Institutional Investor, April 1996

Barings, the Soap Opera

by Susan Webber

Traders have finally attained true celebrity status. Nick Leeson, the rogue trader who brought down venerable Barings, the U.K.'s oldest merchant bank, now joins Jeffrey Dahmer and O.J. Simpson as the subject of quickie books. "Total Risk", by Judith Rawnsley, who worked in Barings' research department in Japan, and Leeson's own account, "Rogue Trader", examine the firm's collapse and the role the now-infamous Leeson played in it.

An operations whiz, Leeson quickly established himself as a seemingly skillful trader. Assumed to be pursuing low-risk arbitrage, he concealed ever growing losses in a secret account, numbered 88888, and took massive positions as the market turned against him. Leeson lost 827 million ($1.28 billion).

How do we judge books published mere months after the event? "Total Risk" is certainly not up to snuff as an examination of the demise of Barings. The obvious signs of haste — uneven writing, excessive attention to peripheral events, overlooked facts — might be forgiven. A more serious flaw is that this book does not come to grips with how Leeson's transgression went undetected and what drove him to criminal behavior.

Rawnsley obviously read the Bank of England's report on Barings' fall and lifted (without attribution) many quotes from it. But it is also clear that she did not distill its wealth of information into a well-reasoned argument, choosing instead to advance at best partial explanations of why the bank fell. She focuses, for example, on the turf battles that erupted in Barings' Asian arm when the Japanese warrant market, its main source of profits, evaporated. But in so doing she underplays the failure of Christopher Heath, the unit's leader in the 1980s, to establish institutional discipline.

Too often accepting what managers tell her, Rawnsley frequently sounds Pollyannaish. She finds it ironic that Barings, owned by a charitable trust, paid more of its revenues out in compensation than did any other British merchant bank. But in fact, that's just what you'd expect when the inmates run the asylum.

Rawnsley's account is irritatingly incomplete; Leeson's "Rogue Trader", by contrast, is surprisingly likable. One can question author Leeson's motives, but he certainly makes a persuasive, internally consistent case.

Leeson recognized derivatives as a promising area while at Morgan Stanley & Co., and then moved to Barings, where his expertise was badly needed. He describes how he saved Barings 90 million by cleaning up an operational nightmare in Jakarta and got his choice of postings as a reward. As the general manager of Barings' Singapore International Monetary Exchange operations, Leeson maintains that he set up account 88888 (a second customer error account) at London's request and initially used it to hide the losses of his neophyte traders. Since he was reporting profitable trades on ever increasing volumes, management applauded his activities, even as outsiders could see that he was carrying insanely large Nikkei 225 stock index positions.

Leeson and his ghostwriter play for maximum sympathy: They dwell on his love for his wife, his support of his team and his despair in prison; they even manage a wink at his drunken escapades. Yet the book also gives an authentic feel for Leeson's increasing desperation as losses spiraled out of control. Best of all is the description of how he coolly deflected management's halfhearted questions with trading double-talk.

Yet he omits some key facts. Leeson contends that he was sent to Singapore as general manager with a charter to build a trading team; other accounts indicate that his responsibilities were unclear and that he exploited a vacuum. He neglects to mention that after his Jakarta assignment, he investigated a fraud similar to the one he himself perpetrated. Nor does he own up to having deleted account 88888 from management reports before he started trading.

The scenario I find plausible is that Leeson, seeing the opportunity to satisfy a long-standing goal of becoming a trader and wanting to assure his success, created account 88888 as his safety net. But he got caught on a treadmill and couldn't get off.