In so far as it’s possible to feel sorry for someone who steals the best part of a billion pounds, I confess to having just a little sympathy with Nick Leeson.
The world’s most famous rogue trader was delivering the closing address at ETF.com’s Inside ETFs conference in Amsterdam last month. “I’ve closed other things before,” said the world’s most famous rogue trader, “Notably a bank.”
The bank in question, of course, was Barings. Over a three-year period, operating from its Singapore office, Leeson racked up a staggering £832 million of losses until he could live the lie no longer. In February 1995, he went on the run, and by the time of his arrest in Frankfurt a week later, Britain’s oldest merchant bank had been declared insolvent.
Leeson is nothing if not honest about joining the public speaking circuit. He needs the money. Employers don’t exactly queue up to offer work to a convicted fraudster with a household name. He appears repentant and openly acknowledges his stupidity, dishonesty and greed. He entirely blames himself for the loss of his reputation, his first marriage and his liberty, serving four years in a gang-ridden Singaporean jail, an experience made all the more traumatic by being diagnosed with colon cancer.
But there’s a bigger reason to rein in our moral indignation about Nick Leeson. Without in any way condoning what he did, Leeson was the product of a system, an industry, a culture. Many other than Leeson played a part in the collapse of Barings, and I’m not just referring to the obvious failure of the bank’s management to scrutinise his work and to spot the losses he was hiding.
Scandals continue today
It is no surprise that bigger scandals have engulfed the banking and financial services sector in the intervening 20 years, and while four key lessons of the Leeson affair continue to go unlearned, we can expect more of the same in the years ahead.
The first lesson is that banks and other major financial organisations must insist on the highest ethical standards. Financial professionals continue to succumb to the same temptations that proved Leeson’s undoing. In a recent survey of top earners in the City of London and on Wall Street, 34 percent said they had actually witnessed or had first-hand knowledge of unethical or illegal practices in the workplace. An incredible 32 percent said compensation structures or bonus plans pressurize employees to compromise ethical standards or violate the law. Most worryingly, the survey suggests that ethical standards are actually falling.
Second, we need to insist on more rigorous education and training for financial professionals. Leeson, who failed his maths A Level, admits to having little qualification for his job at Barings other than a burning desire to make money. Standards may well have improved, but why do we insist on would-be doctors, vets and lawyers studying their subject at university for several years, and yet happily allow young people to walk into a job in the City without any formal background in finance?
Stop idolising the so-called “stars”
Third, we must stop idolising “star” performers. Leeson was revered by his peers and also his managers, who convinced themselves they had found a money making machine. Just days before his downfall, colleagues were flown from around the world to a champagne party to celebrate his latest industry award. It is human nature to look for heroes and in this the media is the biggest culprit. But the reality is there are very few genuine stars in financial markets. Of course there are outliers, but much of the performance we ascribe to skill is in fact the result of random chance. And in cases like those of Leeson or Bernie Madoff, where the figures seem too good to be true, they usually are.
The fourth and final lesson of the Barings collapse is related to the third, and it’s this: we need to make a much clearer distinction between speculating and investing and to ensure that the consumers understand it. The reason why it’s so difficult to outperform with any degree of persistence is that financial markets are fundamentally efficient (and indeed more efficient than they were 20 years ago).
The way to win – other than by investing passively and incurring fewer costs – is to take more risk, to be contrarian, to do what others aren’t doing and to keep doing it. The downside, of course, is that you are just as likely to lose. Nick Leeson, who effectively gambled on the future direction of the Japanese markets, is an extreme example of precisely that. As markets become even more efficient and money managers find it even harder to outperform, the temptation to take bigger and bigger risks – yes, to gamble – with their employers’ or their clients’ money will only rise, especially if their jobs and bonuses depend on it.
Unless we heed the lessons, there will be more Nick Leesons, more collapsed institutions and more fleeced customers in the future.
This article was first published on ETF.com on 2nd July 2015