Riding the wind of rebirth

At the beginning, two of Leeson's subordinates and friends made mistakes during the transaction, which led to losses. When the losses were not large, in order to avoid being affected by them, Leeson decided to help them conceal their mistakes, so he used the "88888" error account.

As the Nikkei index rose, the losses caused by the errors further expanded. When the losses expanded to millions of pounds, Leeson no longer dared to report these errors to the head office.

Now Leeson had to solve three problems: first, how to make up for these mistakes and fill the investment losses brought to the bank; second, how to avoid the monthly internal supervision and audit of the headquarters after recording the errors in the "88888" account; third, the Futures Trading Center required them to add margin every day, and this amount would expose how much the Singapore branch lost every day. At the same time, the "88888" account could also be exposed on the big screen of the Futures Center.

Leeson had to transfer his commissions to his futures account to cover up the account losses. At the same time, in order to earn enough money to compensate for all the losses, Leeson took on more and more private trading risks and began to engage in a large number of straddle position transactions.

The characteristic of this kind of transaction is that if the Nikkei index is stable, Leeson will earn option premiums from such a transaction. However, the risk is that if the luck is bad and the Nikkei index changes drastically, this transaction will suffer a huge loss.

For quite a long time, Leeson did quite well. By July 88888, he had offset all the losses of million pounds in the "" account and turned it into a slight profit. If Leeson had stopped there, what is happening now would not have happened.

However, another mistake occurred. In the last quarter of 1993, the Nikkei index began to fluctuate and trading became very active. However, the computer screens used by the bank for clearing records malfunctioned frequently, and the accounting of countless transactions was piled up.

Because the system was not working properly, transaction records were kept manually, which was inevitably error-prone. For several consecutive days, the Nikkei index soared to a record high. By the time the error was discovered, the branch where Leeson worked had suffered daily losses of hundreds of thousands of pounds.

With no other options left, Leeson decided to keep hiding the mistakes.

By 88888, the loss of the "88888" account had reached million pounds. All he could think about at the time was which direction of market movement would enable him to turn defeat into victory and make up for the losses of the "" account.

In the second half of 1994, Li Sen believed that the island nation's economy had begun to emerge from recession and the stock market would have a sharp upward trend. The opportunity he had been waiting for had finally arrived.

Without authorization, he subscribed for $70 billion worth of island country stock index futures in the name of the bank, and bought $200 billion worth of short-term interest rate call option bonds in the island country futures market by short buying.

If these transactions are successful, Li Sen will gain huge profits from them, not only making up for the book losses, but also bringing him hundreds of millions of pounds in profits.

It was at this time that Zhou Zhi began to notice Li Sen.

Although Leeson was able to escape the supervision of the British headquarters, that was because the two places were half a world away and the current means of communication were not very smooth.

But it did not escape the eyes of AXA Fund Intelligence Department, which pays close attention to the Asian market.

Due to Leeson's reputation as a gold medal trader, the transaction with a leverage ratio of dozens of times and a huge amount of money could not fail to attract Li Laosan's attention.

What’s very funny is that Li Laosan himself is now also at the headquarters of Bahrain Bank.

The Intelligence Department's analysis is almost the same as Leeson's judgment. It also believes that the island nation's economy has begun to emerge from recession and the stock market will have a sharp upward trend.

Even further, this is true for the entire Asian and even world economy.

Therefore, they were ready to follow Leeson's actions. However, when the report came to Zhou Zhi, the words "Barings Bank" alone frightened Zhou Zhi.

Although he didn't know Leeson, the collapse of the Bank of Bahrain in the previous life was a major event that shocked the world.

So he asked AXA Fund Intelligence Department to conduct a detailed tracking, review and investigation of Leeson's trading behavior.

This immediately revealed a big problem. It was obvious that Leeson's trading behavior was too aggressive, so aggressive that it was no longer in line with the style of an investment bank.

There are only two possibilities that could allow Leeson to do so. The first is that he is absolutely sure of the recovery of the island nation's economy and even the world economy. The second is that Leeson is making a big gamble.

Then the question arises. The first possibility is absolutely impossible. Even if you are sure, investing is a cautious behavior, especially for investment banks.

  If it is the second one, then what is the purpose of Senhao's gambling?

Be careful about anything. There were mistakes that even the headquarters of Bahrain Bank could not find out. After reviewing Leeson's trading behavior, the Intelligence Department deduced the biggest possibility - to make up for the loss and make a fortune.

They even made a relatively accurate assessment of the amount of Leeson's deficit, which was at least over 50 million pounds.

  After using these 50 million pounds to hedge Leeson's performance over the past two years, is this genius trader of the Nikkei Index still worthy of the title?

After taking off this halo, Li Laosan, with Zhou Zhi's reminder, discovered the huge risks of Li Sen's operation.

That is, when the Nikkei index rises steadily, the overall profit of Leeson's operation will be very good. If the Nikkei index finally rises to expectations, the profit will be at least over 200 million pounds.

However, there is a huge risk involved. If the Nikkei index falls sharply, the amplification effect of dozens of times leverage will cause huge losses to the 225 futures contracts and interest rate futures contracts.

According to calculations by the Intelligence Department, once the Nikkei 225 index fell below 18500 points, Leeson's position would lose more than two million US dollars for every point drop thereafter.

Even slightly more drastic fluctuations will only result in a slight increase in returns and a sharp increase in risks.

Obviously, if something were to cause Leeson's liquidation, or even make all of Barings Bank's liquid assets unable to offset its liabilities, it would only be something that would suddenly interrupt the Nikkei index's upward momentum, leading to a sharp drop, and the extent of the drop would have to be at least as deep as around 17900 points.

At Zhou Zhi's request, the AXA Fund Intelligence Department roughly estimated the scale of Barings Bank's investment in the Nikkei Index - from the known information, Leeson began to request London to remit 1993 million pounds every day in the first month of 1994 to pay for its additional futures margin. According to this scale, in fact, from 25 to , Barings Bank's investment in the Singapore futures market and the island market exceeded million pounds, which had long exceeded the Bank of England's limit that the Bank of England's total overseas funds should not exceed % of all funds.

For this reason, Barings Bank regarded it as the "tacit approval" of the Bank of England. The most incredible thing is that after discovering a difference of 50 million pounds on its balance sheet at the end of last year, Barings Bank still did not alert to the looseness and negligence of its internal control.

Instead of investigating possible problems, Bahrain's managers placed excessive trust in Leeson and expected him to make money for Bahrain through arbitrage.

Ultimately, it’s because of excessive greed.

In the futures market, if you can see through other people's risks, you can easily turn them into your own wealth. Since Baring is so careless, and AXA has already discovered it, it is impossible not to take advantage of it. (End of this chapter)