GOING FOR BROKE

By Howard G. Chua-Eoan

The week before he disappeared, Nicholas Leeson kept throwing up in the bathroom at work. Colleagues didn't know why. He had been working hard, perhaps harder than usual. For two months, the security guard at his luxury apartment building in Singapore had been complaining about the noise from Leeson's computer printer. It was grinding out copy from 8 p.m. to 4 a.m.--the hours Wall Street did business 12 time zones away. During the daytime, the young Englishman appeared distracted, almost dour. In the trading pit of the Singapore International Monetary Exchange, where Leeson worked from dawn to 7 p.m. among the other men who yelled at numbers careening across video screens, a fellow trader remembers that people would say hello to him and he wouldn't seem to hear them. At least he didn't respond.

Yet on Tuesday Feb. 21, amid the pit's uproar, Leeson replied quite evenly to a question from an A.P.-Dow Jones reporter curious about rumors that the Englishman was making huge purchases on the Japanese and Singapore exchanges on behalf of his London-based investment bank. Leeson coolly explained that he was "buying Nikkei futures here and selling them there." As simple as that, nothing out of the ordinary. One of Leeson's colleagues at another Barings office in Asia told Time of a phone call with Leeson two days later. "He sounded really weird on the phone, like he was in a really good mood," said the man, who often partied with him in London and Tokyo. "He asked me, 'How's life?' He never asked me anything like that before. It was completely out of character. We talked again later in the day, when he must have already known he was in trouble, but he was still joking around. I asked him to change something in the way he sent reports to us and he said, 'Do you want me to tell you which hand I wrote the report with?'"

At the end of trading that day, Leeson gathered up his notes, walked off the floor and began his getaway. By 11:30 that night, he was out of Singapore, checking into a hotel in the Malaysian capital of Kuala Lumpur, 200 miles to the north. At 7 a.m. on Friday, his wife reportedly jumped into a cab and headed for the airport. In his wake lay a venerable 232-year-old British banking empire rendered suddenly and irretrievably insolvent; half the financial world was reeling in fear, the other half in astonishment. On his office desk was a handwritten note that said "I'm sorry."

It seemed beyond imagining that a bank like Barings could be utterly undone, sapped of more than a billion dollars--nearly twice its available capital--in a few weeks of reckless financial gambling by a single person. Around the world staff members were in shock. Many were about to receive their annual bonuses. Now, in Barings outposts outside Britain, passports were being confiscated, properties frozen, company credit cards rescinded, salaries withheld-just as tax time approached. "We were a bank with a crest, not a trademark," said one Hong Kong employee in dismay. Indeed, Barings was one of the Queen's banks (she could lose as much as $1 million), and the founding family currently boasts five different hereditary peerages, more than any other English clan since the Middle Ages. The Princess of Wales is a great granddaughter of a Baring. But last week control of Barings plc appeared to be going to the Dutch firm ING-for the decidedly nominal amount of $1.60.

How could such an illustrious institution come to such an ignominious end? Was it mismanagement or conspiracy? Was it fraud or simply more proof of the treacherousness of those chimerical financial instruments called derivatives? At the moment Leeson, detained in Germany after a week on the run, is the only one who knows the answer to those questions, and last week he wasn't talking. Still, what is already known of his strategy and what could be teased out through interviews with far-flung friends and colleagues suggest a tale of arrogance and greed on a grand scale.

HAD BARINGS ONLY KNOWN ... TIME has learned that at one point late last year, another bank was thinking of hiring Nick Leeson away, but a corporate headhunter contracted to analyze Leeson's abilities recommended against it. There was nothing wrong with his background or performance. The headhunter just "didn't trust him." His report went on to describe Leeson as "very bright but it might be quickness without any underlying depth ... After you have Leeson for six months he might hold you up for a bigger package."

Leeson certainly had the quickness to rise at Barings at a time when a "bite the ass of a bull-every day" attitude-as a British securities executive describes it-was beginning to infect the bank's stiff and cautious culture. In the early '90s, the London headquarters of Barings was struggling with the division that championed derivatives-financial instruments that use the public's massive bet on securities to create a parallel universe of side bets, some straightforward (like futures) and others arcane (like swaptions). Derivatives helped the Tokyo unit make huge amounts of money-the kind of money that made Christopher Heath, the head of Baring Securities who was pushing these instruments, Britain's highest paid executive. The Tokyo team, says a former Barings manager there, "was a loose group having a really exciting time. We'd laugh if someone had had only an hour of sleep a night. There were days when you'd see someone walk in looking like death, then they'd go into the men's room and come out bouncing around like a new man." Barings in Tokyo was the place to be. "There was much more freedom and a lot less compliance," says a former Barings analyst. That kind of volatility, however, flustered the old-line Baring executives who wanted to put the derivatives business under the watchful eye of one of their risk-averse sales experts. "There was no one in Barings top management who understood derivatives," says a former Barings manager. The top brass was weary, but the money being made kept the bank from pulling out of the game altogether. "Barings' problem was that they wanted to be just a little bit pregnant," says an equity manager in Hong Kong. By 1993 Heath had resigned and the Tokyo operation had been through four top managers in three years. "They were a wreck," says a former Barings trader. "No one was really running the show." In time Leeson would take full advantage of that power vacuum.

In 1989 he was hired in London as a back office clerk doing settlement work, making sure all transactions were accounted and paid for. As the bank continued to ponder its commitment to derivatives, he focused on them. By 1992 he had moved from that job to a position as a roving troubleshooter, jetting off to Indonesia to help set up an office or to Tokyo as part of a team investigating allegations of internal fraud. At the time the Singapore International Monetary Exchange was trying to set itself up as Asia's hot new trading floors. Barings wanted a presence-and Leeson was put on the team assigned to help get it. At first he did settlements as he had done in London. Then, because Barings was short staffed, Leeson began executing trades himself. He was only 25, but as a former colleague puts what must have been the bank's position: "So what? No one else knew anything about developing this kind of business."

Before long Leeson was bringing in tens of millions of dollars. Last year, when the Asian markets were sagging, he was thought to have made $20 million to $36 million for Barings. Just a couple of weeks before the bank's collapse, he boasted to friends that he had been promised a $2 million bonus for the work, in addition to his $350,000 salary, company-financed apartment and limitless travel budget. In Singapore he developed a following. Says one trader: "When all the charts said sell, he would push the market even higher and the locals would go with him." His immediate boss in Singapore was so enamored of Leeson's success that the young man operated virtually without supervision-even though other traders were warning SIMEX authorities that Leeson was a "gunslinger" who should be watched carefully. Singapore traders came to feel that Leeson considered himself invincible. As a currency trader put it, "He began to believe his own press clippings."

THE ACCOLADES-AND THE MONETARY rewards-were gratifying, particularly to a working-class kid, the son of a plasterer from the London suburb of Watford. "He doesn't exactly throw money around," his sister Victoria, 21, told the Watford Observer, "but he feels we shouldn't go without and if he can help us, he does-he's our big brother. He loved his work and would put in up to 20 hours a day. He wanted to make something of himself because he knew he could." The press, she added, "seem to be saying that if you are working class, you don't deserve a top job, that you should work as a dustman or a shop assistant." Leeson never attended college. At 18 he became a junior clerk at Coutts & Co., another prestigious bank. In 1987 he became a clerk at Morgan Stanley. That American corporate pedigree, a mark of aggressiveness, was enough to help him land a job at Barings.

For all of their ambitions, Leeson and his wife Lisa never really seemed to fit into the affluent, neo-colonial life-style of Singapore-nor into the city's multiethnic society. Barings paid Leeson's dues for the Cricket Club, an old establishment institution for British expatriates in Singapore, but he rarely went there. The Leesons' three-bedroom apartment was part of a low-rise building on neatly manicured grounds in one of Singapore's fashionable neighborhoods, where Tamil and Malay workers come in every morning to mow the lawns, wash the cars and sweep the grounds. But the Leesons took their apartment furnished and barely decorated it, adding almost no personal touches.

Though Leeson was center of attraction on the trading floor, he was, for the most part, a loner. Last week some of his associates expressed surprise that he was married. Said one: "His behavior was more like that of a bachelor." Almost no one had heard of Lisa Leeson in the expatriate community; she was not a member of any of the social clubs. The live-in maid next door says Lisa rarely left the house. When she did, she wore jeans and T shirts or athletic sweats--and according to the apartment building's security guard, "her face looked angry, thin and pale." Apart from her husband, she seemed to have only one other constant friend, a woman who may later have helped the Leesons with moving arrangements when they fled Singapore.

A competent soccer player back in England, Nick was one of only two foreigners on the otherwise all Malay team of Admiralty Club in 1992 and 1993. He showed up for a few months of training and played in two games before quitting. His coach, Mohamed Ansari, says Leeson was too big and too slow to play with the shorter and swifter Malays. "He was always friendly," says Ansari. But no one on the team ever really got to know him.

In addition to trading, Nick Leeson excelled at partying hard at night. In Singapore, it is a customary coda to the workday. After toiling over charts and numbers, the traders leave en masse for the rows of bars and cafes of the Boat Quay. Some of them tell stories of Leeson as "the wild man." After one late night bout, he was charged with indecent exposure for dropping his pants in front of a group of women. He then gave them his phone number and address and dared them to turn him in. (As good Singaporeans, they did. Leeson was fined $140.) One of his favorite hangouts was Harry's Pub, a small dark bar where the sounds of a jazz trio pour out onto a stone walkway. Says Mary Bell, a Singapore family therapist who works mostly with expatriates: "They really are just kids. When they are all together at Harry's Pub, it seems like they are a universe unto themselves."

As his reputation as Barings' master of SIMEX grew, however, Leeson's tastes changed. He gradually spent less and less time in Harry's Pub and moved upmarket to a row of bars closer to home. One of those he favored was 5 Emerald Hill, an understated establishment favored by the artistic community. There, surrounded by walls of peeling paint and cooled by electric fans, he would listen to blues and soul in the evening, drinking gin and tonics or whiskey, perhaps staring at the apple slices in the giant jar of vodka or the bottled snake on the liquor shelf. When a wine bar opened next door, Leeson spent more and more time there. "It's like an old boys' club, where the guys smoke cigars in leather arm chairs," said Johnny Walker, the bartender at 5 Emerald Hill. Leeson began to learn to buy wine. One of his last purchases, says Walker, was a $93 bottle of St. Emilion 1990, Chateau Trottevieille. "He was a nice guy," says Walker. "He always paid his bills."

He didn't pay all his bills. Last week the Financial Times obtained internal documents pointing to error account No. 88888, a piece of evidence overlooked by Barings auditors. It showed Leeson had already built up a $80 million deficit at the end of 1994, the year in which he supposedly earned huge profits for Barings and had become known unofficially as the Nikkei king on the SIMEX floor. His reputation was based on his ability to spot tiny differences in the value of Nikkei futures on the exchanges of Singapore and Osaka, Japan, and make millions by exploiting the spread, buying where the price was low and immediately selling where it was high. But those 1994 profits now seem almost paltry. In 1995 the losses would increase more than tenfold.

EARLY IN 1994 A NEW YORK CITY-BASED Barings banker introduced Leeson to a client whose identity remains a closely held secret at Barings. The client reportedly told his Barings contact in New York, "I hope you're getting some credit for this because your company is getting a lot of business from me in Singapore." It is still not clear where the mystery client's investing stopped and where Leeson's own-hidden in error account No. 88888-began. But right to the end, Leeson claimed that his huge, inexplicable investments were on someone else's behalf. "He always told us it was for this special customer," says one of his regional supervisors. "When we go back and listen to tapes of those conversations, it's unbelievable. He was so calm. It was a farce."

Leeson started buying and selling the simplest kind of derivatives, futures pegged to the Nikkei 225, an index of the value of 225 Japanese stocks that is Japan's equivalent of the Dow Jones Industrial Average. It was a straightforward process: in effect, Leeson placed open-ended bets on what would happen to billions of dollars worth of Japanese stocks and bonds. His wager was similar to what gamblers in Las Vegas betting on a football game call the over and under-meaning a bet on whether the final score of a football game will be above or below a certain number of points. Leeson was betting the over on the Nikkei 225. If he had been betting the Super Bowl and he went the wrong way on the over-under, he would have lost the amount of his original wager and no more. In the futures market traders only have to put a small percentage on the table--in Singapore, until last week, it was 6%--so losses can exceed the ante by many times.

Barings believed it was not exposed to any risk because Leeson said he was executing the huge purchase orders at a client's behest-and presumably with the client's funds. Furthermore, to Barings' delight, Leeson was also making a tidy profit by making those trades in conjunction with the bank's separate and official holdings of Nikkei 225s in Osaka and SIMEX."I won't tell you how good," says a Barings employee, "but it was a good business." Little did Barings know that it was responsible for error account No. 88888, which was unhedged and would turn out to be fatal to the company.

In late November or December, Leeson decided to wager that the Nikkei index would not drop below about 19,000 points on March 10, 1995. It seemed to be a safe bet: the Japanese economy was already rebounding after a 30-month recession. Using the account No. 88888 also had a special advantage, one that Leeson had probably learned about in his old back-office job in London when he made sure cash flowed into the right accounts. Both Osaka and Singapore demand prompt margin payments on contracts-that is, the difference between what the contracts were sold for and their value at the close of each trading session. Since the account was technically Barings' property, it appears that the company automatically made some of the payments. "It was a free bet," says one colleague.

In addition, while Leeson could call up the error account on the company computer, most of his colleagues, who lacked the special password, did not have access to it. And last week members of Leeson's trading team in Singapore admitted to police that he had instructed them to put only a certain number of specific trades in the error account.

Still, in December 1994 and early January 1995, the Nikkei 225 seemed headed for 19,000. On the morning of Jan. 17, 1995, however, an earthquake measuring 7.2 devastated the Japanese city of Kobe-and the erstwhile stable Nikkei index plummeted more than 7% in a week. Despite that, over the next three weeks Leeson bought thousands more contracts betting that the Nikkei would stabilize at 19,000. "He was going for the big kill," says the director of one trading house in Singapore. A Japanese trading executive remembers wondering what Barings was doing. "We figured that it is such a big sophisticated operation that they probably had a hedge going in another market that we didn't know about," he said.

There were no hedges, no bets the other way to protect Barings' huge exposures. Leeson attempted to trade in Japanese government bonds as well, but these too incurred large losses. In what apparently was a breakdown in internal controls at Barings' treasury, the bank continued to fund Leeson's activities, going as far as taking out an $850 million loan in the four weeks leading up to the collapse.

Barings may have wanted to look the other way. They had allowed Leeson to remain chief trader while also being responsible for settling his trades. At most banks the two jobs are split because allowing a trader to settle his own deals makes it simpler for him to hide the risks he is taking-or the money he is losing. As early as March 1992, an internal fax warned that "we are in danger of setting up a structure which will prove disastrous, in which we could succeed in losing either a lot of money, client goodwill or both." But an internal audit from August obtained by the Financial Times last week concluded that though Leeson was a risk in this situation, his departure would "speed the erosion of Barings' Futures profitability ... (W)ithout him Baring Futures would lack a trader with the right combination" of experience, contacts, trading skills and local knowledge.

Despite this conclusion, Anthony Hawes, acting as a troubleshooter for the Barings inner circle in London, flew to Singapore on Feb. 8 to talk to Leeson and his team. On Monday, Feb. 20, Leeson's regional supervisors in Tokyo asked him to reduce the company's holdings of the Nikkei contracts. "It's almost getting to be a problem," a Barings top manager explained to a friend. No one yet suspected the crisis awaiting the company in account No. 88888. By the time internal auditors did suspect, the amount of credit extended to cover those positions had exceeded the bank's capital.

THE EVIDENCE SUGGESTS THAT LEESON began preparing for the end soon after Hawes arrived in Singapore. On Feb. 15, Leeson's wife Lisa called the Four Winds moving company. Diana Massimiani, Four Winds' assistant manager in Singapore told Time that the Leesons wanted to move their belongings to Kent in southeast England. "She told me she would need storage as they were going away and didn't know when they would reach Kent." Even before that, Leeson had sold his black Rover sports car and was reportedly leasing a white Mercedes. By Friday, Feb. 24, Nick and Lisa Leeson would be on the run. A woman then called Four Winds and said the Leesons had already left on their vacation. Could the movers come by a little earlier?

At about the same time, Peter Baring, chairman of the bank, reportedly received a faxed letter from Leeson. According to the Independent, the trader apologized, provided a detailed account of his dealings and said "he doubted the two would ever meet again." When a weekend attempt by the Bank of England to round up a rescuer failed, Baring hinted that a conspiracy had led to the collapse of the institution his family established 232 years ago. But, says Emma Davey, managing editor of Futures and Options World: "Baring didn't have a clue what this is all about. There is a major cultural gap between the old school and the people who are doing the trading for them.''

Indeed, Britain's sedate financial sector was deregulated in the 1980s-and suddenly the aggressive Americans and Japanese came crashing in with giant salaries garnished with even more gigantic bonuses for star traders. Young, ambitious people like Leeson were swept up in the scavenger hunt for talent, and Barings was for the first time managing a new kind of moneyspinner. "Traders were made overnight," says Valerie Thompson, who traded securities for Solomon Brothers in London for 15 years and watched the change. "Managers did not have time to train them properly. Leeson picked up a little bit of knowledge and used it as a springboard into Barings. He must have thought, 'This is easy. This is Christmas come early. I can do anything.'"

Thompson believes the inexperience and hubris of youth may have been his undoing. "He may have known his stuff, but he had no experience with the critical bit: when to cut your losses. He never went through a bear market. He was lacking that bit in the learning curve when you say, 'I've made a mistake. I've got to get out of here.' He didn't have the courage-or the experience-to go to the boss and admit failure and ask how to get out of it." She adds: "These kids are just learning to walk, and suddenly they are put in charge of too much. They are still in nappies. They don't know what they don't know."

CHEERS WENT UP IN FUTURES MARKETS everywhere when the news broke of Leeson's detention in Germany last Thursday after his Royal Brunei airliner landed in Frankfurt after a 12-hour flight. Leeson had left Kuala Lumpur to rendezvous with his wife Lisa in the Malaysian resort town of Kota Kinabalu, and there, after plunking down $1,600 in cash for seats in the economy section, he boarded the plane in his own name. Malaysian authorities just missed catching up with the Leesons. But reports of their flight immediately circulated abroad. In Frankfurt, German police, carrying pictures of the couple, boarded the plane and took the Leesons into custody. After drinking some tea, Nick Leeson asked for a lawyer and telephoned the British consulate.

Lisa has been released and is back in Britain. Nick's immediate future is uncertain. Singapore has requested his extradition, and Leeson will no doubt contest any attempt to send him back to Asia. In addition to a German lawyer, Leeson has retained lawyers from Kingsley Napley, Britain's leading firm specializing in white-collar crime. Leeson, said Christopher Murray, his attorney at the firm, simply wanted to return to England "to put the record straight." Leeson's sister Sarah, 18, was emphatic. "One person can't lose all that money," she said. "They are playing on his background, making him a scapegoat because of his upbringing. There has got to be a conspiracy"

If Singapore gets Leeson, it will most likely charge him with aggravated cheating and deception. It has already charged him with criminal breach of trust and forgery of certificates. Last week Singapore police seized stationery with faked company letterheads and a dummy bank ticket that said $80 million had been deposited into a Barings futures account at Citibank. No such transfer took place, and prosecutors are likely to argue that it gave Leeson a way of proving he was making the huge Nikkei trades on behalf of a client. "Once he is here," says Pala Krishnan, one of Singapore's leading criminal attorneys, "the maximum sentence he can receive is 14 years, if he is tried by a lower court. If he is tried by a higher court, then the sentence is life." Leeson and Barings should have got out while they were ahead.

--Reported by John Colmey and Frank Gibney Jr./Singapore, Edward W. Desmond/Tokyo, Jay Branegan and Barry Hillenbrand/London, Bruce van Voorst/Bonn and Sribala Subramanian/New York

With reporting by JOHN COLMEY AND FRANK GIBNEY JR./ SINGAPORE, EDWARD W. DESMOND/TOKYO, JAY BRANEGAN AND BARRY HILLENBRAND/LONDON, BRUCE VAN VOORST/BONN AND SRIBALA SUBRAMANIAN/NEW YORK