Financial Disasters

55

enough not to take too close a look at what seemed like a magical source
of profits.
4.1.2.5 How the Unauthorized Positions Were Eventually Detected Large increases
in the size of his reported positions and earnings eventually triggered a more
thorough investigation of Jetts operation.
4.1.2.6 Lessons to Be Learned Two lessons can be drawn from this: Always
investigate a stream of large unexpected profits thoroughly and make sure
you completely understand the source. Periodically review models and systems to see if changes in the way they are being used require changes in
simplifying assumptions (see Section 8.2.8).
4.1.2.7 Further Reading Jett has written a detailed account of the whole affair (see Jett 1999). However, his talent for obscurity remains and it is not
possible to tell from his account just what he believes generated either his
large profits or the subsequent losses. For an account of the mechanics of
the deception, one must rely on the investigation conducted by Gary Lynch
on behalf of Kidder. Summaries of this investigation can be found in Hansell
(1997), Mayer (1995), and Weiss (1994).

4.1.3 Barings Bank

4.1.3.1 Incident The incident involved the loss of roughly $1.25 billion due
to the unauthorized trading activities during 1993 to 1995 of a single, relatively junior trader named Nick Leeson.
4.1.3.2 Result The size of the losses relative to Barings Banks capital along
with potential additional losses on outstanding trades forced Barings into
bankruptcy in February 1995.
4.1.3.3 How the Unauthorized Positions Arose Leeson, who was supposed
to be running a lowrisk, limited return arbitrage business for Barings in
Singapore, was actually taking increasingly large speculative positions in
Japanese stocks and interest rate futures and options. He disguised his speculative position taking by reporting that he was taking the positions on behalf
of fictitious customers. By booking the losses to these nonexistent customer
accounts, he was able to manufacture fairly substantial reported profits for
his own accounts, enabling him to earn a $720,000 bonus in 1994.
4.1.3.4 How the Unauthorized Positions Failed to Be Detected A certain amount
of credit must be given to Leesons industriousness in perpetrating a