The Investor's Shelf — one book
All That Glitters: The Fall of Barings

All That Glitters: The Fall of Barings

John Gapper, Nicholas Denton
1996
T2 364 pages · about 6h 4m to read OL2836029Wgoodreads

By two FT journalists; strong on the management failures in London.

Summary

Gapper and Denton, both Financial Times journalists, wrote the account of Barings Bank's 1995 collapse, in which losses of around eight hundred and twenty seven million pounds destroyed Britain's oldest merchant bank.

The mechanism is the substance. Nick Leeson, running the Barings Futures operation in Singapore, held both the trading position and the back office responsible for settling and reconciling it. That combination let him record losing trades in an error account, numbered 88888, that was excluded from the reports sent to London, while reporting profits from an arbitrage strategy that was supposed to be low risk. The actual position was a large directional bet, including a short straddle on the Nikkei index that lost heavily when the Kobe earthquake moved the market. The losses were funded by margin payments London sent to Singapore on the belief they were financing client positions, and the sums involved exceeded the bank's entire capital before anyone in London established what they were for.

The institutional analysis is what makes the book useful. Gapper and Denton show that the failure was not one rogue individual but a management structure in which no one held clear responsibility for the Singapore operation, in which the profits Leeson reported were implausible for the strategy claimed and were never questioned because they were welcome, in which the separation of trading from settlement was known to be violated and not corrected, and in which the funding requests were paid without anyone asking what position required them.

The book was written immediately after the collapse and before the formal inquiries reported. Its account of the control failure has been confirmed by those inquiries. The general lesson, that a trader controlling their own settlement can conceal any position, became a standard control principle afterward and has been violated repeatedly since.

Key takeaways 7

  1. Leeson controlled both trading and settlement in Singapore, which let him conceal losses in an account excluded from reports to London.
  2. The reported profits were implausibly large for the low-risk arbitrage strategy claimed, and no one investigated because the profits were welcome.
  3. London funded margin calls exceeding the bank's capital without establishing what positions required them.
  4. No single manager held clear responsibility for the Singapore operation, so warnings reached no one with authority to act.
  5. The actual position was a short volatility bet on the Nikkei that the Kobe earthquake destroyed.
  6. Separating trading from settlement is the single control that would have prevented the concealment, and it was known to be violated.
  7. A bank can lose its entire capital through one desk when no one asks why an operation needs the cash it requests.

Who should read it

Risk managers and directors who want the definitive case study of how control separation failures let a single position destroy an institution.

Where it sits in the reference 2

Companies
Assets

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