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In late November or December, Leeson decided to wager that the Nikkei index would not drop below about 19,000 points on March 10, 1995. It seemed to be a safe bet: the Japanese economy was already rebounding after a 30-month recession. Using the account No. 88888 also had a special advantage, one that Leeson had probably learned about in his old back-office job in London when he made sure cash flowed into the right accounts. Both Osaka and Singapore demand prompt margin payments on contracts-that is, the difference between what the contracts were sold for and their value at the close of each trading session. Since the account was technically Barings' property, it appears that the company automatically made some of the payments. "It was a free bet," says one colleague.
In addition, while Leeson could call up the error account on the company computer, most of his colleagues, who lacked the special password, did not have access to it. And last week members of Leeson's trading team in Singapore admitted to police that he had instructed them to put only a certain number of specific trades in the error account.
Still, in December 1994 and early January 1995, the Nikkei 225 seemed headed for 19,000. On the morning of Jan. 17, 1995, however, an earthquake measuring 7.2 devastated the Japanese city of Kobe-and the erstwhile stable Nikkei index plummeted more than 7% in a week. Despite that, over the next three weeks Leeson bought thousands more contracts betting that the Nikkei would stabilize at 19,000. "He was going for the big kill," says the director of one trading house in Singapore. A Japanese trading executive remembers wondering what Barings was doing. "We figured that it is such a big sophisticated operation that they probably had a hedge going in another market that we didn't know about," he said.
There were no hedges, no bets the other way to protect Barings' huge exposures. Leeson attempted to trade in Japanese government bonds as well, but these too incurred large losses. In what apparently was a breakdown in internal controls at Barings' treasury, the bank continued to fund Leeson's activities, going as far as taking out an $850 million loan in the four weeks leading up to the collapse.
Barings may have wanted to look the other way. They had allowed Leeson to remain chief trader while also being responsible for settling his trades. At most banks the two jobs are split because allowing a trader to settle his own deals makes it simpler for him to hide the risks he is taking-or the money he is losing. As early as March 1992, an internal fax warned that "we are in danger of setting up a structure which will prove disastrous, in which we could succeed in losing either a lot of money, client goodwill or both." But an internal audit from August obtained by the Financial Times last week concluded that though Leeson was a risk in this situation, his departure would "speed the erosion of Barings' Futures profitability ... (W)ithout him Baring Futures would lack a trader with the right combination" of experience, contacts, trading skills and local knowledge.