What Is a Bank Failure?

On February 27, 1995, the British Central Bank announced that the Bank of Bahrain, the British commercial investment bank, had closed down due to operating errors. The news spread immediately causing a series of strong fluctuations in the financial community in Asia, Europe and the Americas. The exchange rate of the British pound against the mark of the Tokyo stock market fell to its lowest point in nearly two years. The London stock market also plummeted, and the New York Dow Jones index fell by 29%.

Bahrain bank failure

On February 27, 1995, the British Central Bank announced that the Bank of Bahrain, the British commercial investment bank, had closed down due to operating errors. The news spread immediately causing a series of strong fluctuations in the financial community in Asia, Europe and the Americas. The exchange rate of the British pound against the mark of the Tokyo stock market fell to its lowest point in nearly two years. The London stock market also plummeted, and the New York Dow Jones index fell by 29%.

Chinese name

Bahrain bank failure

Event

Bank of Bahrain goes bankrupt

Time

February 27, 1995

Place

Bahrain bank failure

Bahrain bank failure

In 1763, Sir Francis Bahrain founded the Bank of Bahrain in London. It was the world's first "commercial bank", which provided clients with capital and related advice, as well as doing business on its own. Of course, it also has to bear the risk of buying and selling stocks, land or coffee like other businessmen. Due to its flexible operation and innovation, Bahrain Bank quickly achieved great success in the international financial field. Its business scope is also quite extensive. Whether it is to extract copper from the Congo, sell wool from Australia, or dig the Panama Canal, Bahrain Bank can provide loans for it. However, Bahrain Bank is different from ordinary commercial banks. It does not develop ordinary customer deposits, so its funding sources are relatively limited. It can only rely on its own strength to survive and develop.

When the newly born United States purchased the southern Louisiana state from France in 1803, all funds came from the Bank of Bahrain. Although Bahrain had a strong competitor at that time, a Jewish-run Rothschild Bank, Bahrain was the bank of choice for governments, companies and many customers. In 1886, the Bank of Bahrain issued "Ginis" securities. Buyers poured into the bank like a tide with the application form. Later, they had to use police force to maintain it. Many people waited for a few hours and bought a small amount of stock. Out. By the time it was thrown the next day, the stock price had doubled.

At the beginning of the 20th century, Bahrain Bank was honored with a special client: the British Royal Family. Thanks to the outstanding contributions of Bahrain Bank, the Bahrain family has won five hereditary titles. This can be regarded as a world record, thus laying the foundation for Bahrain's prominent position.

Lisson officially came to work at the Bank of Bahrain on July 10, 1989. Prior to that, he was an employee of the clearing department of Morgan Stanley Bank. After entering Bahrain Bank, he quickly secured the opportunity to work in the Indonesian branch. Because of his patience and perseverance, and his good reasoning, he was able to quickly solve many problems that had not been solved before, which improved his work. Therefore, he was regarded as an expert in futures and options settlement. The job in Indonesia is quite satisfactory and allows him to be assigned a suitable position overseas. In 1992, Bahrain's headquarters decided to send him to a Singapore branch to set up a futures and options trading department, and served as general manager.

No matter what transaction you make, mistakes are inevitable, but the key is to see how you handle them. This is especially true in futures trading. For example, some people mistake the "buy" gesture as a "sell" gesture. Some people buy contracts at the wrong price. Some people may not be careful. Some people might have bought June futures. Bought March futures, and so on. Once an error occurs, it will cause losses to the bank. After these errors occur, the bank must quickly and properly handle them. If the error cannot be recovered, the only feasible way is to transfer the error to a computer called an error account. Account, then report to the bank's headquarters.

When Leeson was a futures trader in Singapore in 1992, Bahrain Bank originally had an "error account" with an account number of "99905", which dealt with errors caused by negligence during the transaction. This was a normal wrong account in the operation of the financial system. In the summer of 1992, Gordon Bowser, who was fully responsible for the liquidation work at the London headquarters, called Leeson and asked him to set up another "error account" to record minor errors and handle them in Singapore by himself to avoid trouble in London. work. So Lisson immediately approached Lisser, who was responsible for the liquidation of the office, and asked her if another file could be established. Soon, Lisser typed some commands into his computer and asked him what account he needed. In Chinese culture, "8" is a very auspicious number, so Leeson used it as his auspicious number. Since the account number must be five digits, the "wrong account" with the account number "88888" was born. .

A few weeks later, the London headquarters called again. The headquarters was equipped with new computers and required the Singapore branch to follow the old rules. All error records were still reported directly to London from the "99905" account. The "88888" error account has just been set up and has been put on hold, but it has become a true "error account" stored on the computer. Moreover, the headquarters had already noticed a lot of mistakes at the Singapore branch at this time, but Leeson had tricked it out. The "88888" neglected account provided Leeson with the opportunity to create false accounts in the future. If this account were cancelled at that time, Bahrain's history might be rewritten.

On July 17, 1992, Lee Wang, a trader who joined Bahrain for only one week, made a mistake: When a customer (Fuji Bank) requested to buy 20 Nikkei futures contracts, the trader It was mistaken to sell 20 shares, and this mistake was discovered when Lisson liquidated the work that night. To correct this error, you must buy back 40 contracts, indicating that the calculation of the closing price of the day, the loss is 20,000 pounds, and should be reported to the London head office. However, under various considerations, Leeson decided to use the wrong account "88888" to undertake 40 Nikkei futures short contracts to cover up this mistake. However, in this way, the transaction conducted by Lison became a "owner transaction", which exposed Bahrain Bank to the risk position under this account. A few days later, as the Nikkei rose 200 points, the loss on this short position increased from 20,000 pounds to 60,000 pounds (Note: Leeson was less than 50,000 pounds a year). At this time, Lisson did not dare to report this mistake up.

Another similar mistake was made by George, Leeson's friend and commissioner. George divorced his wife, immersed in pain all day, and started to give up. Lisson liked him because George was his best friend and one of the best traders. But soon George started to make mistakes. Leeson signaled that he had bought all 100 September futures he sold, worth up to 8 million pounds, and that several vouchers for the transaction were not filled in at all.

If George's mistakes were leaked out, Leeson would have to say goodbye to his already happy life. It would be a breeze for Lison to record several errors made by George in the "88888" account, but at least three problems haunted him: one is how to make up for these errors; the other is how to hide the errors after logging into the "88888" account Passed the internal audit at the end of the month of the London Headquarters. Third, SIMEX required them to add margin every day. They calculated how much the Singapore branch lost every day. The "88888" account could also be displayed on the SIMEX screen. In order to make up for the mistakes of his employees, Leeson transferred the commissions he earned into the account, but of course the premise is that these mistakes cannot be too big, and the amount of losses caused is not too great, but George's mistake is really too big.

In order to make enough money to cover all the losses, Leeson took on increasing risks. He was engaged in a lot of cross-position trading at that time, because at the time the Nikkei index was stable, Leeson earned option premiums from this transaction. If the luck is bad and the Nikkei index changes violently, this transaction will cause Bahrain Bank to suffer great losses. Lison did a great job for a while. By July 1993, he had converted a loss of 6 million pounds from the "88888" account into a slight surplus. At that time, he had an annual salary of 50,000 pounds and a year-end bonus of nearly 100,000 pounds. If Lisson stops, then Bahrain's history will change.

In addition to concealing mistakes for traders, another serious mistake was to win over Bonifay, the largest client in the Nikkei market. In late 1993, for several days in a row, the market price soared by more than 1,000 points every day. The computer screen used for clearing records frequently malfunctioned, and countless transactions were backlogged. Because the system did not work properly, the transaction records depended on human labor. By the time all kinds of errors were found, Rissen had lost nearly $ 1.7 million in a day. With nowhere else to go, Leeson decided to continue hiding those mistakes.

In 1994, Lisson was numb to the amount of the loss. The loss of the "88888" account was from 20 million and 30 million pounds to 50 million pounds by July. In fact, many of the deals that Lison made at the time were being dragged by the market, not because of his expectations of the market. He has become a puppet manipulated by his risk position. What he could think of at that time was which market changes in one direction would make him defeat and win, and he could make up the losses in the "88888" account, and then tried to influence the market movement in that direction.

Lisson described in his autobiography: "I feel ashamed to be such a liar-it was a relatively small mistake at first, but now it surrounds me like a cancer, and my mother definitely did not want to raise me into It looks like this. "

From a system perspective, the most fundamental problem in Bahrain is the confusion between trading and clearing roles. After going to Singapore in 1992, Leeson served as the manager of the Singapore Futures Trading and Clearing Department of Bahrain. As a trader, Lisen's original job was to buy and sell derivative products on behalf of Bahrain's customers, and to carry out these two tasks of arbitrage for Bahrain, basically there is not much risk. Because of the valet operation, the risk is borne by the customer. The trader only earns commissions, and the arbitrage behavior only earns the difference between the markets. For example, Leeson uses the different prices in Singapore and other markets for a short period of time to make profits for Bahrain. Generally banks allow their traders to hold a certain amount of risk positions. But in order to prevent traders from being exposed to too much risk in their own banks, this permission is usually set quite limited. And through the daily settlement work of the clearing department, the bank can also effectively understand and master the situation of its traders and risk positions. Unfortunately, Lison was a trader and liquidator.

In fact, a week before Leeson's arrival in Singapore, there was an internal newsletter within Bahrain that raised concerns about the catastrophe that the issue could cause. However, this concern was ignored, so that after Lison took office, he also served as the transaction and clearing department. If Lison was only in charge of the clearing department, then he would have no need or opportunity to hide the wrongdoing of other traders, and it would not lead to a lasting situation.

When the loss reached 50 million pounds, the Bank of Bahrain sent someone to investigate Leeson's accounts. In fact, there is a balance sheet every day, and there are obvious records every day. It can be seen that Lison's problem. Even at the end of the month, the false account created by Lison to cover up the problem is extremely easy to find-if Bahrain really Has a strict review system. Lisson faked Citibank's £ 50 million deposit, but the £ 50 million has been diverted to compensate for losses in the "88888" account. After checking the accounts for a month, no one checked the accounts of Citibank, so that no one found that there was no deposit of 50 million pounds in Citibank's account.

Regarding the balance sheet, Bahrain Bank Chairman Peter Bahrain also commented in March 1994 that the balance sheet was useless because its composition could change significantly in a short period of time. Therefore, Peter Bahrain said: "If you think that revealing more balance sheet data can increase your understanding of a group, it is really naive." The cost of the Bahrain chairman who does not pay attention to the balance sheet is high No one imagined it!

In addition, on January 11, 1995, the Audit and Tax Department of the Singapore Futures Exchange sent a letter to Bahrain, raising their concerns about the funds needed to maintain the "88888" account. Moreover, at this time Lisson had to ask London to remit 10 million pounds a day to pay its additional margin. In fact, from 1993 to 1994, Bahrain's investment in SIMEX and the Japanese market exceeded 110 million pounds, exceeding the Bank of England's requirement that the total overseas funds of British banks should not exceed 25%. To this end, the Bank of Bahrain has held several talks with the Bank of England. In May 1994, the Bank of Bahrain received a "tacit consent" from a senior official in charge of commercial bank supervision of the Bank of England, but this acquiescence did not leave any supporting documents, as it did not ask the Bank of England's top responsible person to violate the Bank of England Internal regulations.

The most incredible thing is that after the Bank of Bahrain found a balance of £ 50 million on the balance sheet at the end of 1994, it still failed to be alert to the looseness and negligence of its internal controls. In the two months from the discovery of the problem to the subsequent collapse of Bahrain, many senior and senior Bahraini officials had expressed concern about the problem, and the audit department at the headquarters in Bahrain formally investigated it. However, these investigations were deceived by Leeson in a very easy way. Lisson described this period as: "I think it's incredible that no one stopped me. People in London should know that my numbers are fake. These people should know that I ask the London headquarters every day. The cash is wrong, but they still pay it. "

From a financial ethics point of view, if all the financial practitioners involved in the "Bahrain Incident" are scored, they should be given a failing score. In particular, many senior managers in Bahrain did not delve into possible issues at all, but blindly believed in Lisson and expected him to make money for Bahrain arbitrage. It is particularly ironic that, two months before Bahrain's bankruptcy, at a Bahrain financial results conference in New York in December 1994, 250 Bahraini bankers around the world also used Lisson as Bahrain's hero , With long warm applause.

On January 18, 1995, the Great Kobe Earthquake in Japan, the following few days, the Tokyo Nikkei index fell sharply. On the one hand, Lissen suffered greater losses, and on the other hand purchased a larger number of Nikkei futures contracts. It is hoped that the Nikkei will rise to the ideal price range. On January 30, Leeson received funds from London at a rate of 10 million pounds per day, bought 30,000 Nikkei futures, and sold short Japanese government bonds. On February 10, Leeson had a record number of transactions on the Singapore Futures Exchange. It had held 55,000 Nikkei futures and 20,000 Japanese government bond contracts. The greater the number of transactions, the greater the loss.

All these transactions are entered into the "88888" account. The transactions on the account can be concealed because they also hold the power of inspection, but the additional margin cannot be hidden. Liesson continued to make transfers under various pretexts. This degree of looseness is really incredible. In mid-February, Bahrain's total share capital was only 470 million pounds.

On February 23, 1995, the last day of Bahrain Futures, Leeson's efforts to influence the market's direction completely failed. The Nikkei stock price closed down to 17885 points, while Risen s Nikkei futures long position has reached more than 60,000 contracts; while its Japanese government bonds have risen along the way, its short risk position has also reached 26,000 contracts. Lissen's losses for Bahrain, while Bahrain's senior executive was still dreaming of the next day's dividend, finally reached a high of 860 million pounds, causing the fate of the world's oldest Bahrain bank to end.

Singapore s report on the bankruptcy of Bahrain on October 17, 1995, and a sentiment in Lisson s autobiography, may best express our regrets over the Bahrain incident. A paragraph in the report s conclusion is: If the Bahraini Group can take timely action before February 1995, they may still avoid a collapse. As of the end of January 1995, even if major losses had occurred, these losses were ultimately losses. 1/4. If the management in Bahrain knew nothing about the "88888" account until it went bankrupt, we can only say that they have been evading the facts. "

"There is a group of people who could have debunked and stopped my tricks, but they didn't do it. I don't know what the line is between their negligence and criminal-level negligence, and whether they are responsible for me," Lisson said. .But if I were at any other bank, I would not have a chance to start this crime. "

Causes of Bank of Bahrain's collapse

On February 26, 1995, Nick Leeson, a futures manager of Singapore's Bahrain Corporation, invested in the Nikkei 225 stock index futures failure, causing Bahrain Bank to suffer huge losses, totaling a loss of $ 1.4 billion, and eventually being unable to continue operations and declared bankruptcy. Since then, this veteran commercial bank with a history of 233 years and good performance has disappeared in London City and even the global financial community. The bank has now been taken over by Dutch International Banking and Insurance Group.

The Bahrain Bank Group was once the oldest and most prestigious commercial bank group in London, England. It is well-known for its solid development and good reputation. Its customers are mostly noble. Queen Elizabeth II was also one of its customers. . Bahrain Bank Group's business expertise is corporate finance and investment management, with business outlets mainly in emerging countries and regions in Asia and Latin America. Bahrain Bank's pre-tax profit was still as high as US $ 150 million in 1994, and the bank once wanted to expand its business in China. However, a financial speculation the following year shattered all the bank's development plans.

The immediate cause of Bahrain's bankruptcy was that Nick Leeson, a futures manager at Bahrain in Singapore, misjudged the direction of the Japanese stock market. In January 1995, the Japanese economy showed a momentum of recovery. Leeson was optimistic about the Japanese stock market and bought a large number of futures contracts in Tokyo and Osaka, respectively, hoping to make a large profit when the Nikkei index rose. Unexpected circumstances, the sudden Hanshin earthquake on January 17, 1995 hit the Japanese stock market's upward momentum, and the stock price continued to fall. As a result, Bahrain Bank lost US $ 1.4 billion, which was almost all of Bahrain's assets at the time, and this once brilliant financial building collapsed. The news of the bankruptcy of the Bahrain Bank Group shook the international financial market. The stock markets around the world were impacted to varying degrees. The pound exchange rate fell sharply, and the exchange rate against the mark fell to a record low. The hidden impact of the Bahrain Bank incident on the European and American financial industries is inestimable.

On the surface, things seemed simple. Lison's misjudgment was the trigger of the whole incident. However, it is this event that has caused the world's close attention, and the high risks of financial derivatives have been widely recognized. From the misjudgment of Lisson's personal judgment to the failure of the entire Bank of Bahrain, along with the doubling of the investment return of financial derivatives, the same doubling of the investment risk. This is due to the "leverage" nature of financial derivatives.