How a single secret account broke Barings Bank

HostIt's pretty hard to wrap your head around how a bank that helped pay for the Louisiana Purchase and survived the wars of Napoleon could just vanish in a couple of weeks. You expect a giant like that to be bulletproof, but it all came apart because of one young guy in Singapore and a single spreadsheet. How does a two hundred year old powerhouse just fall over like that?

GuestIt really comes down to a mix of old school trust and a very modern, very messy mistake. Barings Bank wasn't just any bank. It was basically royalty in the financial world. People used to call it the Sixth Great Power of Europe because it was so big and so famous. By the early nineties, they wanted to get in on the fast paced world of trading in Asia. So they sent a young, hungry guy named Nick Leeson to Singapore to lead the way. But the bank made a fatal error right at the start. They let him run the trading floor where the bets happen, and the back office where the paperwork gets checked.

HostSo he was the guy playing the game and the guy acting as the ref at the same time?

GuestThat's exactly it. In any normal bank, those jobs are kept far apart. You never let the person making the bets be the same person checking the math. It's the most basic rule in the book. But because Leeson held both sets of keys, he could make a trade, lose a bunch of money, and then just change the records so no one back in London saw it. He could basically move money around in the shadows and tell the bosses whatever he wanted.

HostAnd I guess he started using that power the second things went wrong?

GuestWell, it actually started with a small mistake by one of the people working for him. Leeson didn't want it to hurt his image as a star trader, so he hid that loss in a secret account he named 88888. He chose that because eight is a lucky number in that part of the world, but for the bank, it became a financial black hole. He used that account to hide every failed trade while using the bank’s own cash to double down on his bets. It's a bit like a gambler at a casino who loses a hundred dollars and then bets two hundred to try and get it back. He was sure the market would eventually swing his way and wipe out the debt.

HostBut he was asking London for huge amounts of money to fund those bets. Didn't anyone wonder why his star performance required so much cash?

GuestYou would think so, but the bosses were blinded by the profits he was reporting. He told them he was making record amounts of money, so when he asked for more cash, they just saw it as a way to make even more. They misread his massive risks as high performance. He was deep in this cycle of losing money, hiding it in account 88888, and then making even bigger bets to try and cover his tracks.

HostIt feels like that kind of luck has to run out eventually. What was the breaking point?

GuestThe breaking point was a literal earthquake. By early 1995, Leeson had moved from small errors to a massive bet on the Japanese stock market. He was betting that the market would stay stable or go up. To make money on this, he used some very complex moves that only paid out if the market stayed in a tiny price range. Then, on January 17th, a huge earthquake hit the city of Kobe. The Japanese market took a nose dive, and Leeson’s position turned into a total disaster.

HostI imagine that's the moment you have to put your hands up and admit you lost.

GuestMost people would, but Leeson did the opposite. Instead of admitting defeat, he tried to buy the market. He used hundreds of millions of pounds of the bank’s money to buy up stocks, hoping he could single handedly push the whole Japanese index back up. He was trying to move an entire nation's stock market through sheer force. It was an impossible task for one guy, but he kept throwing the bank’s money into the fire anyway.

HostSo how did the whole thing finally hit the light of day?

GuestBy late February, the hole was just too big to ignore. The people checking the books finally started asking why he needed so much cash for what they called margin calls, which are basically bills you have to pay when your bets are losing. On February 23rd, Leeson realized the game was over. He left a note on his desk that simply said I'm sorry and he fled Singapore. By the time the bank realized what had happened, he had racked up losses of over eight hundred million pounds.

HostEight hundred million. How much was that compared to what the bank actually had?

GuestIt was more than double the bank’s total capital. This bank had been around for two hundred and thirty three years, but in an instant, it was broke. It was eventually sold to a Dutch bank for the symbolic price of exactly one pound.

GuestThat one pound price tag is the ultimate proof of how fast a lack of oversight can destroy a legacy. Those basic rules about separating who makes the bets from who checks the books are the only thing that keeps a single person from toppling a global giant.

HostA bank that once funded the growth of whole nations ended up being worth less than a cup of coffee. All that history and power couldn't survive a single secret account that nobody bothered to check.