board of directors should have put the management committee under constant
pressure to formulate these risk reporting systems.
Senior Barings managers ignored internal audit reports, as well as inquiries
from the Bank for International Settlements. They even ignored (for
a while) the cold reality of Leeson’s call for cash, when trading losses required
Barings London to borrow the needed funds and wire them to
Singapore. Barings management thought Leeson was arbitraging, and
therefore, it funded his margin calls without demanding full explanations.
Arbitrage traders are not supposed to be superstars. They are not supposed
to earn enormous profits. Rather, they should be earning small profits on
numerous trades with almost zero net exposures. When an arbitrage trader
begins to earn 20% to 50% of a multinational bank’s annual profits on
riskless trades, as Leeson claimed to be doing, warning bells and sirens
should sound immediately.
Had Leeson been fully hedged, then the margin calls on one exchange
would have eventually been offset by gains on the other. To be sure, he
would have needed to post larger and larger amounts to his margin accounts
as his positions expanded, but they would have been nowhere near
the level of funding he requested.
The truth is that Leeson’s supervisors seemed to bend over backwards
looking for reasons to believe that he was staying within the bank’s guidelines
and the eye-popping trading profits he was generating were legitimate.
Whatever arguments Leeson’s supervisors concocted, they were invalid and
shallow. Barings had rules and regulations in place that were supposed to
stop traders (including Leeson) from activities such as carrying open
overnight positions, exposing the bank to any one customer for more than
25% of the bank’s capital, and selling options. Almost no twisting and
turning can reverse the fact that many levels of management above and
around Leeson failed to function properly. It is sobering to think how many
individuals with brilliant minds and the opportunity to study at universities
like Oxford and Cambridge were duped by a lone rogue trader in Singapore.