In 1992, Leeson began making unauthorised speculative trades. These proved successful at first and made significant profits for Barings. Leeson appeared to be an exemplary employee. However, it was not long before things began to take a turn for the worse. At that time, a derivatives trader only needed to bring to the table a small percentage of the amount being traded, thereby making it possible to incur huge losses if the deal went sour.
Many of Leeson’s deals did turn sour and he opened a secret account (numbered 88888, considered an extremely lucky number in Chinese numerology) to hide his losses from the company. By late 1992 the account, for which Barings was responsible, was in the red by over £2 million and by late 1994, the sum had grown alarmingly to £208 million. Executives at Barings were none the wiser and by the end of 1993, Leeson had made in excess of £10 million, accounting for ten percent of Barings’ total annual income. The whiz kid could do no wrong in their eyes.
On 16 January 1995, Leeson placed a short straddle (a non-directional options trading strategy, involving substantial risk) in the Tokyo and Singapore stock exchanges. It was basically a bet that the Japanese stock market would make no significant overnight move. This seemed reasonable, as the Japanese economy was experiencing a rebound after a 30-month recession. However, the following morning, at 5.46am on 17 January 1995, the Great Hanshin Earthquake struck. Its epicentre was the prominent port city of Kobe, Japan. It measured 6.9 to 7.3 on the Richter scale, lasted 20 seconds and killed over 6,000 residents. Its effect was to cause massive upheaval in the Asian markets as well as in Leeson’s plans.
Not to be outdone, and in attempt to recoup his losses, Leeson then embarked on a series of increasingly risky new investments. He bet that the Nikkei Stock Average would recover swiftly. This did not occur and Leeson was further compromised.
He carried on requesting funds from Barings to continue trading, in the hope that he would rectify his losses. In three months he purchased more than 20,000 futures contracts – worth around $180,000 each – in an attempt to move the market. It was all in vain and these trades totalled three quarters of the eventual $1.3 billion loss suffered by Barings.
On 23 February 1995, two days before his 28th birthday, Leeson decided the situation was beyond his control and he would never redeem himself. He fled, leaving a note that simply said, “I’m sorry”. Barings executives discovered what he had done, were forced to inform the Bank of England, and Barings bank went bust.