Georgia Straight
for February 1995, Article 3

Mr Nicholas Leeson, the 28 year old ex trader for Barings Bank, has done what no one thought could be done - yet paradoxically what many worried might happen. On his own, he bankrupted a 300 year old merchant bank.

The reason people thought it couldn't happen was simple - banks don't go broke any more. Do they?

The reason so many worried that this sort of thing might happen was because the game being played by Barings - and all banks for that matter - was such a dangerous one with so much money being played with by adventuresome young hotshots and with so few controls in place it seemed a prescription for disaster. Still - a 28 year old losing a billion bucks in a couple of months? Surely that couldn't possible happen. But it did.

What happened is really not so complicated as it seems. While the investment priesthood has, as all priesthood's do, created a complex patois which is very hard to understand, in fact the game is a simple one.

The game is "futures" - and it is a game we all play.

When we take out a mortgage we play the "futures" game. If we take one short term, we gamble that rates will fall. If we "lock in" for a long period, we gamble that rates will go up. It is, of course, more complicated than that in the "futures" market, but that's the essential principle of it all.

A common form of futures is in the agricultural field where traders buy commodities today, gambling on the hope that when the product actually goes to market the price will be higher. This often suits the farmer who gets a price certain, but for the commodity "investor" - if that can possibly be the right word - the gamble can be enormous.

The potential for disaster is compounded by the fact that investors can buy on "margin". In other words they can pay, say, $5 for a $100 item and if the product sells for $150 dollars pocket a $50 profit on a $5 down payment.

The problem comes when the price drops to $50 and the broker demands the full $100 contract price.

That's what happened to the high rolling Leeson, who had been betting the banks money that the Nikkei Index would go up rather than down. The Japanese Stock Market had gone into the dumper and Leeson reasoned that it would bounce back. What he didn't reckon with was the Kobe earthquake which sent stocks plummeting further.

The bottom line was a billion dollar loss by one wet behind the ears kid, toppling one of the most respected merchant banks in the world.

What this illustrates is two things.

First, large organizations playing this sort of game do not have appropriate controls over the actual soldiers in the field. There seems no doubt that Barings Bank knew that trouble was brewing in Singapore, where Leeson did his trading. They had been warned by auditors as well as a senior member of their firm in Singapore whom Leeson had managed to bypass in making his deals. By the time the head of the dinosaur learned that its tail was on fire it was too late. In fact, the Board of Directors was so arrogant and cocksure that the Bank of England and other banks would bail them out that they asked that the expected bailout be done in a hurry so that the next Monday deadline for 100 million pounds in bonuses to be paid out to senior management could be met!

The second thing this shows is that everything, except the ability to stop bad things happening, is moving with lightening speed. Huge deals are made in nano seconds. Leeson did his damage in a couple of months. It's as if we had developed an automobile which had to go 200 miles per hour to keep up with traffic, but whose brakes didn't work after it reached 50. This is a very real problem of the Computer Age and what is so worrying is that no one seems to care. Governments still behave as it they can exercise control over their money; that they can, if they wish, set the value of their money .. or set interest rates .. or restrict people from obtaining foreign currency. These things they no longer can do - at least they can't do them effectively, any more than Barings Bank could stop Mr Leeson in time.

Money can be moved too quickly for any controls to be effective. When I say that governments can no longer do these things I mean as matters now stand. Whether or not, through international agreements some order can be brought to the marketplace is a matter of speculation, but I doubt it.

What we have seen in the past few years is the economic equivalent of a nuclear threat. During the ERM crisis in the UK a couple of years back, one trader, George Soros, took on the Bank of England and the Chancellor of the Exchequer and won hands down to the tune of a billion dollars profit, give or take a shilling. One man did this! And we saw it happen. Yet we're surprised that another man, given free rein to pledge his bank's credit, could ruin it.

Could it happen in Canada?

Why not? Back in the early eighties when Jack Gallagher and Dome Petroleum were, thanks to the Liberal government of the day, flying high a Canadian Bank would have gone under if the Government hadn't stepped in.

I have no idea as to what must be done. But what is clear is that Mair's Axiom I, namely that you make a serious mistake assuming that people in charge know what the hell they are doing, is alive and very well in the world of high finance - a world in which those of us who don't play the game must endure the consequences of the actions of those who do.