Nick Leeson: Poor Management Culture Allowed Me to Fail

Friday 19 February 2016
Nick leeson, the rogue trader who brought down barings bank, speaks to CMI about his remorse and how a culture of fear and incompetence allowed him to get away with his illegal trading for so long
Nick Leeson

Nick Leeson became a household name in February 1995 when the £862m worth of hidden losses he had racked up illegally trading futures and options in Singapore brought down Barings, the 233 year old merchant bank that used to serve the Queen.

Since then, Leeson has spent three and a half years in a Singaporean jail, where he survived a battle with cancer and a divorce, before becoming CEO of Galway United Football Club on his return to Ireland. More recently he has re-launched a risk management consultancy business helping banks and other financial institutions close the gaps that allowed him to rack up such staggering losses.

In Conversation With Nick Leeson

Speaking to CMI as part of their Bouncing Back series of events, Leeson openly admits his responsibility for the collapse of Barings, but said that a culture of fear and incompetency was the reason he was able to get away with his illegal trading for so long.

The illegal trading started after a junior colleague, just a few days into her job, made a mistake when placing a trade, which led to a discrepancy in the numbers. The first thing Leeson had to do the next day was inform a senior colleague.

“He was not a very approachable person,” Leeson says. “He was a pretty nasty man. He wasn’t very good with the local employees and would often belittle them in front of other people. So I spoke to him the next day before the markets opened and he asked me to refer it to London. [The people in London] wouldn’t be at their desks for another five hours and I never notified them. The position got worse during the course of the day and I obviously became more complicit as the loss got bigger.

“There was a culture at the time and I think people are very influenced by what they see and what they hear. There were a couple of people who had made small errors previously and lost their jobs. I am a very loyal person, I think that stems from my working class background, and I didn’t want this young lady who had only been with us for a couple days to lose her job.

“So I kept it in the illegal account and over the next couple of days the loss just got bigger and bigger.”

This culture of fear ultimately led to trading staff, including Leeson, hiding further errors from senior management, exacerbating the problem.

“Every time anyone made a mistake everything was hoovered up into the illegal account,” he says. “People weren’t being admonished and they weren’t being reprimanded; there was no real managerial-employee type of relationship at that time.

“They became comfortable with the way things were happening. Because the [illegal] account became this catchall account, everybody was very comfortable. They were well looked after, and it became an accepted practice. A lot of people suggest there was collusion between me and the other people on the trading floor, but they were just naïve.”

The Wrong People in the Wrong Place

Leeson argues that poor integration of the long-standing Baring Brothers and the younger and more nimble Barings Securities was largely to blame for these management inadequacies.

“There were two organisations: Baring Brothers – the 233 year old merchant bank, and Barings Securities, which was only founded in 1985,” he says. “You’ve got these two contrasting types of organisations: one which is very staid and a closed environment, and Barings Securities, which is very dynamic and is all about getting out there and gaining the business as quick as you can.

“They were trying to merge the two organisations… and a lot of people from Baring Brothers who didn’t have the direct or requisite experience to look after that particular part of the organisation (Barings Securities) were put in the senior positions.”

“Incompetence and negligence were at the forefront of everything that went on in that period,” he adds.

This ‘incompetence’ was epitomised by senior management not questioning Leeson about the trading he was conducting, something he openly admits had led him to reporting financial positions that should not have been possible.

“There is no common sense explanation to give [for what I told colleagues I was doing],” he says. “I was able to fob them off with completely ridiculous stories that had no merit and would not have withstood any sensible form of investigation or interrogation.

“They didn’t ask those questions because they didn’t understand it, and they should have probed a bit further until they really understood what was going on. Because they didn’t have that level of understanding they weren’t able to challenge me.”

Mistakes Are Still Being

Leeson says that star employees who have too much confidence in the work they are doing can be problematic for managers. Staff who are getting the results are hard to challenge, even if the routes they are taking could be risking the long-term success of the organisation.

“You still get these star traders who are making an awful lot of money in newly developed products and people don’t want to challenge them,” he said. “If they have that confidence and that bravado, psychologically it becomes very difficult in financial institutions to address those issues.

“It’s about gaining that competitive edge and keeping that edge, sometimes even within your own organisation. It’s not firm-to-firm; it’s desk-to-desk, financial location-to-financial location. Whatever constraints you try to impose on the industry, banks are the absolute best at getting around them.”

All this is evidence that the lessons of Barings’ collapse have still not been learnt by organisations across the globe, and Leeson argues that the real answer to the problem is having a culture that places importance on empowering managers within the organisation rather than overly relying on technology and processes.

“There are piecemeal lessons that are learnt for a period of time,” he says, “but it is a human failing: when things are good people quite easily forget. You need to be constantly reminded of the demons that exist in your past, otherwise they do have the capacity to occur again.

“People are very important within anything that goes on in an organisation. You can use technology to mitigate some of the risks you face, but you still need good quality people. The startling thing we see now in 2016 is a lot of people aren’t risk managers; they are just risk processors adhering to the latest set of rules and regulations. That’s a worrying development, because it’s about continually challenging what goes on in your organisation and making sure people are on their toes.

“Otherwise people get comfortable and complacent.”