Colm Brady

Nick Leeson Interview 10th March 2008

Nick Leeson is the man who broke Barings Bank in 1995. Operating in the frantic world of futures trading he racked up losses of £827 million, the highest ever loss by a Rogue Trader at that time. Life has moved on for Leeson – he was released from Changi Prison in Singapore in 1999 and now lives in Galway where he is the chief executive of Galway United soccer club.
Leeson has been a hard man to get hold of, he gives the impression of being constantly on the move. I met him in his office, which is installed in a Portacabin behind the Goals of Terryland Park. He is a little stockier with less hair than the photographs from his Barings days. The office contains a laptop and a Blackberry; the tools of any Chief Executive. Only the steel grilles on the windows destroy the illusion. Leeson has reduced debt levels at the club and has brought in additional sponsorship from local business. He is realistic about the financial state of FAI soccer being light-years from that of the Premiership.
“Football Clubs in Ireland don’t make money.” Leeson states with the authority of a man who knows.
“Its not the sort of Investment that anyone would really want.” Leeson deals with local companies that have done particularly well and want to give something back.
He has been living in Galway for five years now and likes the pace of life here.
“Galway has all the attractions of a big city but doesn’t have the social problems that Limerick or Dublin have.”
Leeson still keeps an eye on the markets and his former colleagues. When asked does he get inundated with calls each time a trading scandal breaks, he nods.
“Its more a lesson for the Banks that don’t understand the markets as well as they should do.”
When I ask him about Jerome Kerviel who lost €4.9 Billion for French Bank Societe General in January 2008, he seems unperturbed about the size and timing of the losses.
“Look back at any rogue trading or financial scandal, and the clues that indicate that something is wrong are very obvious. After the event it is difficult to see the lack of common sense, someone looking at the numbers and saying that something is clearly wrong here. I think that the reason for this is that these guys (senior management) become so far removed from what is going on.”
His own bosses in Barings were proved to have a very tenuous grasp of derivative products, and Leeson thinks this is still the case in many banks.
“They are not willing or don’t seem to be able to highlight their lack of knowledge by asking the questions that they should. They don’t want to show themselves up by asking the simple questions. An information deficit then exists and increases all of the time.” he adds.
“As they go through their careers managers tend to become distanced from what is going at the sharp edge of the business ….that creates a knowledge and information deficit that is not acceptable.”
“When it explodes as it did in the Kerviel case, it is as dramatic as it can be. The guy was clearly out on a limb for a long period of time, as I was in Singapore. There were so many things that should have highlighted that something was wrong – the amount of funding that was required, the huge margin calls.”
When asked about high tech trading techniques, Leeson says the Societe General were at the forefront of technology in these markets.
“Societe General is a company I know very well. Societe Generale were at the cutting edge of the derivatives markets. The fact that it can happen at Societe General means it can happen to anybody.”
Is there such a thing as a Rogue Trader?
“I think it is a combination of personality and system failure. You need a certain type of individual. You need someone who is undisciplined who is prepared to break the rules, who is very stubborn and obstinate. Someone who is stubborn about what they are doing and thinks they are going to get out of it.”
Leeson has made a living teaching bankers how to avoid the nightmare scenario of a trading meltdown. He is fond of laying the bulk of the blame at the door of the people in charge of running a bank and rarely admits his own responsibility. The Barings directors didn’t want to query the star trader who was apparently the source of a large chunk of the banks profits. Leeson is quoted as saying he wouldn’t spend the rest of his life saying sorry. No amount of apologising would correct the massive losses which collapsed Barings and 50% of Leeson’s earnings still go to the liquidators of the bank.
Peter Baring famously concluded in 1993 that it was not actually terribly difficult to make money in the securities business. The fact that he had no inkling of what lay in wait for the Queen’s Bank is an indicator to Leeson.
“If you take your finger off the pulse … if you don’t have controls and systems…and they are simple controls…its not rocket science.”
I ask him about the main types of Trading Staff; the Traders and the Mathematicians who design complex models to calculate prices.
“They are different types of people. The quantitative guys are the real bookworm types that get off on numbers. Traders are out there to make money and are probably more into the thrill of how the markets move. I think there is a big difference but they both get it wrong from time to time. Goldman Sachs Alpha fund lost 37% of its value because a set of circumstances arose that wasn’t included in their system.”
I compare Barings Singapore operation to that of AIB’s American subsidiary Allfirst. Both were remote from their owners geographically and I wonder was that a factor in the Trading losses.
“I don’t think there is a profile to be honest. I think you are looking more for a deviation from the normal type of business. Then you get that information or knowledge deficit. That tends to be when something like this occurs. I mean the idea that Kerviel was particularly good with IT systems and was able to hide stuff to me holds no water.”
“There are so many levels, you go through compliance, liability management and treasury departments. They all should have an idea when something is wrong. It is a complete breakdown and the only reason, I believe, is that people aren’t prepared to ask those simple questions. These people think they are masters of the universe - they are not”
I ask Leeson if the markets have changed a lot since his time in the markets.
“I still have friends trading in the markets and I don’t think they would thank me for the amount of controls they have to work with nowadays. The thing with the financial markets is that they are always changing. A group of banks will open a particular market. They will make a lot of money, a lot of other banks then join then the opportunity to make money goes away and they move onto the next big thing.
Derivative products are always changing and there is always a catch up in the compliance and control areas to try and understand what is going on with the business.”
“Alan Greenspan before he left the Fed asked all the big American banks whether they understood credit derivatives. The back offices of all of them said No they didn’t understand the risks.”
I am aware that Leeson was a proponent of online Poker and ask him does he play much nowadays.
“Not as much as I used to. I wouldn’t say it is a common thing in traders, they all have different vices. Trading is a zero sum gain – somebody is winning somebody is losing, same as in Poker. You are up against other like minded individuals. One thing about traders is that they like to win and they like to make money. If you are beating the best people that are around you, then it is far more interesting.”
In his book Rogue Trader Leeson describes the massive transactions he was making as “Trading Ether”. He still admits to this impression.
“It does and it loses its sense of reality. You know what the numbers are and as they start to get bad you are trying to avoid them. Money has a far more real value when you step away from the trading floor.”
Leeson’s reason to set up the operation in Singapore was to take advantage of small price differentials between the Osaka and Singapore Markets on the Nikkei 225 index. I wonder was there a lot of money in this sort of operation.
“It depends on your systems and reaction times. You tend to have a market that leads and if you can take advantage of the anomalies, it depends what size trade you can do.
I have a friend that trades equities in Germany - they have nine or ten stock exchanges there. He had a computer system that was so developed he used to get the stock exchanges phoning him up to ask him to turn off his computer trading system because they couldn’t handle the volume of trades.”
“Again if you are looking at trading between London and Frankfurt you have a currency issue. His system was so complex that if there was a trade out there between the different stock exchanges in Germany it could trade 1000 times a minute.”
“There are enough anomalies out there, its just whether you need one big one or you are willing to take 100 or 200 little ones to realise the money that you want to.”
In the months leading up to Barings Collapse Leeson was getting queries from the Japanese financial press. It seems incredible that Barings still knew nothing of his positions.
“Yamaichi Securities issued a research document. It was the same with John Rusnak. The rumours were very strong, the type of trading that he was doing, the methodology that he was going through weren’t right for a bank of that size. It didn’t suit the profile, what I was doing at Barings didn’t suit the profile. It wasn’t one of the big hitters, it was a niche player had great research and every now and again would pull off a bit of a coup.”
“To accumulate the size of position that I had that was against the trend of where Barings were in the market. Rusnak at Allfirst was exactly the same – there were people in the market who wouldn’t trade with him because they knew something was wrong. The size and type of trading weren’t right for the bank.”
He continues by saying the Asian Markets were aware of his trading.
“There were regular meetings in Tokyo about my positions. I crossed volatility from 50% to 7% so everyone else in the options market was feeling a lot of pain because that represented a loss for them. They would meet and discuss ways that they could manipulate volatility a little bit higher to put the pain back on me. How many of them knew that something was wrong I don’t know but the Yamaichi research document came out in late January 1995 and the bank collapsed in February 1995 and the only ones not reading that research were the people at Barings.”
How do you view the importance of Hedge Funds in the market?
The effect they can have on the market is huge because they have so much money invested. Every market survives through a certain amount of speculation and a certain amount of hedging. They are a very important part of any financial market. I guess their derivative use has probably got more sophisticated over the last ten to fifteen years. Therefore their influence on the derivative markets is a lot greater than it used to be.
Are you still trading?
“I trade a little bit from time to time if the markets get particularly volatile which is what I used to be good at.”
Leeson still sees Spread Betting and CFDs (Contracts for difference.) as valid forms of investment in Ireland.
“They are a great tool if you know how to use them. I wouldn’t recommend them to just anybody. I use financial spread-betting myself. I wouldn’t have a problem with either method.”
“A friend of mine who used to work for Goldman Sachs resigned as a director and uses spread-betting exchanges. I mean you don’t pay capital gains on it and it has distinct advantages. I don’t understand why so many people in Ireland still use traditional stockbrokers with their exorbitant fees. It doesn’t make any sense – you can get the same degree of exposure for smaller investment. You have to be prepared to cover your margins. If you are going to buy fifty grand of equity you could put five into CFD accounts and have the other 45 as margin.
It doesn’t suit everyone – you have to work out what your own risk profile is and decide what you hope to achieve. You get a property developer going out to trade a currency when he never has traded currencies before.”
As he glibly describes investment vehicles that are dangerous in inexperienced hands, it is obvious he sees himself as a player of the percentages. There is a hierarchy of the wicked at work here and Leeson confirms it as we conclude the interview.
“Kerviel kept doubling up his bets, the most basic gambling system. There is a term for the type of double down betting. I don’t think it is really a trading technique. I don’t think my technique was refined, but it was a little different than that. I tried a few different things to get myself out of it. His technique was as basic as you could get.”
Leeson seems to take an almost boyish glee in the level of Jerome Kerviel’s losses. At last someone has knocked him off the top spot. As we conclude the interview we talk about FAI soccer, Leeson seems relaxed in his new fiefdom. If nothing else he is an optimist.

posted by Colm Brady @ 10:35 PM