Explanation:
The basic problem at Barings was operational risk control. Nick Leeson was in charge of trading and settlement. This dual responsibility allowed him to hide losses by crossing trades at fabricated prices. He then booked the profitable side of the trade in accounts that were reported and the unprofitable side in an unreported account. The lack of supervision also permitted him to shift from hedged trading strategies to speculative strategies in an effort to hide previously incurred losses. Clearly, his reporting to multiple managers in a convoluted organizational structure led to ambiguity concerning who was responsible for performing specific oversight functions.
(Book 1, Module 9.2, LO 9.a)
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Question 84
In the case of Barings Bank, Nick Leeson incurred huge trading losses. Which of the following statements correctly describes one of the factors that led to the bankruptcy of Barings?
A
Barings had insufficient liquidity to cover marked to market losses.
B
Leeson had a supervisor controlling the back-office functions on his trades.
C
Leeson held speculative double-short positions in the market for Nikkei 225 futures contracts.
D
There was ambiguity concerning who was responsible for performing specific oversight functions.
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