Rogue Trader

 

The Cast

          NICK LEESON . . . . . . . .            Ewan McGregor

          LISA LEESON    . . . . . . .              Anna Friel

          PIERRE BEAUMARCHAIS . .  Yves Beneyton

          BRENDA GRANGER. . . . . .       Betsy Brantley

          ASH LEWIS  . . . . . . . . . . .           Caroline Langrishe


directed by James Dearden.  101 minutes.  1999.


Nick Leeson, the 20-something futures trader who single-handedly brought down Barings Bank in 1995, began writing an account of his exploits soon after he arrived in Singapore’s Changi prison. Rogue Trader, the book, is a vivid but maddeningly self-serving cautionary tale of the dangers of a derivatives operation run amok.

Films based on the financial world are usually painted in broad strokes. Even the best of the recent contributions to the genre such as Wall Street and Barbarians at the Gate focus on the shopworn themes of avarice, lust and machismo, without much consideration of the more complex workings of the human psyche. Rogue Trader is subtler: Nick possesses neither insatiable greed nor unquenchable lust for power. His motivation is merely to make his deceased mother, his wife and his father, a plasterer, proud. This desire to please others ultimately leads to his downfall.

Rogue Trader begins with young Baring's Bank back-office clerk Nick Leeson being sent to Jakarta to straighten out a mess involving bearer bonds. After solving the problem--and meeting Lisa, who soon becomes Lisa Leeson--Nick is transferred to Singapore to become general manager of Baring's Simex trading operation, focusing on derivatives of the Nikkei Index, particularly futures and options. Nick is tapped to run both the trading side of the business and the back-office settlement operation—a decision that would prove disastrous.

Shortly after setting up shop, Nick creates an error account--choosing the number 88888 because a clerk says the Chinese consider eight a lucky number--to sort out the inevitable mistakes of an inexperienced trading operation. On one Friday afternoon, Nick is confronted with just such a gaffe. One of his young traders mistakenly sells 20 Nikkei futures rather than buying 20, creating a $30,000 hole in the balance sheet. Nick tells his immediate boss, Simon Jones, regional manager of the Southeast Asia division, about the problem, but Jones brushes it off, telling Nick to deal with it himself. Nick does, but not in a way Jones would have liked. On Monday, rather than immediately trading out of the position and taking the loss from Friday's price, Nick keeps the position in the hope that the market will improve. The reverse happens, and Nick is forced to sell at a $90,000 loss to get out.

Putting his back-office knowledge to work, Nick places the loss in the 88888 account. His plan: to trade out of the hole using Baring's client accounts, diverting the profits to cover the error account. As long as the balance is zero by the end of the month, he reasons, no one will know the difference.

Before long, he has run the 88888 account into a $15-millio hole. Nick, pounding a heavy bag at a gym, hatches his ultimate strategy to circumvent the balance sheet:  he realizes that he can solve the problem of funding his growing initial margin payments by selling options. “That will generate commission in-gain,” he enthuses, “and will return the balance on the five-eights account to zero.”

There's one catch to the plan, however: Nick must generate huge business to keep up with the margin calls. Enter Pierre Beaumarchais, a Swedish investment banker and big-ticket player who falls into Nick's lap at the perfect time. Soon Nick is doing big business, and by the end of 1993 he makes up the entire $15 million loss in the 88888 account. Nick, now the biggest player at the Simex, resolves to kick his addiction to the 88888 account once and for all.

But soon thereafter, Beaumarchais requests a big trade that Nick doesn't fully understand. Without being sure he can pull it off, Nick guarantees Beaumarchais' price and tries to “leg it” in order to keep the business from going to the Societe Generale Bank of Switzerland. The plan backfires, and Nick is forced to reopen the 88888 account. The downward spiral has begun.

Later on, a back-office clerk notices a 7.78-billion-yen loss in the 88888 account--roughly $78 million--and Nick scrambles to cover his tracks. He tells the clerk to print a report showing that Simex owes Barings the sum, then requests more cash funding from London to cover his margin payments, which are becoming massive. Meanwhile, he begins lying to Simon Jones and the London office about the deal and the extent of the bank's positions. By the end of 1994, Leeson is in deep trouble.

McGregor succeeds in conveying, in bile-swallowing candor, what it’s like to be constantly on the wrong side of the market. In Nick's case, the market is also a metaphor for the class system he has tried to leave behind. Nick's working-class background is established in the film’s deft opening scene: When Nick's drunken friend Steve is rude to a young woman in a London nightclub, the woman's friend hurls a chair that accidentally hits Nick in the face. Nick is thus introduced as a victim of circumstance--a theme that the film, like the book, revisits often.

While Nick's losses grow, Lisa has a miscarriage. The event becomes a turning point: Nick decides that he will take an even more aggressive approach to get out of his mess. When a Coopers & Lybrand accountant preparing the 1994 year-end audit confronts Nick about the 7.78-billion-yen receivable from Simex, he concocts a wild story about an over-the-counter trade between Spear, Leeds & Kellogg and Barings. The accountant demands documentation, and Nick, adding forgery to his crimes, provides it, even arranging for a bogus bank transfer.

Meanwhile, the positions in the 88888 account begin taking on a life of their own. The Kobe earthquake sends the Nikkei plummeting, causing Nick to lose more than $75 million in a single day. Nick tries to hold on until February 24--bonus day. He’s been promised at least $500,000, and plans to get out of Singapore upon receiving the check. But the clock is working against him as his losses mount. On February 23, one day before he’s to receive his bonus, the Nikkei falls to 17,665 despite Nick’s frantic efforts to prop up the market. Nick realizes it’s over, having lost more than $500 million all told. He and Lisa flee Singapore, only to be captured by German authorities after landing in Frankfurt the following Monday.

The result of Nick's rogue trading: Barings loses more than $1 billion as its positions crash, and the bank is bought by ING for $1.

Rogue Trader is not without its flaws. Its depiction of Nick's trading losses is thin: the 88888 account balloons with little explanation, and Nick's efforts to reduce the position get short shrift as well. The dialogue is occasionally stilted, as characters delve into unnaturally expository language for the benefit of the audience. Some of the expressly educational material is uneven--there are detailed definitions of futures contracts and margin payments, for instance, but not options, leading one to believe that Nick's claim of collecting “commission in-gain” from his options trades, rather than premium, is more than a misnomer. In one questionable sequence, Nick, in a voice-over, says he stands to make a killing if the Nikkei moves to 19,000 as a result of all the options he had been selling. But the book version notes that Leeson had been selling straddles around 19,000, meaning he needed the index to stay near 19,000 or he stood to lose vast sums.

And while the characters of Nick and Lisa, his wife, are well realized, others are less thoughtfully developed, particularly when the film strays from the book's account of events. Ron Baker, introduced in the film as head of derivatives trading in London, is an adrenaline-charged buffoon, especially in a fictionalized motivational speech at the annual meeting in London. Peter Norris, the CEO of Baring's, is an aloof opportunist who bawls when the bank finally goes bust. Peter Baring, the Baring's Chairman of the Board, is a pompous blueblood. The book notes that his famous statement: “"...it was not actually terribly difficult to make money in the securities business",” was uttered in a meeting with Brian Quinn of the Bank of England. In the film, the comment is made by a smug Baring before a rapt audience at a dinner party, to thunderous applause.

In a film so dominated by dialogue, Nick's description of the continent of Asia says it all: “

"What's good about this place is it's not still full of pompous ex-colonials who think they were born to rule the world... anyone can make it here.”"


* The Toronto Stock Exchange web site provides the following explanation about derivatives:

The term "derivative" doesn't actually refer to a specific type of investment vehicle. Instead, it describes a broad class of trading instruments that have no tangible worth of their own, but "derive" their value from the claim they give their owners to some other financial asset or security.

For example, gold bullion is a real financial asset. Gold futures contracts give their owner the ability to buy or sell the underlying bullion. The derivative in this case is a futures contract, which has no intrinsic value itself.

Likewise, stocks are real assets because they represent an actual ownership interest in the issuing companies, but call options on a stock are derivatives because their value is largely determined by the value of the underlying stocks.

There are many different types of derivatives, including futures contracts, forward contracts, put and call options, warrants, and swaps. Today, many derivative products trade on organized exchanges such as the Toronto Stock Exchange and the Toronto Futures Exchange and have standardized pricing and delivery specifications.

Exchange-traded derivatives fall into two general categories: options and futures. An option contract allows the holder to buy (call option) or sell (put option) a specified underlying asset by a specified date at a specified price. A futures contract requires the seller to deliver a specific asset (or cash equivalent) to the buyer on a specified date for a predetermined price.

 

ASSIGNMENT

Consulting your textbook, notes on the Barings fiasco, and John Dickson and Tony Highland's articles, discuss and give your opinion on Nick Leeson and the financial destruction of Barings Bank. Did it have any effect on the international currency market? Why or why not? Use the correct economic vocabulary terms.

Write out your answers on the AP Macroeconomics Blackboard Discussion Board no later than midnight Sunday, April 9.

 

Derivatives

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