On this day in 1995, Barings Bank collapsed. A colossal trading loss of £827m, accumulated in secret by the original ‘rogue trader’, Nick Leeson, brought the world’s second oldest merchant bank to its knees in a matter of days. The demise of Barings was a catalyst for major change in the banking industry and would cement the formation of operational risk as a distinct risk category. 25 years on, a lot has changed since those greed-fuelled days of profit at any cost. Here, Nick Leeson speaks exclusively to Carrie Cook at Risk Universe about the event that would change his life and the world of banking, forever.
Many rogue trading cases have made the headlines in the 25 years since the collapse of Barings Bank; some involving losses that eclipse Leeson’s £827m. But nonetheless, the story remains one of the most memorable loss events in recent history and continues to influence banking regulation to this day. But banking misconduct is still a huge issue. So what - if anything - has really changed since ‘95?
Rocking the boat
For one, there are plenty more people working in risk and compliance these days. “This has increased dramatically; the skillset is a lot better than it was,” says Leeson. But the power these individuals have is still questionable, even now. “Banking is a very strange industry where people get paid - in those mid-management roles as well - a lot of money. And sometimes people find it difficult to rock the boat and ask difficult questions. I don’t think that’s changed. I think a lot of people get caught in those particular roles; they’re getting a decent salary; they probably won’t get that anywhere else.”
Leeson does believe, however, that risk and compliance professionals aren’t seen as the enemies of profit they once were. “If I was to characterise the last 25 years; it’s improved immeasurably, but it started at a really low base 25 years ago. There were very few people in risk management and compliance; they weren’t really heard. They didn’t have that much authority in the organisation.” Leeson does believe some measures, particularly the First Line of Defence, are having a real impact though. “[The First Line of Defence] is sitting on top of the traders, looking at all of their emails, watching all of the trades as they go through, and the data analysis is light years ahead of where it was back in my day.”
A more politically correct world
I can’t help wondering how the events leading up to 26th February 1995 might have differed had there been the same open attitude towards mental health issues as there is today. Might a 28-year-old Nick Leeson in 2020 have asked for help before his losses reached bank-crushing levels? This is the million-dollar (or £827m) question, and highlights one of the most important lessons learned from the ordeal. “For me, communication is the best possible thing that anybody can learn,” explains Leeson. “I could have quite simply asked for help and advice, and I didn’t do that. That then set me down the wrong path. Had I felt empowered to speak about it in the environment that I was in, you know, explain some of the issues that I was facing - who knows? I can’t guarantee this to you, but the story could have been very, very different.”
Does he think the change in attitude towards mental health issues is being felt in the world of finance yet? “You’d hope so. I’ve done some stuff internally with banks...some in the UK, some in the US, where they are very focussed on mental health and they have a mental health awareness week, or they have some form of [mental health] stream that they work their employees through.” This, he says, is a “really positive development” and a sign the world of banking has softened since his time in the industry. “It was all about success and ego and how much money you were making. It’s a different sort of environment [now]. We live in a far more PC world than it was back in 1995.” Having an open dialogue about workplace pressures and mental health is essential for any organisation looking to cultivate a resilient workforce, he says. “Having an environment where people feel they can talk is [what makes] a strong organisation
and an organisation that’s looking after its employees. Everybody needs to feel empowered. Without that, you have an organisation that could potentially conceal some errant behaviour.”
After fleeing Barings’ Singapore office in February 1995 and escaping to Thailand, Malaysia and then Germany, Leeson was eventually arrested at Frankfurt airport in November that same year. He served four years of a six-and-a-half-year sentence in a Singapore prison for forgery and cheating. Many lengthier prison sentences have been issued for banking misconduct since, including 14 years to LIBOR rate rigger Tom Hayes (later reduced to 11 years in an open prison); and 11 years to Galleon’s Raj Rajaratnam, the fund manager at the centre of one of the world’s largest insider trading rings. But does Leeson believe the prison sentences and fines are enough to make a lasting impact on banking misconduct, or is it more about rebuilding culture? “It’s about culture, but I think there has to be punishment; if you don’t have punishment, you don’t have a deterrent…It’s like looking after an errant child if you like; if you keep threatening them with things and then you don’t follow through, eventually they don’t believe you’re going to do anything. I think the prison sentences do send a strong message to people who work within the industry...I think it does set the correct tone. [As for] the fines; I’ve long held that these don’t work, because you’re fining the people who can afford to pay them.”
So, how do we tackle the culture issue? “People are very influenced by what they see and what they hear…If you see people doing wrong and then being brought to task, you think twice about doing it yourself. Unfortunately, 25 years ago when I was at Barings, everybody was putting trades in error accounts, nobody really worried about doing it; it almost became commonplace. And so, when it was my turn to put a trade into an error account, it was far easier to do than it should have been. That was one of the reasons [it happened] - again, it’s not the only reason, and I’m not trying to detract at all from my own wrongdoing - but I think the more you hold up examples of people who’ve done wrong, be that me, be that Tom Hayes, be that somebody like Tom Hardin in the US, who have effectively lost everything through their wrongdoing; I think it does serve as a strong message about what your behaviour should look like.”
Despite his speculations about how things might have panned out had he asked for help when he needed it, Leeson has little patience for those who blame persistent bad behaviour solely on workplace pressures. “People will always bring up mitigating circumstances, like pressure to perform and things like that. They really don’t hold much favour with me. Everybody knows the difference between right and wrong and what I did was wrong. I knew it was wrong at the time, and very stupidly continued and therefore was rightly punished. And I’m fully accountable for that period of my life.”
Compliance: not the sexiest subject
Improving staff engagement with compliance issues is still a massive challenge for organisations, says Leeson, and this is where real-life examples of poor decision making can prove invaluable. “Compliance and risk management...they are not the sexiest subjects.” Using an impactful story to demonstrate both the personal and organisational impact is “one way to make it more appealing, or more insightful, for the employees,” he says.
Leeson now earns a living doing exactly that; speaking at after-dinner engagements and conferences about his experience at Barings - an enterprise he is reluctant to call an “advisory” service. “I hate to use the word advice...I suppose it’s more me telling stories. I’m quite matter-of-fact about it...It’s just a very honest, candid account of what happened. It doesn’t paint me in a particularly good light and there’s no intention to do that. Then the organisation can kind of deliver their messages off the back of that.” He is also hoping to join forces with insider trader-turned FBI informant, Tom Hardin, for an upcoming workshop. “We’re still sort of working on how we’re going to deliver it. The idea is that it will be some stories from myself and Tom; an account of both of our situations; and then some of the senior management within the bank - or whatever organisation it is - will have a panel discussion around the type of messages that they want to enforce.”
Ex-hedge fund manager, Hardin, was questioned by two FBI agents in July 2008 about alleged insider trading involving scores of individuals, including employees of large corporations, financiers and even lawyers. He immediately confessed to his involvement in the scheme and evaded prison by helping secure convictions for more than 80 individuals. Hardin’s is another cautionary tale worth telling, says Leeson, and combined with his own, could help drive home key compliance lessons for firms. “[Hardin] made some bad decisions and put his career massively at risk; he effectively lost everything. I had a very narrow ethical compass [at Barings] and wasn’t thinking about shareholder value or how my actions were impacting on other people. Well that’s something that needs to be regularly enforced within an organisation. It is very easy to talk about things in a classroom and [say] this is how we expect you to behave and this is how we expect you to react - but...unless you can give real-life examples of the types of situation that you might find yourself in, and the difficult decisions that you need to make, it’s very difficult for people to fully understand the ramifications of their actions.”