...Barings Bank and Nick Leeson Introduction I would like to present the case of Barings Bank, one of the most famous histories in the world when one man led to the bankruptcy the oldest British bank. Barings collapsed on February 26, 1995, due to the activities of one trader, Nick Leeson, who lost almost $1.4 billion. The loss was caused by a large exposure to the Japanese stock market, which was achieved through the futures market. Leeson, the chief trader for Barings Futures in Singapore, had been accumulating positions in stock index futures on the Nikkei 225, a portfolio of Japanese stocks. As the market fell more than 15 percent in the first two months of 1995, Barings Futures suffered huge losses, which were made even higher due to the sale of options, which implied a bet on a stable market. As losses mounted, Leeson increased the size of the position, in a stubborn belief he was right. Finally, on 25 February 1995 he walked away, when he realized that bank was unable to make the cash payments required by the exchanges. Later, he sent a fax to his superiors, offering “sincere apologies for the predicament that I have left you in.” Nick Leeson had totally wiped out the venerable 233-year-old Baring Investment Bank, which proudly counted Queen Elizabeth as a client. He left behind huge liabilities totaling $1.4 billion, more than the entire capital and reserves of the British institution. This situation - and a similar scam at the New York branch of Japan's Daiwa Bank in October...
Words: 3328 - Pages: 14
...the essay should identify and justify your selection of 2 components of the COSO framework that were most violated in the rogue trader movie In Rogue Trader movie Nick Leeson makes unauthorized trades and covers up losses which are sufficient to bankrupt Barings bank. While management thinks that Nick brings large profits to the bank, Nick hides losses under fake error account which people think belongs to a customer. Leeson is able to cover up his losses because bank's management allows him to run both the trading floor and the back office facilities. Nick is afraid of management finding out about his first loss and does things such as finding a new client, requesting funding and so on, to hide his losses and show profits. However, Leeson incurred even more losses, which he is not able to hide in the end. It's not Nick Leeson who collapsed Barings, it's Barings' internal controls and standards that were not present or violated and allowed one employee to bankrupt long standing bank. One of the most violated component of the COSO framework is the internal control environment of Barings. When Nick's unethical behavior at the bar got him to jail, management didn't care about his unethical behavior, all they cared about is to get him out of jail because he brings in a lot of profit. No one even sat down and talked to Nick in regards to his actions afterwards. Nick was given a freedom and power to act the way he wanted. Management didn't check or control him. When management...
Words: 678 - Pages: 3
...instruments? A better understanding of the events surrounding recent derivatives debacles can help to answer such questions. This article presents accounts of two of the costliest and most highly publicized derivatives-related losses to date. The episodes examined involve the firms of Metallgesellschaft AG and Barings PLC. Each account begins with a review of the events leading to the derivatives-related loss in question, followed by an analysis of the factors responsible for the debacle. Both incidents raise a number of public policy questions: Can government intervention stop such incidents from happening again? Is it appropriate for the government even to try? And if so, what reforms are indicated? These issues are addressed at the end of each case study, where the lessons and public policy concerns highlighted by each episode are discussed. Alex Mendoza assisted in the preparation of this article. Ned Prescott, John Walter, and John Weinberg provided valuable comments on earlier drafts. Any remaining errors or omissions are the responsibility of the author. The views expressed are those of the author and do not necessarily represent those of the Federal Reserve Bank of Richmond...
Words: 16257 - Pages: 66
...Daniels Fund Ethics Initiative University of New Mexico http://danielsethics.mgt.unm.edu Banking Industry Meltdown: The Ethical and Financial Risks of Derivatives INTRODUCTION The 2008–2009 global recession was caused in part by a failure of the financial industry to take appropriate responsibility for its decision to utilize risky and complex financial instruments. Corporate cultures were built on rewards for taking risks rather than rewards for creating value for stakeholders. Unfortunately, most stakeholders, including the public, regulators, and the mass media, do not always understand the nature of the financial risks taken on by banks and other institutions to generate profits. Problems in the subprime mortgage markets sounded the alarm in the 2008–2009 economic downturn. Very simply, the subprime market was created by making loans to people who normally would not qualify based on their credit ratings. The debt from these loans was often repackaged and sold to other financial institutions in order to take it off lenders’ books and reduce their exposure. When the real estate market became overheated, many people were no longer able to make the payments on their variable rate mortgages. When consumers began to default on payments, prices in the housing market dropped and the values of credit default swaps (the repackaged mortgage debt, also known as CDSs) lost significant value. The opposite was supposed to happen. CDSs were sold as a method of insuring against loss. These...
Words: 6137 - Pages: 25
...Rogue Trader How many times can you go double or nothing before you wind up a billion pounds in debt? In “Rogue Trader”, a film based on the life on Nick Leeson, we get a glimpse into this real world dilemma. The drama begins with Leeson’s promotion to general manager of Barings Futures Singapore. As general manager, he faces a personal quandary and must decide whether to cover for a friend and coworker who made an honest mistake (one that resulted in the loss of a substantial amount of money) or to turn the same person in to face termination. Leeson chooses loyalty to his friend over loyalty to the bank, and covers up the losses by creating an error account. This account served to hide said losses while Leeson tried to make back the money that was lost. After experiencing additional losses, Leeson hit a lucky streak and was able to make up the money due to market growth. However, the profound effects of making so much money in the market quickly got to his head. Riding on the coattails of this success, coupled with other catalytic factors that created another loss, he was once again put in the same position to make up lost dollars in the market. From this point on, we see Leeson gamble on the market, doubling down and hiding his losses from everyone around him until his debt becomes insurmountable. Based on Leeson’s actions, the two COSO components most violated are risk assessment and control activities, of which many examples can be seen throughout the movie. Risk Assessment...
Words: 888 - Pages: 4
...FIN 444 MID 2 assignment FACULTY MzF How Leeson Broke Barings |The activities of Nick Leeson on the Japanese and Singapore futures exchanges, which led to the downfall of his employer, | |Barings, are well-documented. The main points are recounted here to serve as a backdrop to the main topic of this chapter - the | |policies, procedures and systems necessary for the prudent management of derivative activities. | |Barings collapsed because it could not meet the enormous trading obligations, which Leeson established in the name of the bank. | |When it went into receivership on February 27, 1995, Barings, via Leeson, had outstanding notional futures positions on Japanese | |equities and interest rates of US$27 billion: US$7 billion on the Nikkei 225 equity contract and US$20 billion on Japanese | |government bond (JGB) and Euroyen contracts. Leeson also sold 70, 892 Nikkei put and call options with a nominal value of $6.68 | |billion. The nominal size of these positions is magnificent; their enormity is all the more astounding when compared with the | |banks reported capital of about $615 million. | |The size of the positions can also be underlined by the fact that in January and February 1995, Barings Tokyo and London | |transferred US$835 million to its Singapore office to enable the latter the meet its margin obligations...
Words: 6854 - Pages: 28
...Enterprise Risk Management at Hydro One (A) An early adopter of Enterprise Risk Management, energy giant Hydro One anticipated new threats and opportunities in an industry that faced climate change and carbon legislation, the deregulation of electricity markets, and the greater adoption of renewable technologies. CEO Laura Formusa felt Hydro One's risk profile had shifted, to the extent that she had to ask herself -- was the strategy tenable? The case provides a rich description of Enterprise Risk Management in action, and shows how Hydro One executives arrive at a shared understanding of the risk profile of the company. In the narrative a diverse group of managers (the chief executive, the chief financial officer, the head of the public relations and the chief regulatory officer) voice their views on the risks, collectively bringing a multiple stakeholder perspective to the risk profile. The case challenges students to define the problems and risks that the company faces, given its strategic objectives, its evolving risk profile, and the changing environment. The case also offers a discussion ground for defining the role of the chief risk officer, and the relationship between risk management, strategic planning and capital budgeting. Procomp Informatic: Stepping on Ethical Landmines in Asia The collapse of Procomp Informatics Ltd, a major Taiwanese chipmaker, has been regarded by Taiwan's market watchdogs as similar to the scandal of the U.S. energy giant Enron in 2001....
Words: 2159 - Pages: 9
...Module 1 Introduction to financial risk management (FRM) Financial Risk Management Module 1 Introduction to financial risk management Question 1 In 2009 which organisation posted the biggest corporate loss in US history and in the same month announced staff bonuses in excess of USD 450 million? a. b. c. d. American International Group (AIG). Lehman Brothers. General Motors. Merrill Lynch. Question 2 The Gig, an Australian heavy metal band, has decided to let its fans invest in the music industry and guaranteed that for every $100 invested in The Gig Music Fund they will get a monthly dividend of $12.00. After six months $20 million has been invested and the depositors have all received $12.00 a month. A spokesman announced that the band needs to raise an additional $5 million to fund a new album and offers music lovers $15 per month for every new $100 invested. Your parents are aware you are completing a financial risk management course and ask your advice as to whether or not to invest. You respond: a. b. c. d. The Gig has a proven track record of paying dividends so go ahead with the investment. The new album is a guaranteed success, so there is little risk involved. This appears to be a Ponzi scheme so reject the offer. Everyone so far has made money and hundreds of people have already done their research, so it is a quality investment. Question 3 The board of South Soap Ltd, an Australian soap manufacturer exporting throughout the...
Words: 3005 - Pages: 13
...customer highlighting is automatic debiting the customer account by way of penalty. This action cause the customer has to rethink his errant financial way. The bank should having a notice or inform to their customers before debiting any penalty. This may cause many of customers that face the financial problem to fall into difficulty. Besides, the customer notices he cannot contact to employee over the time. The customers are confronted by the impersonal ever-changing, pre-recorded, faceless entity which the bank has become. The customers want to deal with a flesh and blood person but not the automated voice phone system. This impersonal conversation will make customer loss of confident about what the customer inquire. Moreover, customer will get charge for the advertising material sent by bank. It charges for $2.00 per page customer read. For the bank nominated contact, that will be billed at $5 per minute. Bank should be let the customer know early for the reading fees or ask for customer permission whether having interest about the advertising material. If not, bank should not send to them. This may causes the customer read on it unconsciously. To helping the customer, customer service should not be charge. Lastly, the problem is the automated voice phone system of the bank. The customer contact to the bank need to go through very long time system and it need to charges. They need pressing buttons on the phone, customer will be guided through an extensive set of menus...
Words: 501 - Pages: 3
...Owners saw their slaves in terms of capital investments. In this mindset, enslavers saw an opportunity to “transform control over enslaved people’s bodies into authority over their own credit” (245). The C.A.P.L, or Consolidated Association of the Planters of Louisiana, was put into action by politician-entrepreneurs Edmund Forstall and Hughes Lavergne, who chartered the company in 1827, which allowed planters to mortgage their slaves and buy stock in the C.A.P.L. (245). By owning stock in the company, these planters were allowed to borrow bank notes “of up to half the value of the mortgaged property” (246). These slave holders were then able to use this money to re-invest in their own plantations, such as buying more slaves, a cotton gin, etc., which furthered the cotton industry. But how did the C.A.P.L. essentially securitize these mortgages from the planters? The C.A.P.L. sold bonds “on the financial...
Words: 1136 - Pages: 5
...What are the major problems with regard to the collection of crime statistics? Discuss, within your answer, the weaknesses and strengths of the official crime statistics and British Crime Survey. Official crime statistics are secondary documentary sources which are most commonly based on figures from the police and the courts. These are then announced by the Home Office at a later date. Interactionists question the validity and reliability of official crime statistics as they state that official crime statistics greatly underestimate crime itself, and as a result they only represent ‘the tip of the ice berg’ suggesting that they are not representative of all crimes. Furthermore, Interactionists dispute that statistics are seen to be socially constructed. One example is through the underreporting of known crimes. The case for the British Crime Survey rested largely in the value to policy-makers of having at least a rough idea to the extent and shape of the problem which the criminal justice system was intended to tackle. Police statistics of recorded crime seemed adequate as a measure of police workload, but because of unreported and unrecorded crime – deficient as an index of crime. The British Crime Survey illustrates that the public do not necessarily report crimes that they have been victims of, for example in 2008 only 42% of crimes were reported by victims. Victims may not report crimes to the police as they may be too insignificant and believe that the police force either...
Words: 2106 - Pages: 9
...Visit the Wall Street Journal and other similar sites as may be appropriate. Read at least two articles about the current state of the economy and consider how the economy may be influencing your life One of the biggest problems facing our nation as a whole is that we no longer produce that the things that we need to sustain ourselves. We are now exporting more than we are importing and that in itself is putting us in massive debt. Another problem that we face as a nation is that all of our large corporations know that it is cheaper to use labor from other countries because they are willing to work for less. It is impossible to get a decent job and getting a degree in no way promises that I will be able to find a good job when I’m finished. It used to be that a better education meant a better living in our country and now that is simply not the truth. This issue strongly impacts my life because I am a single mother who is hoping to better the lives of her children by educating myself well enough to get a good paying job that allows for us to have health insurance. I am also hoping that it allows for normal hours so that I can be home to fix dinner and help with homework. Our country has similar hard times when the stock market crashed. I know that we are not quite to another depression but we are very close. I wonder what we are going to do when our troops come home. There aren’t any jobs for those of us that they are there protecting what type of jobs will there be available...
Words: 1059 - Pages: 5
...In India, Air-conditioner was perceived to be a Luxury item in early nineties. The excise duty on it was as high as 110%. There were very few takers for this product. Baring few players like Voltas, Fedders Lloyd, Blue Star, LG and Samsung this industry was dominated by small scale unorganized manufactures. Over the period of time Government of India has reduced the excise duty to 8.24% (2007 onwards). There by reducing the price difference between unorganized and organized sector. Also due liberalization, the economy grew and hence improved the purchasing power of customers which in turn somewhere also pushed the demand for Air conditioners. Through the ninety’s the Indian consumer durable market had grown at the rate of 15% per annum. This thing changed suddenly in year 2000 and the industry showed negative growth for continuous four years before showing signs of growth. Rapid opening up of the economy and drop in the interest rates (18% to 8%) changed further added fuel to the fire and this industry saw a boom in their business. Consumer goods market has grown at a fast pace since last 5 – 6 years. Reduction in Excise duties made these products more affordable. Indian consumer durable industry has still a long way to go. The penetration level of the industry is very low as compared to the international market. Indian refrigerator market is the fifth largest market in the world, but if we consider the penetration levels it is just 13 % whereas Malaysia, Singapore and Australia...
Words: 2861 - Pages: 12
...DEFINATION OF KEY TERMS. DISCUSS This is to investigate or examine by arguments. Examining the key points and possible interpretations, sift and debate, giving reasons for and against and then draw conclusion.(The Learning Centre 2012). ORGANISATION This is an institution, an association consisting of a group of people having common aim and objective, working in a common platform. Profit making organization: The organizations which are working for their benefit as well as for the benefit of the common people are called as the Profit Making Organization, for example cooperatives. A profit organization exists primarily to generate a profit, that is, to take in more money than it spends. The owners can decide to keep all the profit themselves, or they can spend some or all of it on the business itself. Or, they may decide to share some of it with employees through the use of various types of compensation plans, e.g., employee profit sharing. Non profit making organisation: A non profit organization exists to provide a particular service to the community. The word "non profit" refers to a type of business one which is organized under rules that forbid the distribution of profits to owners. "Profit" in this context is a relatively technical accounting term, related to but not identical with the notion of a surplus of revenues over expenditures. The main aim of these organisations is helping the community and is concerned with money only as much as necessary to keep the...
Words: 3111 - Pages: 13
...Undergraduate Research Opportunity Programme in Science Value at Risk Dai Bo Supervisor: Dr. Arie Harel Department of Mathematics National University of Singapore Academic year (2000/2001) I Summary Value at Risk (VaR) is one of the most popular tools used to estimate exposure to market risks, and it measures the worst expected loss at a given confidence level. In this report, we explain the concept of VaR, and then describe in detail some methods of VaR computation. We then discuss some VaR tools that are particularly useful for risk management, including marginal VaR, incremental VaR and component VaR. The next consideration is the effect of time varying risk, which can be estimated by a moving average model or a GARCH process. Finally, we introduce some back testing methods to validate the use of VaR model. All description, definitions, examples, results, proofs, tables, and remarks in this report are taken from the 2nd edition of the book of Philppe Jorion “Value at Risk” (Jorion 2001), unless otherwise indicated. II Table of contents Cover page I Summary II Table of contents III Chapter 1 Motivation and Introduction 1 1.1 Motivation 1 1.2 Introduction 1 1.3 Overview of the report 2 Chapter 2 VaR computation 3 2.1 Definition of VaR 3 2.2 Measuring returns 3 2.3 Computation of VaR 4 2.4 VaR measurement over different parameters 9 2.5 Choice of parameters 10 ...
Words: 3437 - Pages: 14
