Rogue Learnings


When most people issue a bad cheque, the worst thing that happens is that the payment bounces at the bank. “When I did it,” says Nick Leeson, “the bank bounced.” Known in financial circles as the original rogue trader, Leeson’s misbehaviour on the trading floor more than two decades ago has long since been overshadowed, at least in the media, by bigger and more recent losses generated by other industry bad boys. But if you look at the big picture, the Leeson case still stands out, and not just because he was played by Ewan McGregor in the 1999 movie “Rogue Trader.” Leeson singlehandedly toppled a major financial institution. Indeed, today’s push for effective risk management of global trading practices can be traced back to his actions as a 20-something trader in in the mid-1990s, when Britain’s oldest merchant bank at the time suffered a US$1.3 billion loss thanks to Leeson’s unauthorized speculative bets on futures contracts in Singapore. Believe it or not, the actions in question were not driven by greed. Simply put, Leeson bankrupted the Queen’s personal bank, destroyed his career and reputation, and was sentenced to six and a half years in a gang-ridden Singaporean jail because he did not have what it takes to admit failure. In this IBJ interview, Leeson talks to Ivey Business School Professor Gerard Seijts about lessons learned, the unique challenges faced when managing trading risks today, and why he supports initiatives by Ivey’s Ian O. Ihnatowycz Institute for Leadership to help the world proactively develop business professionals with superior judgement driven by a proper balance of leadership character dimensions.

IBJ: Nick, you are infamous for taking down the financial empire that funded the Napoleonic Wars with unauthorized trades you made as an inexperienced manager of a new futures market operation in Singapore during the early 1990s. Before your hidden losses were finally revealed in 1995, you appeared to have it all as a trading wizard trusted and rewarded by senior management because of your perceived record of oversized profits. But most people don’t know your backstory, so can you briefly describe your upbringing?

NL: I was raised in a working-class background with a brother and two sisters. We lived in a rough neighbourhood, not overly rough, but one of the rougher-type areas. My family didn’t have a great deal. But while we didn’t have lavish holidays, my mother and father always somehow managed to survive and give us what we needed. My Scottish mother was the breadwinner of the two. She was also the motivating force when it came to education. She wanted her kids to have a better lifestyle than she did.

IBJ: So were you a relatively good student?

NL: I was an overachiever in school. I always found it quite easy to pass exams. For me, they were just a test of memory, and my memory is very good, so I was always a year ahead of where I should have been in my early education. When I got to secondary school, I did well for the first few years, then I got a bit sidetracked as many people do. I played a lot of sports and I was well liked.

IBJ: What about your ethical foundation?

NL: Like most kids, my parents taught me the difference between right and wrong. I don’t think my moral compass extended much further than that. But I have looked back over the years and tried to identify things that may have influenced me as a trader, and there is really nothing that stands out, at least not in my upbringing. In Singapore, of course, I wasn’t thinking about shareholder value or how my actions were going to impact other people because we were not really taught anything but “sink or swim.”

IBJ: So with your academic abilities, why did you go straight into the workforce after high school?

NL: I was an “A” student in math for most of high school. Until I was 17, I had a very strict disciplinarian as a math teacher. He didn’t mess around in his classes, and I got on very well with him. But he got sick and our substitutes made it very easy to go missing. As a result, I missed a lot of lessons. My grades dropped significantly and acceptance to university became a question mark despite the fact that I was doing well in other areas. At the time, a lot of other students were applying to a bank trainee program, so I applied as well. I landed one of the few interviews offered to about 50 people who had applied and was the only one from my school offered the job. University was still an option, but I didn’t know what math grade I was going to get, so I accepted the job, which had a good starting salary. I like to joke that failing math made banking the only career for me.

IBJ: In prison shortly after Barings failed, you wrote a book about your experience that was later turned into a movie. Have your thoughts about what happened matured with time?

NL: Good question. To be honest, the book was co-written the year that I was arrested for one purpose and one purpose only, which was paying my significant legal fees. And it was focused on me. The first chapter ends by saying, “When an immature person has status, he will do absolutely anything to protect it.” For me, that embodies a lot of what happened. But 21 years on, I can see a bigger picture because I have assimilated information from other people about other things that were going on at the same time. Barings wasn’t a well-structured or well-run bank. But questions about what was going on in Singapore when I was in charge were raised by experienced traders on the asset liability committee. These questions, however, were always pushed back by senior players who didn’t understand the ins and outs of the futures and options business. Keep in mind that Barings Brothers was a very old merchant bank, but Barings Securities was formed via a merger in 1985. As a result, there was a consolidation of different personalities and skill sets that put square pegs in round holes. So without me knowing it, senior management became a really effective foil for my actions. Square pegs within the asset liability committee stopped dead any conversation about risks I was taking when there was no way for the bank to deploy capital anywhere else because I had it all with me in Singapore.

IBJ: What insights into your actions, if any, did you gain obtaining a psychology degree in prison?

NL: The psychology degree that I did was very broad, touching on a lot of subjects in very minor detail. That said, while studying psychology, I was left on my own for 23 hours a day with nothing to do, so I was constantly reflecting about everything that had happened to me during that period, looking at things that I’d done, the way that I’d reacted to events and how I handled relationships, trying to sort of really get behind some of the decisions that I made during that period and think about what I would have preferred to have done. That was probably the hardest thing I have ever done. When you look at my trading patterns in Singapore, I don’t necessarily come across as too realistic, but I am quite rational about things. And looking inside myself to work out why I’d done some of these crazy things was cathartic because it helped me really examine my past decisions and values to help understand how I could possibly hope to change those in the future. I needed to understand my behaviour for myself more than anyone else.

IBJ: So what do you think about risk management in the finance world today?

NL: In my opinion, there is no question that risk management has improved over the last few years. Financial organizations still tend to put their most intelligent and sophisticated people on the trading floor in order to make as much money as possible. But in most cases they now also have pretty good risk intelligence people to make sure the traders are making money correctly. So while I think there is still a ways to go when it comes to reducing the talent gap between these two functions, the gap has gotten smaller over the years. The big problem that I see today is the support that organizations give risk managers. The history of trading, especially in Europe, is littered with risk managers who lost their jobs because they asked difficult questions. If you don’t have a risk manager with authority, you are not effectively managing risk.

IBJ: In other words, the calibre of people going into risk management roles doesn’t matter much if they are not empowered to ask questions that need to be asked.

NL: Yes. When profit is the motivation, there is always an inclination to believe good results have been generated the right way, especially by top performers. Look at my case at Barings. I was an outlier on pretty much every metric you can imagine. I had the largest amount of the bank’s capital at my disposal. I had the biggest volume of trades. I reported the largest profits. My activity and results should have generated risk management concerns, but that didn’t happen because senior people wanted to believe in me.

IBJ: So while risk management has improved on the talent front, empowerment remains an issue. Would you also say the pressure cooker environment needs to be addressed because we still have plenty of relatively immature 20-something traders in positions to do real financial damage to the global economy?

NL: Absolutely. That’s a whole other problem that remains. I think some other form of education or training program is required to help traders make the right decisions when confronting challenges within their organizations — on and off the trading floor. Leadership also needs to stop worrying about appearances. At Barings 21 years ago, senior people insisted everything was okay because they were not prepared to admit they were not sure if everything was okay and ask questions. People who freely admit that they are not sure about operational matters are not what we’re traditionally drawn to when we look for a leader, but it’s what we need.

IBJ: So you think a different corporate culture, along with the formal development of what Ivey calls “leader character,” could have influenced you to make responsible decisions in Singapore?

NL: No question. At Barings, I wasn’t challenged and I wasn’t supported. The organization recruited from the best schools, but it was very much “sink or swim,” with no formal training programs. And that culture played a role in my actions. Money was not my motivation for hiding initial losses. I wanted to look as successful as I could. Failure just wasn’t an option.

IBJ: What were your goals when you first landed in Singapore?

NL: Well, at the time, I saw me getting to the top of the organization, or close to the top, as quickly as I possibly could. I had no shortage of confidence in my abilities. I thought I could cope with everything. Obviously, history proved me wrong. But in my mid-20s, I had already achieved a lot of success without really encountering anything I couldn’t cope with.

IBJ: When did that change?

NL: Quite early on to be honest. And I didn’t do particularly well when confronted with things I couldn’t easily cope with. That’s when my decision making became an issue. It goes back to what you call leader character. I’d always encourage people to ask for help. But I lacked the ability to do it myself. It’s that simple.

IBJ: When you couldn’t cope with admitting losses, did you feel okay with covering them up partly because doing so short term was relatively common?

NL: Yes. I think people are very influenced by what they see and hear in any organization where rules are bent, and bending rules was commonplace at Barings. When it came to be my first turn putting something into an error account, which allows you to warehouse losses while you try to fix them, I didn’t consider it a big deal because I’d seen it done so often by others in the past. In fact, the first time I did it was out of loyalty to someone I hired who made an error. The young lady in question had worked for us for less than a week and Japanese markets were in free-fall so circuit breakers were kicking in and increased volume was going through Singapore. We went from having one or two people answering the phones to everybody answering the phones and the new employee cast an order the wrong way under this pressure. Instead of reporting this up the line, I used an error account. If a behaviour is wrong, it’s always wrong. But that’s something that has been quite difficult to get past in the financial markets. And at Barings back in 1995, when somebody broke the rules and everything turned out okay, nobody said anything about it. There is no legitimate reason to warehouse trades at any time. But I learned you could do it for a long time without others knowing about the losses you are hoping to repair.

IBJ: When you started to cover up your own losses, did you ever consider in any way the impact that your actions could have on bank shareholders and employees?

NL: No. I was trying to correct the situation. But my motivation wasn’t about shareholder value or protecting other employees. It was a case of trying to survive. And I did not have the character required to seek help. Barings wasn’t a great organization for communication between departments. Nobody shared information. Sometimes the risk manager would phone to ask me a question and I would respond in a particular way. Then the compliance officer would phone, asking a similar question maybe an hour later, and I would give a completely different answer. The two never shared information. And I didn’t talk to anybody about what I was doing. People found that difficult to understand, but it was very much me trying to overcome all of these problems on my own and trying to do it with some bad decision making.

IBJ: And where was risk management at that time in the organization?

NL: Risk management was very much a new field at the time. I think we had one risk manager, one compliance officer, and one HR person for 2000 employees and the risk manager wasn’t seen too frequently in Singapore. I think he possibly visited just once during the three years that I was there. And nobody ever did an effective position check with any actual accounts that were traded in Singapore.

IBJ: So what advice do you have for today’s traders with considerable leeway to break rules and cover up mistakes?

NL: That’s simple. Don’t do it. Always be open and honest about what is happening with trades. Nobody is perfect and you’re always surrounded by people with more experience than you. If you lose your job because you’ve made a bad mistake, that’s not so bad. It’s very difficult to rebuild a reputation, but it can be done. A friend of mine who runs a big bank in Europe expects people to make mistakes, not hide them, so he uses my story as an example. As a twenty-something trader, I viewed asking for help as a sign of weakness, and so I went to jail and lost my reputation.

IBJ: Do you think rogue traders should be cut slack because of the enormous pressures they are put under every day?

NL: I was at a law firm a couple of months ago, where one lawyer made that point, arguing people shouldn’t be seriously punished in a lot of rogue-trading cases because of job pressure and other mitigating factors. I think that is complete and utter rubbish. Traders are some of the most intelligent, educated people on this planet. They know what they are supposed to be doing and they know what they shouldn’t be doing. There was pressure on me to perform, but I’m not going to hide behind it. I knew that what I was doing was wrong. I knew it was wrong from day one. There wasn’t a day that it felt right. But I craved success and couldn’t face up to my own failure. And because of how things were run, I was given the opportunity to try and correct the situation by doing things I knew were wrong. And admitting failure was a far more horrible thing for me to do at the time than doing things I wasn’t supposed to do.

IBJ: Okay, so what about your message for corporate directors?

NL: If they are serious about risk management, they should never get too far removed from the people making money. You need to be very, very sure that you know what is going on if you expect to challenge things intelligently. I was never seriously challenged, not from my first day of trading until the last day. There was just no internal challenge. There were certainly people that could have done it, but the process broke down at every single level because of an inclination to believe all is well by senior management. And while things are better today, I still know of risk managers being told to get lost when attempting to challenge top traders. Many compliance officers still work in a climate of fear so they don’t bother asking questions they really want to ask. They just continue doing business as usual because the salaries are relatively good, or they are stuck with nowhere else to go within the organization. And if you hire intelligent and aggressive people to take risks in a high-pressure job, without combining it with intelligent challenges, the potential for scandal exists. Everybody knows top traders are confident and assertive because of the value of their skills. But I was confident and assertive and skilled. And I was lying every single time someone asked a question that could have saved the bank.

IBJ: In other words, to effectively manage risk takers, you’d better have equally strong personalities in risk management.

NL: Absolutely.

IBJ: So from a director’s perspective, you recommend making sure there is a culture in which the risk management side is empowered to ask questions with no obstacles, while traders feel empowered to admit mistakes without risk to their careers.

NL: Absolutely. If you look back at Barings and some of the other scandals, the problem is culture, communications and fragmented systems. The information required to manage risk is always there. It’s just a matter of whether or not you’re using it or sharing it. In some cases, technology is still an issue. I was recently in South Africa, where trying to get disparate technologies to talk to each other is still a problem, so a lot of stuff gets missed.

IBJ: Okay, so you see the challenge of managing risk as an organizational issue. So what do you think about the regulatory response to the financial crisis?

NL: I think it’s like somebody has pulled an elastic band and we have now gone maybe a bit too far in the other direction when it comes to compliance and regulation.

IBJ: Do your children know your history?

NL: I have two older stepchildren who know my story. But I also have an 11-year-old boy who wasn’t aware of it as the 20th anniversary of Barings’s collapse approached last year. I knew there was going to be a lot of media interest in recounting what happened, so I wanted to tell my son. I knew it was potentially going to be my most difficult conversation ever, but I needed to talk to him because he was going to see my face on TV and in the newspapers. Without going into too much detail, I told my son that his dad went to jail for causing the collapse of a bank. He was a bit aghast, but he knows what I am like as his dad, and about 30 seconds after hearing my story, he said: “Can we go out and play football?”

IBJ: What do you say when people who don’t know you wonder why we should take advice from a convicted criminal?

NL: Well, all I really try to do is be as candid and honest as possible about my experiences. And if that helps send some people in business down a better behavioural path, then it has to be positive. I certainly like to think that if I had heard a story like mine with its extreme ramifications and consequences as a young bank trainee, I’d have admitted mistakes at Barings instead of covering them up. I knew I was doing wrong hiding my losses, but I genuinely never expected the bank to collapse. That was the furthest thing from my mind. It goes back to that whole ethical compass and judgment thing. Being honest and able to admit mistakes should have been engrained in me. I should have understood everything that I did within the organization had an effect on shareholder value and other employees. Maybe I acted the way I did because it was other people’s money. I still don’t completely have an answer for that. But all I was thinking back then was that I was going to be able to turn my losses around. It probably wasn’t until late 1994 that I realized it was very unlikely that I was going to be able to fix things. And I still couldn’t tell people. I never told my first wife what was going on. She found out more from the newspapers than she did from me. Success at the time was everything to me. Talking about my failure was just not on the agenda.

IBJ: So you see yourself as a case study that can help shape better behaviours.

NL: Absolutely. I had two choices when I came back from Singapore. I could have changed my name and disappeared. But that would have been lying to myself. So I chose instead to stand up and take it on the chin and come to terms with it myself. There have been some very, very negative moments along the way. But I genuinely believe that you can learn as much from people’s mistakes as you can from their successes.

One response on “Rogue Learnings

  1. John Kerr

    A very good interview. Unfortunately memories are short and profits often rule as mediocre managers try to make their next quarter’s numbers. Clamping down on a star trader is a move that requires some confidence. The young traders themselves may be intelligent but also are insecure, often immature, and are occasionally lacking in ethics. Giving a client bad advice to make money is as unethical as knowingly taking too much risk. The key is having managers who understand the financial risks being taken and senior managers who don’t expect home runs every quarter. A successful trader has to act on instinct or he/she gets left behind by the market. Traders who try to figure out every aspect of a situation seldom succeed and I would dispute that they are all super intelligent. Knowing adequate math to assess a trade does not make you a genius. The most successful trades are often those who recognize patterns without at all understanding the causality. There have to be rules to follow that are enforced. Management has to insist on ethical behavior. If you let someone finagle a client, he/she will soon be finagling you. And it will probably be the trader you least suspect. The embezzler is usually the person who smiles a lot and works late to cover their tracks.

    I once told a bank treasurer, who was contemplating buying a derivative product, that the young man selling it would make $1 million if he sold 10 of the products and would be fired if he sold less than 5. Should you trust him? The compensation of investment bankers in general requires extreme monitoring and few managers in the past were prone to do so. A partner at Goldman makes $20 million plus and will only continue to do so by generating enormous revenues. What have you done for me lately? The normal mantra of Wall Street is caveat emptor for that reason.

Leave a Reply

Your email address will not be published. Required fields are marked *