How One Trader Brought Down the U.K.'s Oldest Merchant Bank

In 1995, a 28-year-old British trader broke one of the oldest banks in England...

Other rogue traders have lost more money... gone to prison longer... and tanked markets harder.

But Nick Leeson enjoys the rare distinction of destroying Barings Bank – an institution that had survived 233 years. (Barings helped fund the Louisiana Purchase in 1803.)

It all happened when Leeson got on the wrong side of some big trades...

Leeson was a trading floor wunderkind, reportedly single-handedly accounting for 10% of Barings' profits in 1992. Eager to give their hot talent room to run, Barings gave Leeson a lot of leeway on the bank's trading floor in Singapore to work his magic.

The problem, though, was that Barings gave Leeson too much authority. He not only made trades – he also settled them. That meant that he could manipulate the desk's trading accounts to hide his losses.

That's as if you're the top chef at a fancy restaurant where the tables are packed every night. You're also a highly respected restaurant critic for the local paper. When you say something about an eatery, people listen. Two thumbs up from you can mean there isn't a reservation available for weeks.

For a while, things are good. But then, everything you touch becomes inedible. Luckily for you, though, you can hide your attack of the gastronomical yips – for a while, at least – because you can give your restaurant a glowing review to keep customers coming through the door.

In a way, that's similar to how Nick Leeson obscured his losses.

Leeson had hit a losing streak. He was taking enormous positions on the Japanese stock market... and they were all going down.

But rather than face up to it, he cooked the trading account books so that his losses didn't show... kind of like the restauranteur giving himself good reviews.

By late 1994, Leeson was $352 million in the hole. To try to make it back, the next month he put a big bet on futures on the Japanese stock market. But a massive earthquake in the Japanese city of Kobe crushed Japan's stock market... and Leeson's positions.

Leeson, sitting on losses of $1.2 billion, big enough to wipe out Barings' balance sheet, threw a Hail Mary by doubling down. It didn't work. Earthquakes play for keeps.

Leeson fled town with his wife, leaving behind a note reading, "I'm sorry." Barings, its capital wiped out, declared bankruptcy.

After a global manhunt, Leeson was arrested in Germany and extradited back to Singapore, where he was sentenced to six and a half years for forgery and fraud. (His wife left him, too.)

In law-and-order Singapore, prison is no fun. As Leeson told the Guardian newspaper a few years ago...

You're locked up 23 hours a day; you sleep on a rough, uneven floor; everybody else is a Triad gang member. It's 100 degrees when you get up in the morning and gets hotter during the day.

Leeson served four years in prison after he was released for good behavior.

Today, he runs a trading service for retail investors.

There are some important lessons here for anyone who handles money...

Remember the Infinite Monkey Theorem. This is the difference between skill and luck. Given enough time, a roomful of monkeys randomly hitting keys on a typewriter will produce a work of Shakespeare. But note my personal corollary to this theorem... Given enough time, some hotshot trader on a trading floor will produce outsized profits, and everyone will think him a genius. He's not. Don't confuse brains with luck – in others, or in yourself.

Don't double down... use stop losses. Some gamblers are seduced by the Martingale strategy – when you have a loss, double your bet to get back what you lost. The best way to remove the temptation is to establish a stop loss level – that is, a price point on the way down at which you sell, no matter what. It would have helped Leeson. Waiting for the rebound is a terrible strategy.

Ponder the worst. Channel self-help guru Dale Carnegie's timeless advice and "awfulize" by imagining the worst thing that could happen with a position – and plan accordingly. No one can anticipate an earthquake, but your portfolio – and your brain – should be ready for one, just in case.

And with any luck, you'll avoid these critical mistakes when it comes to your own portfolio.

Consider hiring a woman to manage your money. Most traders and money managers are men. But studies have shown that women are actually better investors. Men tend to trade too much and are more likely to be the "dumb money" that sells low and buys high. Women are better at sticking to an investment plan. Studies have shown that female investors significantly and consistently outperform their male counterparts.

Why? One big reason is testosterone, which can lead to overconfidence and bad decision. In caveman times, overconfidence helped the man get the woman and slay the tiger. But the primitive instincts triggered by testosterone can be downright dangerous on the trading floor, where aggression and overconfidence aren't helpful.

And if you do have someone of the male persuasion advising you on your investments, it's best if he's older. After the age of 35, testosterone levels start to decline. By the time the average man reaches age 60, he has 30% less testosterone than a 30-something male. This means that, older men's trading decisions are less influenced by testosterone.

What's more, for investors who have been around the block a few times, the thrill of a risky trade is replaced by a different objective: Living to fight another day. And older investors also have a lot more experience to draw from... and might realize that, say, doubling down after an earthquake rattles a market might be a bad idea.

It's a lesson Nick Leeson would have done well to heed.

Best regards,

Kim Iskyan
June 22, 2022