The collapse of Barings, Britain's oldest merchant bank, was announced on this day in 1995, after one of its traders had run up trading losses of well over £800 million.
It transpired that Nick Leeson had been making unwise speculative investments in futures contracts – basically betting on market movements around the world – while taking advantage of a lack of oversight to hide growing losses.
As well as being the chief trader in the Singapore office, Leeson was also responsible for settling trades – jobs usually done by different people. Trusted for his earlier successes and effectively unsupervised by London, he began making bigger and bigger gambles to offset losses.
The 28-year-old found he was able to hide debts, and fund his new trades, using a Barings error account – one used to cover mistakes in trading. By manipulating the account, he was able to report a profit of £102 million in December 1994 – when in fact he had already lost £200 million.
He had been investing in the Japanese Nikkei index, gambling that it would recover quickly after a slump. When it did not, partly due to an earthquake in Kobe in January 1995, the losses spiralled out of control.
By the time Leeson fled to Malaysia on February 23, he had lost the bank a total of £827 million – an amount it was unable to cover from capital. The collapse cost Barings another £100 million, and it was declared insolvent three days later after an abortive attempt at a Bank of England bailout.
An investigation led by Chancellor Kenneth Clarke heaped scathing criticisms on the bank for its failure to implement proper auditory controls. Leeson was arrested while on his way back to London, tried in Singapore and sentenced to six-and-a-half years in jail.