How account 88888 sank Britain's oldest bank

Nick Leeson had his biggest chance in July 1993. He could have started afresh, and no one that mattered would have been any the wiser. The market finally did what he had been praying for, and as it soared he was pulled out of the mire of lies and losses that he had been hiding for a year from his bosses at Baring.

A pounds 6m loss, hidden in the secret 88888 error acount, and fed by the illicit use of excess client money and funds drawn from London under false pretences, suddenly surged into profit.

The following are extracts from Rogue Trader, by Nick Leeson (Little Brown, pounds 16.99).

'I was so happy that night that I didn't think I'd ever go through that kind of tension again. I'd pulled back a large position simply by holding my nerve ... but first thing on Monday morning I found that I had to use the 88888 account again.

I was in a bizarre situation, in that I had one foot on the dealing floor ... but I was also in charge of the girls in the back office, who would carry out any of my requests. I could see the whole picture, and it was so easy. I was probably the only person in the world to be able to operate on both sides of the balance sheet. It became an addiction.

As well as the astonishing behaviour of the London staff, who transferred this money to Singapore without questioning what it was for, my concealment was helped because I was supposed to report to four different people. My direct supervisor was Simon Jones in Singapore, but he wasn't interested in the futures and options side of the business ... I'd go up and see him in the afternoon, but we mainly talked about football.

Another notional boss was Mike Killian, head of Global Equity Futures and Options Sales (based in Tokyo) ... Although he wanted the profit that was attributed to me, I was having less and less to do with him.

Then, lastly, I had two more bosses in London - Mary Walz, and her boss Ron Baker, in the Financial Products Group. In due course Baker began to be excited by the size of the profits I was reporting, and he took direct responsbility for me ... My reporting lines were as hazy and inbred as the Baring family tree itself. Apart from these four bosses, I also asked Brenda Granger in Settlements for the daily transfers of cash. It was a bizarre structure, and one which allowed me to run my own show without anyone interfering.

"1993 was a good year for investment banking,"' Peter Baring announced as he released Barings' results in February 1994. Barings made profits before tax of pounds 200m and deducted pounds 100m for staff bonuses, which gave a net pre-tax profit of pounds 100m. I had concealed a loss of pounds 23m in Account 88888. My official profits were not declared separately ... and I didn't have an exact idea how much they credited me with, but it was over pounds 10m. In the context of the Group's profitability my hidden losses were large, but I simply sold more options, asked for more funding from London and rolled the entire position forward.

I was beginning to grow rather numb at the size of the rising losses. At first I had been terrified of the pounds 60,000 losses I made, but as they rose, I had to accommodate increasingly large figures. Some days I made pounds 5m profit simply because the size of the position led me to large swings; other days I lost pounds 5m, and I was back towards pounds 20m, then pounds 30m, soon in 1994 up to pounds 50m. At the beginning of 1994 Ron Baker became my immediate boss, and the pressure rose on the profit and loss account. We were all driven to make profits, profits and more profits.

The phone rang beside me. I picked it up in a daze and peered at the luminous hands of the alarm clock: 2 am. "Nick, it's Ron .. .look, the point is this - the old farts want you to begin to unwind the position a little. They're worried about the levels of funding needed to keep it going. The second thing is we need another pounds 2m profit before the end of the month to secure our bonuses ... You've got to do it Nick. There's no room for failure. Do you understand what I'm saying?

Given the millions, millions of pounds I was beginning to ask for, Barings were having liquidity problems. It is illegal for any bank to transfer more than 25 per cent of its share capital out of the country without notifying the Bank of England ... Barings' directors had a number of meetings with the Bank of England, in which they discussed permission to transfer more than 25 per cent of Barings' share capital overseas, principally to my operation in Simex and to Japan. This permission was talked around and around but was never given. However, throughout 1993 and 1994 Barings' exposure to the Simex and Japanese markets exceeded pounds 117m, 25 per cent of its share capital, in every reporting quarter except the one between April and June 1994, when it came in just below.

(On 6 September 1994, George Maclean, head of banking at Barings, telephoned Christopher Thompson, senior manager at the Bank of England in charge of supervising merchant banks like Barings, to ask where it stood on exposure to Japanese exchanges).

Christopher Thompson told Maclean that the matter was "buried reasonably deep in his in-tray". According to Maclean, he then went on to say that he was "happy with Barings having reported the situation and that we should continue to exceed 25 per cent of our capital base from time to time". This granting of the Bank of England's nod and wink of approval was never documented. At the end of 1993, I hadn't had a problem. I'd been able to sell and bring in a premium which exactly equalled the realised loss, bringing the account to zero. The value of the options was under- water to 4bn, but that could be rolled over and carried forward .... Now, at the end of 1994, the figures had multiplied tenfold ... I couldn't sell enough options to match the realised loss. I was 7.78bn short. I'd paid 7.78bn losses over to Simex, by way of variation margin payments which I'd received from London, but which had no corresponding entry on the balance sheet. There was a 7.78bn hole.

With my scissors, stick of paper glue and fax machine, I had created pounds 50m. Coopers & Lybrand, world-class auditors, had agreed the figures. Barings, a world-class merchant bank, was holed by pounds 50m. I had no idea what Barings' profits were going to be for the year (1994) just ended, but they couldn't top pounds 200m. People were talking about a pounds 100m bonus pool, and Peter Baring was in line for about a pounds 1m bonus as a retiring present ... And I, sitting at a formica desk on the 14th floor of a tower block in Singapore, had cut and pasted in fifty million quid.

On Sunday 26 February 1995, Barings collapsed under pounds 900m of losses. In March, Britain's oldest merchant bank was sold to ING, the Dutch bancassurer, for pounds 1; 23 former Barings executives resigned or were fired. Leeson is serving a six-and-a-half year sentence in Singapore prison.