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It is not at. aU ~trange that Nick LJ:eson's immense losses resuIte? en~irely from the sharp declme In the Tokyo Nikkei mdex WhiCh, plummeted, the inquIry mforms us, "following the Kobe earthquake". Leeson's ross-making positions were 100 per cent I composed of Japanese instruments: the Nikkei 225, the Japanese Government Bond (JGB) contract and the Euroyen contract. Cynics might wonder why an earth9uake would trigger a sudden massive selling bout in the Japanese market. However, I can reassure you that things like this do happen. During October 1987, the mother of all storms that swept along the English Channel and hit the southern parts of England triggered a massive London stockmarket slump, wiping billions off the value of stocks and shares. This followed the snowstorm of the previous Friday in New York that triggere.d the even more massive New York Slock Exchange sell-off that wiped even more billions off US equity prices.' These two events almost led Ito a global financial meltdown which was saved, with minutes Ito lSpare, by the ever-helpful American Federal Reserve System. Those who have researched the mos.! infamous crash of a1lltime-the 1929 New York collapse-now know that a eoJerie of influential 'm.oney barons' engineered the event and gained fortunes for themselves in the process. This, however, is another entirely unrelated story. Those things don't happen any more, do they? However, back at the London ranch, no one from the tea lady upwards discussed the precise figures inNolved in Leeson's aCJivities. Peter Baring, the Chairman, blandly stat ed: "We never specifically talked about the size of the position." This is quite remarkable in that he was the chairman of the oldest bahk in England and might have shown some interest in exposure. I frankly find this comment whoJly disbelievable. Likewise, none of the other directors wished fo know what their position was. In point of fact, Tony Hawkes, whom we re:ferred to earlier, had gone to Singapore in early Februa.y 1995 (from where he jet-setted to Tokyo until it was time to return to Singapore~, not to quiz Leeson on the enormous (and overleveraged) pool of borifOwing he had built up, but, on the contrary, "to arrange higher intra-day overdraft limits". The idea was to increase funding, not red.uce ,it Why? Th.ere is a time-honoured technique amongst City traders who have a 'bad' position. Rather than 'cut' the position and take a reali~ed loss (making you Mr Unpopular in the bonus sweepstakes), the trick is to double your position, thereby averaging the price of your book, and grimly wait 'til the market reverses itself, at which point you get out with an immense sigh of relief. I'm ashamed to confess that dUring my days as treasurer and director of a I)cading City b.ank, I observed such reprehensible benaviour on a number of occasions and thus can speak with a cer,tam amount of experience and insight Personally speaking, ,j[ is my experience that managements are not only aware of this doubling-up technique but occasionally encourage itSl"use, especially when the only alternative is to book a large realised loss (and decrease the bonus pool and get fired at the next AGM). On these occasions, senior management are usually extremely reluctant to record formally any instsu<;lions or 'guidance' they give to rheh trader for fear that they will be held to blame if t!:lings tum out badly. The trader is left, as they say in banking parlance, "to sweat over his book", knowing that he will be held solely responsib'le for the dire results. (His alternative is to resign, or otherwise demand written authority and be sacked.') The Barings strategy was therefore not uncommon. The amounts involved" however, were. It is cJeaF from the inquiry report that Leeson continued to double up III this manner until he could bear if no more, and scarpered, leaving everyone to panic and literally shed tears. APRIL-MAY 1996 NEXUS • 29