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Insights of the CaseIn February of 1995, one man single-handedly bankrupted the bank that financed the NapoleonicWars, Louisiana Purchase and the Erie Canal. Founded in 1762, Barings Bank was Britain’s oldestmerchant bank and Queen Elizabeth’s personal bank. Once a behemoth in the banking industry,Barings was brought down by a rogue trader in a Singapore office. The trader, Nick Leeson, wasemployed by Barings to profit from low risk arbitrage opportunities between derivatives contracts onthe Singapore Mercantile Exchange and Japan’s Osaka Exchange. A scandal ensued when Leeson lefta $1.4 billion loss in Barings’ balance sheet due to his unauthorized derivatives speculation, causingthe 233-year-old bank’s demise.Nick Leeson grew up in London’s Watford suburb and worked for Morgan Stanley after graduatingfrom university. Shortly after, Leeson joined Barings and was transferred to Jakarta, Indonesia to sortthrough a back-office mess involving £100 million of share certificates. Nick Leeson enhanced hisreputation within Barings when he successfully rectified the situation in 10 months.In 1992, after his initial success, Nick Leeson was transferred to Barings Securities in Singapore andwas promoted to general manager, with the authority to hire traders and back office staff. Leeson’sexperience with trading was limited, but he took an exam that qualified him to trade on the SingaporeMercantile Exchange (SIMEX) alongside his traders. Leeson and his traders had authority to performtwo types of trading such as transacting futures and options orders for clients or for other firms withinthe Barings organization, and arbitraging price differences between Nikkei futures traded on theSIMEX and Japan’s Osaka exchange.As a general manager, Nick Leeson oversaw both trading and back office functions, eliminating thenecessary checks and balances usually found within trading organizations. In addition, Barings’ seniormanagement came from a merchant banking background, causing them to underestimate the risksinvolved with trading, while not providing any individual who was directly responsible for monitoringLeeson’s trading activities. Due to his lack of supervision, the 28-year-old Nick Leeson promptlystarted unauthorized speculation in Nikkei 225 stock index futures and Japanese government bonds.These trades were outright trades or directional bets on the market. This highly leveraged strategy canprovide fantastic gains or utterly devastating losses – a stark contrast to the relatively conservativearbitrage trading that Barings had intended for Leeson to pursue.Nick Leeson opened a secret trading account that was numbered “88888” to facilitate his surreptitioustrading. He lost money from the beginning. Increasing his bets only made him lose more money.