Nick Leeson and the Collapse of Barings

On February 26 1995 the world was shocked by the news that Britain’s oldest bank, Barings, had collapsed. People were even more surprised when they learnt that it was due to the actions of just one man – a young trader called Nick Leeson.

Lesson had started working at Barings Singapore office in 1992, when he was 25 years old. Using the bank’s money, he bought and sold derivatives contracts – like futures and options – at SIMEX, the Singapore Monetary Exchange. This can be a very risky business, but Barings thought it knew what it was doing.

Leeson quickly became the star of the Singapore office and its profits from derivatives trading grew dramatically. His bosses in London were delighted. But they didn’t know the full story. In fact, while his huge profits appeared in the official reports, he was hiding his losses in a secret account. And his losses were much much bigger!

The truth was that Nick Leeson had never behaved like an ordinary trader. He saw the financial markets as a gambling casino and, just like a losing gambler, he believed that he would win in the end. So, towards the end of 1994 he decided to solve his problems by making a very big gamble.

Leeson though that the Tokyo stock market would remain fairly stable for the next few months. He knew that he could make a good profit from this situation by selling a special kind of option contract – so he sold thousands and thousands of them. But, unfortunately for Leeson, Japan was entering a very unstable period.

On 17 January 1995 a huge earthquake hit the industrial city of Kobe. In response, the Tokyo stock market plunged. Leeson’s gamble had gone badly wrong and Barings had lost a huge sum of money.

Leeson didn’t stop gambling. He believed that by spending an enormous amount of his bank’s money, he could control the market and save his position. But he was wrong. By February 23 he had lost more than £300 million and the game was over. The following day he and his wife flew to Malaysia for a holiday.

Back I London, Leeson’s bosses realized what had happened. Day by day, as the losses grew, it became clear that Baring was bankrupt. On March 6 it was sold to a Dutch bank for just £1.

On March 2 1995 Leeson was arrested by German police at Frankfurt airport on his way from Malaysia to the UK. He was later sentenced to six and a half years in a Singaporean jail. On May 1 of the same year twenty-one members of Baring senior staff resigned or were sacked by the new owners.

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Funding IT Start-ups

Nick Denton

Venture capitalists (VCs) act as headhunters. An entrepreneur who approaches a VC for finance will not typically have management experience. If you hire a good CEO, the business will take care of itself; but usually an entrepreneur has no network and no idea who to hire,' says Mr. Tim Draper of Draper Fisher Associates. So the venture capitalist usually takes on the role of recruiter, finding the entrepreneur some experienced executives.

Second, VCs provide advice and support. Accel Partners, for instance, gives office space and time to entrepreneurs so that they can develop their business plans. For inexperienced entrepreneurs, VCs are advisers, too. 'We are professional coaches,' says Ms Ann Winblad, co-founder of Hummer Winblad.

Third, an active venture capitalist puts the companies in which it invests in touch with professional services firms such as lawyers and accountants specializing in information technology. Start-ups backed by a well-known venture capital firm can often obtain legal and other professional advice at a lower rate, until they have the revenues to cover full fees.

Fourth, the backing of a leading venture capital firm, which has identified technology trends correctly in the past, brings credibility with commentators and the start-up's potential customers. 'Far from just providing money, the venture industry brings contacts and confidence,' says Mr. Neil Weintraut of 21st Century Venture Partners. 'We create markets as much as we create companies.'

Finally, the most ambitious venture capitalists act as boosters, not just of a few companies, but of the whole category into which an investment falls. They attempt to create excitement around a particular concept, such as the Java computer language, which will make people take it seriously as a business.

From the Financial Times
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