, a major earthquake occurred in Kobe, Japan, and the Nikkei index continued to plummet. At this time, Leeson had completely lost his mind. He even began to frantically buy Nikkei stock index futures, trying to push up the index by himself. In order to achieve this goal, he needed more funds. So he began to ask the London head office to provide him with margin, on the grounds that he was cooperating with a major client. Because Leeson currently has the title of star trader. Not only did the head office not have any doubts about his behavior, but also he was full of expectations that he could make more money for Barings Bank. So a continuous flow of funds was remitted from London to Singapore, even violating the Bank of England's regulations that other banks should not send more than 25% of their own funds to overseas branches. On February 23, 1995, the London head office finally overdrew itself. But even with a huge amount of funds, Leeson still couldn't stop the Nikkei index from continuing to fall. By this time, Barings Bank's losses had exceeded £860 million, far exceeding the bank's total capital.
At this time, Leeson, who was powerless and had used up all his bullets, finally knew to stop and hurriedly fled to Germany with his wife. Before leaving, he only left a note on his workstation, which read "I'm Sorry". As the truth came to light, the senior managers of Barings Bank could do nothing but stare blankly. On March 26, 1995, Barings Bank was symbolically acquired by the Bank of England for one pound. With this, the century-old bank that had helped the United States buy half of the country and helped Britain defeat Napoleon completely disappeared from the world financial stage.
Nick Leeson, who created this miracle single-handedly, was transferred to Singapore by the German police a week after Barings Bank declared bankruptcy and received a six-and-a-half-year sentence. The case of Barings Bank's bankruptcy has now been written into textbooks for future generations of students and financial practitioners to study repeatedly. The direct cause of this result must be Nick Leeson's illegal operations and speculative behavior. However, the root cause is still the flawed management model and inefficient supervision mechanism of Barings Bank. As Leeson said afterwards, if there was only one person who could intervene in my behavior, this result would not have happened.
First, the personnel arrangement of Barings Bank did provide sufficient and necessary conditions for Leeson to get into trouble. In addition, the internal auditors of the head office also seriously failed to perform their duties. In July 1994, two auditors at the London headquarters did discover the losses of Wu Ba Zhong. At that time, Leeson lied that the funds were borrowed by Huaxi Bank. This lie was actually very good. As long as the auditors checked it a little, Leeson would be caught on the spot. However, they believed Leeson's poor words. Secondly, the senior management of Barings Bank did nothing to prevent risks. Although the two auditors did not delve into Leeson's lies, they did ask the head office to further investigate the Singapore branch. But the senior management eventually ignored these suggestions. Finally, Barings Bank even disdained the risk warnings from the outside. In fact, during the period when Leeson was playing with fire, the Singapore Exchange had issued warnings to the head office of Barings Bank countless times after discovering Leeson's abnormal behavior, but these warnings were all ignored by the senior management in London.
Perhaps the reason why Leeson had such bad luck in investment was that he wasted all his luck in avoiding regulation. In addition, we will find that the financial instrument option contract that eventually led Leeson to bring down the Bank of Barings is actually a financial derivative. When it comes to financial derivatives, there are always countless crazy things that cross our minds. In fact, the original purpose of this financial instrument was to avoid risks. For some shareholders who must hold company shares, or merchants who conduct forward transactions, a well-designed contract or a hedging transaction can serve as a good risk hedge for the uncertain future. Financial derivatives themselves are neither good nor bad, but their high leverage attributes are often regarded as legal by some investors.
For example, Binance's options are originally hedging tools, and secondly arbitrage tools. Now many people have turned it into a contract attribute product (one-sided) that can earn ten or even a hundred times the return at a very low cost. For example, on November 7, the xrp call option was opened and delivered on the 15th. There was a 100-fold return rate of 0.09 for buying, and the delivery was more than 10 yuan. If you misread the market, you will lose the premium at most. This is a more stable arbitrage tool than the contract. It will not explode. Only on the delivery date will you either get rich or return to zero. The risk is extremely low and the return is infinite. I don't know why so many people still open 100-fold leverage contracts. The leverage of options is nearly 1,000 times. If the contract is stepped back, it will explode. If the option is stepped back, it will be stepped back. As long as it is not the delivery date, your position will definitely be there. As long as the market is predicted, you can violently insert a pin and pull back in the middle. Options are as stable as Barings Bank and trust you. In a nutshell, you can sleep well when you open options, but you can easily suffer from insomnia at night when you open contracts.
I first came into contact with options through the inspiration given by Lee Sen, the devil trader of Barings Bank. However, I basically opened hedge positions and occasionally unilateral positions. The reason why I seldom opened positions in the past six months is that options allow more ways to play, two-way arbitrage and hedging, and they account for a small proportion of the capital.
To summarize the Barings Bank bankruptcy case:
The collapse of Barings Bank is a classic case of out-of-control risk management. The main reasons are:
1. Weak internal control: The bank lacked an effective risk monitoring and control mechanism and failed to promptly detect and stop the huge speculative behavior of trader Li Sen.
2. Management failure to perform its duties: The management failed to adequately understand the risks of derivatives trading, placed too much trust in Leeson’s reports, and failed to take timely action.
3. Risk concentration: The bank concentrates too much risk on one trader. Once a risk event occurs, the loss will be unbearable.
Lessons learned from the Barings Bank incident and risk control guidance
4. Strengthen the construction of risk management system
5. Establish a sound risk assessment system: Conduct comprehensive risk assessments on all businesses on a regular basis, especially high-risk businesses such as derivatives.
6. Strengthen risk monitoring: Monitor transaction status in real time and detect abnormal trading behavior in a timely manner.
7. Establish a sound risk reporting mechanism: Report risk status to senior management regularly to ensure information transparency.
8. Strengthen risk culture construction: Integrate risk management awareness throughout the entire organization and cultivate employees' risk prevention awareness.
9. Clarify the division of responsibilities: Different departments should check and balance each other to avoid excessive concentration of power.
10. Strengthen authorization management: Strictly control transaction authorization rights to prevent unauthorized operations.
11. Establish a sound accounting system to ensure that financial data is authentic and reliable.
12. Strengthen the management of high-risk businesses
13. Strictly restrict derivative transactions: Establish detailed trading rules and limits.
14. Strengthen supervision of traders: Regularly assess traders and audit their trading behaviors
15. Improve the risk awareness of management:
16. Strengthen training for management: Improve management’s awareness and attention to risk management.
17. Encourage management to participate in risk management: Incorporate risk management into the performance appraisal of management.
The collapse of the Bank of Bahrain also sounded the alarm for us cryptocurrency traders. Risk management is the cornerstone of the survival and development of financial traders. Only by establishing a sound risk management system can we effectively prevent risks and ensure the stable operation of the financial system.
Cryptocurrency is always popular, liquidation is invisible, and money still has a familiar taste
I will continue sharing next week. You are welcome to provide cases. I wish you all make a lot of money. See you next time!
