Baring Bank Case
CHAPTER 9 CASE: The Fall of Barings Bank
The story of Barings Bank shows how overconfidence, coupled with poor internal control, can even bring down an historic financial institution. Below we provide a few teaching points.
Nick Leeson seemed to have all the characteristics of an overconfident trader. As described in the chapter, excessive trading, lack of diversification, and too much risk were obviously present. Self-attribution bias seemed to play a major role. One commentator notes that Leeson “got overconfident after initial trades were successful [and] when he started to lose money, got way too aggressive trying to make it up.” When Leeson was asked about his actions, he explained that “I was determined to win back the losses [. . . ] I was well down, but increasingly sure that my doubling up and doubling up would pay off. . . ”, thereby overestimating his abilities by thinking he could outperform the market even after severe losses. A case study into the affair concluded that it was overconfidence that led Nick Leeson to bet his reputation. But, as Saul Hansell of The New York Times stated, “It isn't just rogue traders -- loose cannons stretching internal rules on trading desks -- who have destroyed their investors’ wealth. Money managers who play by the rules can get caught up short, too, when they fall to overconfidence about their mastery of the markets.” He further wrote that, “It is no secret that traders, as a class, are a young, independent and cocky bunch. The sheer size of the money they are juggling can lead to a master-of-the-universe attitude.”
STUDENT CASE: The Fall of Barings Bank
Barings Bank was founded in 1762 as the “John and Francis Baring Company” by Sir Francis Baring. This bank was the oldest merchant bank in London, financed the Napoleonic Wars, and was the Queen of England’s own bank. In 1996, one man, Nick Leeson, managed to bring down Barings Bank, one of the oldest and most conservative financial
The story of Barings Bank shows how overconfidence, coupled with poor internal control, can even bring down an historic financial institution. Below we provide a few teaching points.
Nick Leeson seemed to have all the characteristics of an overconfident trader. As described in the chapter, excessive trading, lack of diversification, and too much risk were obviously present. Self-attribution bias seemed to play a major role. One commentator notes that Leeson “got overconfident after initial trades were successful [and] when he started to lose money, got way too aggressive trying to make it up.” When Leeson was asked about his actions, he explained that “I was determined to win back the losses [. . . ] I was well down, but increasingly sure that my doubling up and doubling up would pay off. . . ”, thereby overestimating his abilities by thinking he could outperform the market even after severe losses. A case study into the affair concluded that it was overconfidence that led Nick Leeson to bet his reputation. But, as Saul Hansell of The New York Times stated, “It isn't just rogue traders -- loose cannons stretching internal rules on trading desks -- who have destroyed their investors’ wealth. Money managers who play by the rules can get caught up short, too, when they fall to overconfidence about their mastery of the markets.” He further wrote that, “It is no secret that traders, as a class, are a young, independent and cocky bunch. The sheer size of the money they are juggling can lead to a master-of-the-universe attitude.”
STUDENT CASE: The Fall of Barings Bank
Barings Bank was founded in 1762 as the “John and Francis Baring Company” by Sir Francis Baring. This bank was the oldest merchant bank in London, financed the Napoleonic Wars, and was the Queen of England’s own bank. In 1996, one man, Nick Leeson, managed to bring down Barings Bank, one of the oldest and most conservative financial