April 5, 2011 / 7:37 AM / 8 years ago

Lessons on Japan quake from rogue trader Leeson

TOKYO (Reuters) - Nick Leeson was flipping through television channels on March 11 when he saw the shocking images of the Japan earthquake.

It provided a stark reminder for the one-time high-flying broker because Japan’s last major temblor led to the exposure of his massive loss-making trading positions that sank his 233-year-old bank.

The market volatility following Japan’s latest disaster meant there is a chance other traders could be caught out just as he was after the Kobe quake in 1995.

“When any market moves significantly, there’s a chance it will shake out something like my story,” he told Reuters by telephone from the west coast of Ireland where he now lives.

Leeson has had 16 years to reflect on the fraud that led to the collapse of Barings Bank, an institution that counted Queen Elizabeth II among its clients, assisted a young United States buy the Louisiana Territories in 1802 and helped Britain with financing in World War II.

“What I could have done years ago, and didn’t do was turn around to the people I worked with and asked them for help,” said Leeson, who was based in Singapore at the time. “I probably would have made a couple of different turns than I did ultimately.”

Leeson’s worst turn was to try and dig himself out of a hole and make up losses he had hidden in Barings’ error account 8888 by betting Japan’s Nikkei 225 would rise after the Kobe quake.

The 27-year-old trader disappeared, leaving his managers a sorry note and losses that had quadrupled to $1.3 billion.

“I had gone past the scared phase. The only thing I wanted it to do was end. There was a perverse sense of release,” recalls Leeson.

In the three trading days following the latest disaster, Japan’s Nikkei 225 tumbled almost 20 percent, wiping out hundreds of billions of dollars in value, before recouping more than half those losses.

Losses after the Kobe quake were not as steep, but still enough to sink Barings.

MORE AND MORE EDGE

The price Leeson paid for deceiving his bosses, including buying 20,000 Nikkei futures contracts in a futile bid to lift the market, was four and a half years in Singapore’s Changi Prison. He was locked up 23 hours a day with little to entertain him or his Triad gangster cellmates.

It’s an experience he says should serve as a warning to any would-be rogue trader.

“Whilst it might happen, everyone thinks it will happen to somebody else. It’s definitely alive and kicking in the financial market,” explains the former broker. “The rush to make money and make money in new and innovative ways is what financial markets are trying to do. Everyone is looking for more and more edge.”

Nearly two decades on, a new generation of traders work amid tighter oversight, some of it thanks to Leeson, meant to catch irresponsible risk takers.

Yet for all the new checks and balances, unanticipated black swan calamities, such as Japan’s 9.0 magnitude earthquake and tsunami on March 11, still have the potential to smoke out rogue traders, says Leeson.

“You would like to think that loopholes have been closed, but then you look at the whole Societe Generale story,” Leeson added.

Societe Generale trader Jerome Kerviel was convicted in 2008 for unauthorized trading that lost his company almost 5 billion euros ($7 billion). Like Leeson, who published a book about his exploits, Kerviel explained his deeds in his ‘Memoirs of a Trader’.

Leeson’s book was later made into a movie starring Ewan McGregor.

Leeson has had some serious contenders for the title of biggest rogue.

An audacious and unapproved plan by Yasuo Hamamaka to corner the global supply of copper left his company Sumitomo Corporation nursing a $1.8 billion hole in its accounts in 1995.

Leeson is also way behind the biggest loser of all. That title goes to former Morgan Stanley trader Howard “Howie” Hubler, who was blamed for losing his bank $9 billion in the subprime debacle. Hubler is not the subject of any criminal allegations.

Yet no one since Leeson has attained the same notoriety because although other companies wobbled, none failed in the spectacular manner that destroyed an icon of the British financial establishment.

Those few months still dominate his life. Even now, Leeson pays most of his bills with money he makes on the after-dinner speaker circuit recalling the events of 1995.

His own appetite for risk, however, has not completely been scared out of him and he still invests, although now only with his own money. He even offers tips on Twitter.

This time, he thinks there’s a killing to be made in shorting gold and oil and isn’t betting on the Nikkei rising in the wake of Japan’s killer quake.

“Morally, I still think it’s a difficult one to play,” explained Leeson.

($1=0.703 Euros)

Editing by Lincoln Feast

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