Page 271 - A Banker Down the Rabbit Hole

When Leeson's office desk was broken into after he went on the run, his
bosses found a pot of glue, scissors, and various blank headed letters -
which he had used to fraudulently authorize some of his trades. Part of
his deception involved little more than cutting and pasting people's
signatures on letters and faxing them through to head office.

Because the purchases required only a small down payment -- typically
10 percent or less, traders said -- Mr. Leeson was able to amass a position
large enough to excite comment throughout Asian financial markets
about his aggressive strategy, analysts said, even as his trading was going
unnoticed by regulators. The regulators had not yet determined how
much Mr. Leeson had put down as a margin payment on his position.

It is unclear what alerted Barings to the problem in Singapore. But, as
his positions deteriorated, Mr. Leeson would have faced calls for increased
margin payments.

Nigel Hamilton, who is heading the Ernst & Young team, said the loss
stood at $900 million before the 3.8 percent fall in Japanese markets
today, suggesting that the loss is now well in excess of $1 billion.

Insights from the episode
1. Back office operations should have been kept strictly separate from
front office managed by Nick. The operational risk due to human
errors or frauds could have been avoided.
2. Second check is a must. The bosses failed to detect the errors and
excessive risk taking by assuming that he cannot err and will continue
to make profits for ever. They forgot that everyone is prone to errors.
Systems were not in place for internal controls.

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268 | A Banker down the Rabbit Hole