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Offline leoniekrauss

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Case Analysis
« on: June 01, 2009, 01:53:02 pm »
My Case Analysis is attached.

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Leonie Krauß

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« Last Edit: December 13, 2009, 08:59:17 pm by Ted Azarmi »

Offline HannahHerrmann

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Re: Case Analysis
« Reply #1 on: June 01, 2009, 04:39:48 pm »
The collapse of Barings Bank

Barings Bank was a merchant bank founded in 1763. It didn’t only accept deposits and loan money but traded on its own account. Besides, the bank owned a membership “seat"on the SIMEX, the Singapore International Monetary Exchange. In the beginning, it didn’t activate its seat but as the business with SIMEX grew  considerably, the bank activated it in 1992. Mr. Leeson became the general manager and should set up the trading operations in Singapore.   
Mr. Leeson was already very experienced in business but had a special character as he liked to “behave like an animal”. From my point of view, it is very curious that nobody seemed to discover Mr. Lesson’s private character. Perhaps, he wouldn’t have got the job, if people had known his through charaketer.
Trading in the brokerage business often leads to trading errors. If people are inattentive or misunderstand each other , they sell instead of buy or trade the wrong product.  Consequently, the company has to clear the faults which decreases the profits. At Barings Bank, the losses were booked  on error accounts and deducted from the bonus. In my opinion, this procedure is very reasonable as it leads to more carefulness.
However,  Mr. Leeson decided to cook the books because of the deductions of his bonus. When he forgot to correct the fault of a phone clerk who sold contracts instead of buying them, he denoted  that the error had been corrected the day before and matched it against a dormant account 88888 which he wanted to hide. I find it really astonishing that Mr. Leeson could act like this. Aren’t there any blockades so that you can’t change the data from the days before? The text says, that the SIMEX monitors the trades. How could Mr. Leeson submit the records so easily?   
Probably, he could act like this because he had a position as manager in control of settlement and floor operations. Normally, settlement staff should control the firm’s operations, but Mr. Leeson had both positions. Barings Bank wanted to save money by employing only one manager but didn’t they think about future losses because of fraud? Especially, as they employed a person with such an ambivalent character.
In the following weeks, there were more and more mistakes which Mr. Leeson booked on the dormant account. At the end of each month, he had to fool the internal auditors. That’s why he booked the losses of the dormant account to his department’s commissions earned account. Why didn’t anybody notice the huge fluctuations on this account?
The losses of the dormant account grew enormously as Mr. Leeson took undue risk at his firm’s expense. He didn’t have to be afraid of any deduction of his bonus anymore and consequently this “control mechanism” didn’t work anymore. He started to separate the orders or broke the rule of no overnight positions, which increased the risk once again. However, I do not really understand this separation between the short and the long position, what does it really mean?
Furthermore, there were some external factors which increased the error account The office in Singapore was under-stuffed and had especially not enough skilled people. This fact led to more errors in Mr. Leeson’s department but it doesn’t justify his behaviour.
Besides, Mr. Leeson had to arrange daily margin calls which normally ensure that a member firm can accomplish its obligations. Mr. Leeson requested these funds of his London department which surprisingly supplied him with the money.  From my point of view, this fact shows, that it was not only Mr. Leeson, who ruined the bank. London didn’t really control him and didn’t want to have any problems because of their property trades.  Normally, a British bank can commit only 25% of its capital to risky ventures but Barings Bank exceeded this limit.
After the Kobe earthquake which helped the bank’s collapse, Mr. Leeson tried to gamble once again by means of a huge number of Nikkei contracts with the aim of a liquidity squeeze. But what does this term mean?
The losses of this last gamble brought Barings Bank down. 

Hannah Herrmann

JuliaKessler

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Re: Case Analysis
« Reply #2 on: June 02, 2009, 04:03:22 pm »
Case analysis attached

Nice holidays to everyone
Julia Kessler

Offline sabine.pfaff

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Re: Case Analysis
« Reply #3 on: June 03, 2009, 09:37:41 am »
The Barings Bank – Case Analysis


General Information about Barings

Barings Bank was founded in 1763 in London. It was a merchant bank trading on its own account and very successful. In 1980, Barings Bank set up brokerage operations in Japan and later expanded to other Asian countries. The seat on the SIMEX was activated in 1992 when Nick Leeson was general manager and should set up and run the trading operations in Singapore which finally led to the bank’s insolvency.

Who is responsible for the collapse?

The fact that trading errors influence the traders’ bonuses could cause Leeson’s behavior of trying to hide his losses. This system even represents an incentive for the traders not to be honest in my opinion. It is obvious that traders want to gain as much money as possible and Leeson’s idea with the “error account” therefore was quite clever.
Another interesting aspect is that Barings Bank did not employ enough staff to run the subsidiary in Singapore adequately. Leeson and his traders were so stressed that errors seemed to be unavoidable. Furthermore, the lack of the separation of operations from the settlement business made it possible for Leeson to hide his losses because there was no control. These facts show us that Barings Bank was not completely innocent.

But what’s about Nick Leeson’s behavior?
For every single error, Leeson found an appropriate excuse that made it possible that his superiors did not question his actions. It seems that he completely forgot the responsibility he had concerning his colleagues, the bank and its customers. This also shows his deal with Philippe which reveals Leeson’s inexperience in some aspects. On the one hand, he is not able to estimate the consequences of his deals adequately. On the other hand, he completely underestimated the risk he was bearing which we can see by the following quote: “At this point a trader with a prudent approach to risk would have taken the loss and unloaded the deal at 0.138 or whatever price that the market could bear. However, Mr. Leeson took another large gamble.” (page 23) Here we can see that he did not behave as traders usually acted.

Another interesting aspect that is mentioned in the case is that the British regulators did not sanction Barings Bank. The 25 % limit was exceeded and nobody acted against this violation of law so that we can say that the bank of England that had sufficient information did not stop Barings’ transfers to Singapore.

But the most surprising aspect in my opinion is that nobody neither noticed Leeson’s ambiguous character nor his error account 88888. Probably, it was impossible for the internal auditors to discover Leeson’s error account because he cooked the books thoroughly, but it is absolutely questionable why Barings paid so extremely high margin calls. The text even says that Barings did not fully understand Leeson’s operations. Why didn’t they stop paying money and started an investigation at this point? The fact that Leeson’s operations were profitable is no reason for ignoring the circumstances.

Finally, the Kobe Earthquake in January 1995 contributed to Barings final bankruptcy because the market dropped down significantly. Leeson tried a desperate attempt to move the market price but failed and Barings Bank was taken over by ING.

In conclusion, we can say that not only Mr. Leeson’s behavior led to the dramatic bankruptcy of such a big merchant bank. He was able to find loopholes in the system that made it possible to hide his losses but he is not the only guilty party in this case.





Offline Michal Wilczek

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Re: Case Analysis
« Reply #4 on: June 08, 2009, 11:50:43 am »
Find my summary attached.

Michal Wilczek

Offline TanjaKroh

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Re: Case Analysis
« Reply #5 on: June 12, 2009, 02:53:00 pm »
My Case Analysis is attached.

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Tanja Kroh

Offline B.Tisch

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Re: Case Analysis
« Reply #6 on: June 12, 2009, 06:20:27 pm »
solution attached

Offline Sandra Hokenmaier

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Re: Case Analysis
« Reply #7 on: June 14, 2009, 10:57:03 am »
Case Analysis – The Collapse of Barings Bank
Sandra Hokenmaier

Background

Barings Bank was founded in 1763 and known as the oldest merchant bank in London until its collapse in 1995. The bank not only accepted deposits and provided financial services to its clients but also traded on its own account. Barings was internationally very successful, which encouraged the company to expand to Japan, Hong Kong, Singapore, Indonesia and various other Asian countries.
In 1992, the bank faced the beginning of the end when it decided to activate its seat on the Singapore International Monetary Exchange (SIMEX) and therefore appointed Nick Leeson as general manager in charge of the trading operations in Singapore.
Nick Leeson managed to lose a total sum of £827 million ($1.3 billion) speculating primarily on future and option contracts, which finally caused the bank’s insolvency in 1995. Barings
Bank was purchased by ING, a Dutch bank, for the nominal sum of £1.

Factors that contributed to the failure

Cases like Barings Bank failure are unique in the economy’s history and result in thorough investigations to find out the reasons for the downturn.
Concerning Barings Bank, it is primarily Nick Leeson who can be blamed for the bank’s collapse. As staff needs to take responsibility for its own trading errors, Mr. Leeson rather decided to cook the books and falsified trading records in the bank’s computer systems instead of accepting a deduction of his year-end bonuses after having been involved in a trading error that caused the bank a major loss. At this point I would like to question the practice of using error accounts that are usually charged to year-end performance bonus accounts. On the one hand, employees are provided with an incentive to be vigilant against errors, but on the other hand, it encourages dishonesty as no one likes to see his or her own profits decline. In addition, it is mentioned in the case that Mr. Leeson’s office was short-staffed so that errors were unavoidable and could not be fully credited to the dealers, thus bonus deductions were unjustified.
According to the text, the recruitment of Nick Leeson as general manager can be highly questioned. His ambiguous character and personal background make clear that he should not have been in charge of a position with that much responsibility. A man who takes part in brawls and who has problems to control his sexuality is not determined to work in any serious business. It can be criticized that he was not sufficiently prepared to work as ex pat, but I also believe that his behaviour would not have been appreciated in his home country either.
Nick Leeson managed to hide his character as well as to hide all his losses from the home office in a dormant account number 88888. It is incomprehensible to me how Barings’ internal auditors could not find out about account 88888. What is the use of auditing, if it can be tricked as easily as it is described? The purpose of auditing is to investigate a company’s accounts and to check them for mistakes. In Barings’ case the audit department completely failed its task.
Moreover, Barings Bank dealt with important deals in the brokerage business, which involved huge amounts of money. There is no doubt that operations of these sizes should be based on mutual control by staff and separation of operations from the settlement business.
At Barings Bank, Mr. Leeson was trading floor manager and head of settlement operations at the same time. By wanting to save one person’s salary, Barings made it possible that Nick Leeson blowed the whole bank’s equity capital. Usually, the back office controls and supervises the operation’s staff activity to ensure that they do not take on too much risk at the expense of the firm’s survival. It is a general rule that a bank should not put in access of 25% of its capital in risk by purchasing derivatives. However, at Barings, Mr Leeson was not only operating but also ensuring accurate accounting for the unit. In fact, there was no supervision from London and he could manage things as one pleases. The British regulators did not even intervene when they were informed about Mr. Leeson’s margins that exceeded far more than 25% of the banks assets that were placed on risk.
As London was dazzled by Singapore’s apparent profits and did not completely understand Mr. Leeson’s operations, it paid margin calls that in any other brokerage operation would have been rejected. Thus, it was always ensured that the Singapore’s division met its financial obligations.
Deficient internal auditing and risk management practices allowed for the bank’s collapse in January 1995 when the Japanese market, at which Leeson was operating, dropped down significantly due to the Kobe earthquake. The huge number of Nikkei contracts that Leeson finally purchased to move the market price was determined to be the straw that broke the
camel’s back when the Nikkei crashed in February 1995.

Consequences


Mr. Leeson was arrested in Germany and sentenced to a six and a half-year prison term. His wife divorced him while in prison and he was diagnosed colon cancer. Today, he is recovered, he manages an Irish soccer team and is married to a second wife.
However, in my opinion it is not only Nick Leeson who can be made responsible for Barings bankruptcy. We have seen that many other factors as for example the lax enforcement of the brokerage and banking regulations contributed to the bank’s failure. It seems like Barings example was not deterrent enough to avoid similar lapses. In late 2001, investors lost more than $60 billion in the spectacular collapse of the energy giant Enron, which was accused of a multitude of ethical breeches, including deliberately misleading shareholders about the company’s true financial status. In 2008, the French futures trader Jérôme Kerviel has been blamed for losing his bank £3.7bn.
This causes me to question the whole banking system as the financial crisis proved again that banks and other companies still seem to be not efficiently controlled and supervised. At the moment many new laws and regulations are passed by international committees and we will see soon whether the measurements bear fruits.


Offline ChristianHattendorff

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Re: Case Analysis
« Reply #8 on: June 14, 2009, 08:19:57 pm »
Case Analysis: Barings Bank                                                             06/14/09

Christian Hattendorff

The case of Nick Leeson at Barings Bank 15 years ago and that of J. Kerviel at Societe Generale over one year ago are examples of extreme fraud that harmed the company significantly. Barings Bank even collapsed. Many reasons can be found to explain these phenomena; important ones are base motives, risk incentive problems and a failure of control mechanisms.

Barings Bank was founded as a merchant bank in 1763 and it traditionally traded on its own account as well. With a long and outstanding history Barings was a very proud bank, operating in the whole world. To strengthen their business in Asia, they decided to trade at SIMEX (Singapore International Monetary Exchange) and put Nick Leeson in charge of leading the division as general manager.
Leeson came from humble homes in England and started his career at a bank in London. He several times switched the employer and finally got employed by Barings where he rapidly worked his way up. Concerning his character, it seems that there was much left to be desired: he had a rude behavior and strange friends.
But, how did the fraud take place?
Trading operations in investment banks usually lead to mistakes due to misunderstandings and so on. Those faults have to be cleared and, normally, they cost money. For those errors Barings Bank created so called error accounts on which the losses were booked, having a negative impact on the responsible person’s bonus at the end of the year.
The division of Leeson made many errors in their futures and options business and he made sure that the losses were booked on the error account 88888, which was secret and only known to Leeson. Within years the losses added up to 1 billion US dollars. Officially, his division seemed to be very profitable. The main office in London even paid high amounts Leeson needed for margin payments.

I think one of the biggest and basic problems of the Barings Bank case is the problem of risk incentives. In the agency-principal-framework Leeson is an agent working for his principal and employer Barings. He participates in the success of his division by receiving a bonus, but he does not participate in losses, at least not to the same degree since he is not an investor of Barings Bank. Therefore, he has an incentive to take a higher risk as he would otherwise do.
Another important reason is the failure of control mechanisms. First, Leeson was responsible for trading and, at the same time, for settlement. This should normally be separated. Internal controls failed, especially the supervisors did not recognize that something was going wrong. In addition, external control mechanism failed as well. English authorities and the SIMEX were not aware of irregularities.

Offline rolf.schmucker

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Re: Case Analysis
« Reply #9 on: June 14, 2009, 09:21:26 pm »
Find my case analysis attached.
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Offline AndiStaudacher

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Re: Case Analysis
« Reply #10 on: June 15, 2009, 11:07:46 pm »
Please find my Case Analysis attached.

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Offline ellmar

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Re: Case Analysis
« Reply #11 on: June 16, 2009, 08:27:15 pm »
Please find my case analysis attached.
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Offline larissa

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Re: Case Analysis
« Reply #12 on: June 17, 2009, 03:36:58 pm »
Solution attached.

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Offline Hülle

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Re: Case Analysis
« Reply #13 on: June 17, 2009, 05:55:38 pm »
Analysis attached, see you tomorrow!

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Offline magicblu

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Re: Case Analysis
« Reply #14 on: June 17, 2009, 11:52:25 pm »
Case Analysis

The case depicts a problem in international financial markets, more specifically the events that caused the collapse of the Barings bank. Questions that will be dealt with in the following analysis include: Who was Nick Leeson and what was his position at Barings? What contributed to the collapse of the Barings bank? What can be done to avoid fraud of traders?

Who was Nick Leeson and what was his position at Barings?
Leeson was an ambitious person who took inconsiderate decisions. At Barings, he was assigned to set up and run operations at a new subsidiary in Singapore. As general manager of the subsidiary, Leeson was responsible for the profitability of the subsidiary. Errors that frequently occured in trading were allocated to those who caused them and subtracted from the end-of-year bonus.

What contributed to the collapse of the Barings bank?
Leeson was ambitious about his salary and about keeping his job. When London warned him that trading errors had to be reduced, Leeson started to cook the books and opened up a secret error account to hide trading errors. He soon assumed also errors of others and took higher risks so the hidden liabilities of the subsidiary grew until the fraud became too obvious. Leeson resigned and the Barings bank collapsed.
The complete picture of the story is different when looked at more in detail. General management in London made a mistake in assigning someone a position of trading and settlement. Furthermore, they accepted lack of staff and partly also lack of skilled staff and the heavy workload each employee had to bear, which led to costly errors. Neither Barings management nor SIMEX became suspicious about mysterious movements and sudden reduction of errors, nor did anyone discover the error account 88888. This questions the ability of SIMEX in discovering fraud because the institution obviously failed in fulfilling its goal. If fraud is so easy, the system does not work and has to be reassessed.

What can be done to avoid fraud of floor traders?
The case gives a detailed description of Leeson’s behavior in Singapore. This suggests that either cultural problems might play a role, or on the other hand also ethical problems or character traits. In my opinion, the mindset of floor traders has to be examined in a psychological test before employment.
Additionally, division of powers has to be guaranteed. Trading is a tough business and the prospect of high gains can make people ruthless. This always has to be on the screen of managers.
Incentives have to be reassessed and checked so that they lead to the desired results. Boni must involve both losses and gains. If traders don’t participate in losses, they become inconsiderate and take irrationally high risks they would otherwise not make.