Pamela vs Barclays Bank: Case of history repeating itself?

MUTALE BWALYA writes

IN February 1995, Nick Leeson, a “rogue” trader for Barings Bank, UK, single-handedly caused the financial collapse of a bank that had been in existence for hundreds of years. In fact, Barings had financed the Louisiana Purchase between the United States and France in 1803.

Leeson was dealing in risky financial derivatives in the Singapore office of Barings. He was the lone trader there and was betting heavily on options for both the Singapore (SIPEX) and Nikkei exchange indexes. These are similar to the Dow Jones Industrial Average (DJIA) and the S&P500 indexes here in the US.

In the early 90s, Barings decided to get into the expanding futures/options business in Asia. They established a Tokyo office to begin trading on the Tokyo Exchange. Later, they would look to open a Singapore office for trading on the SIMEX.

Leeson requested to set-up the accounting and settlement functions there and direct trading floor operations (different from trading). The London office granted his request and he went to Singapore in April 1992. Initially, he could only execute trades on behalf of clients and the Tokyo office for “arbitrage” (Lesson 10) purposes.

After a good deal of success in this area, he was allowed to pursue an official trading licence on the SIMEX. He was then given some “discretion” in his executions meaning; he could place orders on his own (speculative, or “proprietary” trading).

Even after given the right to trade, Leeson still supervised accounting and settlements. There was no direct oversight of his “book” and he even set-up a “dummy” account in which to funnel losing trades.

So, as far as the London office of Barings was concerned, he was always making money because they never saw the losses and rarely questioned his request for funds to cover his “margin calls” (Lesson 3). He took on huge positions as the market seemed to “go his way.” He also “wrote” options, taking on huge risk (Lesson 10).

He was, in fact, perpetuating a “hoax” in his record-keeping to hide losses. He would set the prices put into the accounting system and “cross-trade” between the legitimate, internal, accounts and his fictitious “88888” account. He would also record trades that were never executed on the Exchange.

In January 1995, a huge earthquake hit Japan, sending its financial markets reeling. The Nikkei crashed, which adversely affected Leeson’s position (remember, he had been selling options). It was only then that he tried to hedge his positions, but it was too late.

By late February, he faxed a letter of resignation, and when his position was discovered, he had lost US$1.4 billion. Barings, the bank which financed the Louisiana Purchase between the US and France, became insolvent and was sold to a competing bank for $1.00!

(If you are interested in more details regarding this infamous case, you can read “Rogue Trader” by Nick Leeson himself. There is also a movie of the same name starring Ewan McGregor which should be available on Netflix or DVD.)

The following two case studies are brief descriptions of similar, catastrophic losses by Bank employees with little, or no, oversight.

This case study presents serious lessons for Banks especially on the cost of having inadequate oversight and controls over individuals who are key custodians of key assets of an organisation such as the Dollar vault in the Pamela vs Barclays scenario.

How did the Bank allow only two people to have such unfettered access to astronomical amounts of money in the first place under weak oversights conditions? How is it that a mere Bank employee could walk away with such an astronomical amount?

What would happen then if a well-trained criminal attacked the Bank wouldn’t they wipe out the entire Bank without getting caught. As for bringing Pamela to book trust me that is a mammoth task for the security team as she will probably use that same money to go deep under the radar wherever she maybe.

Trust me, it’s not easy to fish out someone if they conceal themselves in a big city like New York or Seattle. However, this will also provide an interesting litmus test for the calibre of our security team to clamp down on sophisticated and organised crime at Barclays Bank.

Surely the Bank of Zambia also needs to review policies which govern the amounts of money that can be held by a Bank at its branches and vet the security procedures in place.

This is important because such theft has the potential to bring down an entire Bank like Barclays Bank as was the case with Barings Bank wherein customers perceive the Bank to be risky resulting in an exodus of clients from the Bank conversely it also has the potential to destabilise the entire Banking system/Financial system.

The author is an Accountant based in South Africa.