WEBVTT 00:00:00.000 --> 00:00:02.220 I want you to picture something just for a second. 00:00:02.580 --> 00:00:06.320 Reach into your pocket or maybe check the cup 00:00:06.320 --> 00:00:09.599 holder in your car. Find a coin, a single one 00:00:09.599 --> 00:00:12.779 pound coin. It's a pretty trivial object, right? 00:00:12.880 --> 00:00:14.560 You might use it for a shopping cart at the supermarket. 00:00:14.779 --> 00:00:17.140 Maybe you get a piece of gum. It's basically 00:00:17.140 --> 00:00:19.239 loose change. It's kind of money you drop on 00:00:19.239 --> 00:00:21.640 the pavement and, you know, maybe not even bother 00:00:21.640 --> 00:00:24.500 to bend over and pick up. Exactly. Now take that 00:00:24.500 --> 00:00:28.239 one coin and I want you to imagine. Using it 00:00:28.239 --> 00:00:30.879 to buy a bank. A piggy bank. Not a piggy bank 00:00:30.879 --> 00:00:33.039 and not some, you know, fintech startup in a 00:00:33.039 --> 00:00:36.299 garage. I mean, one of the oldest, most prestigious, 00:00:36.479 --> 00:00:39.700 most aristocratic financial institutions on the 00:00:39.700 --> 00:00:41.679 entire planet. It sounds like this set up to 00:00:41.679 --> 00:00:44.420 a really bad joke. A man walks into a bank with 00:00:44.420 --> 00:00:47.539 a pound of coin. But as we're going to find out, 00:00:47.579 --> 00:00:49.880 financial history has a much darker sense of 00:00:49.880 --> 00:00:52.200 humor than fiction. We are talking, of course, 00:00:52.259 --> 00:00:54.619 about the spectacular, the almost unbelievable 00:00:54.619 --> 00:00:57.560 and frankly humiliating collapse of Barings Bank. 00:00:57.880 --> 00:01:01.920 In 1995, this institution, which had stood proud 00:01:01.920 --> 00:01:06.140 for 264 years, was sold. To the Dutch bank, ING. 00:01:06.280 --> 00:01:10.400 For the nominal sum of one pound. One. To really 00:01:10.400 --> 00:01:12.500 get your head around the sheer gravity of that, 00:01:12.519 --> 00:01:15.000 that one pound price tag. Yeah. You have to understand 00:01:15.000 --> 00:01:16.840 the history that was being sold for scrap metal. 00:01:16.959 --> 00:01:20.140 Right. This isn't a dot -com bubble burst. This 00:01:20.140 --> 00:01:22.620 is the bank that financed the Napoleonic Wars. 00:01:23.019 --> 00:01:25.420 This is the bank that effectively paid for the 00:01:25.420 --> 00:01:28.219 Louisiana Purchase, doubling the size of the 00:01:28.219 --> 00:01:31.219 United States. It was founded in 1762. Just think 00:01:31.219 --> 00:01:33.219 about that for a second. That's before America 00:01:33.219 --> 00:01:36.500 was even a country. This bank survived the American 00:01:36.500 --> 00:01:38.719 Revolution, the French Revolution, World War 00:01:38.719 --> 00:01:40.900 I, the Great Depression, World War II. It was 00:01:40.900 --> 00:01:43.560 a titan. It was the financial bedrock of the 00:01:43.560 --> 00:01:46.319 British Empire. And yet it wasn't a world war 00:01:46.319 --> 00:01:48.640 that killed it. It wasn't a pandemic or a revolution. 00:01:48.819 --> 00:01:51.920 It collapsed. It completely disintegrated in 00:01:51.920 --> 00:01:54.760 a matter of weeks because of one guy. One guy. 00:01:54.939 --> 00:01:58.280 A 28 -year -old trader in a striped jacket sitting 00:01:58.280 --> 00:02:00.939 at a computer terminal in Singapore hiding his 00:02:00.939 --> 00:02:03.340 mistakes. It's just the ultimate case study, 00:02:03.420 --> 00:02:05.739 isn't it? The tension between centuries of tradition 00:02:05.739 --> 00:02:09.699 and the raw, brutal speed of modernity. Absolutely. 00:02:09.759 --> 00:02:11.639 On one hand, you've got gentlemanly capitalism. 00:02:12.280 --> 00:02:15.539 titles, tea at four o 'clock. On the other, you 00:02:15.539 --> 00:02:19.080 have the lightning fast, high risk, testosterone 00:02:19.080 --> 00:02:22.120 fueled world of modern derivatives. And somewhere 00:02:22.120 --> 00:02:24.340 in the middle of all that, a catastrophic failure 00:02:24.340 --> 00:02:26.639 of risk management. And a failure of imagination. 00:02:27.000 --> 00:02:29.560 I think that's the real key. The people in charge 00:02:29.560 --> 00:02:31.879 in London, the ones running the bank, they just 00:02:31.879 --> 00:02:33.740 couldn't imagine that someone like Nicolese could 00:02:33.740 --> 00:02:37.620 destroy something as permanent, as solid as bearings. 00:02:37.900 --> 00:02:40.039 So that's our mission for this deep dive. We're 00:02:40.039 --> 00:02:42.389 going to trace this whole arc from being a global 00:02:42.389 --> 00:02:46.530 superpower to just total ruin. We need to understand 00:02:46.530 --> 00:02:49.889 how bearings literally shaped the world map and 00:02:49.889 --> 00:02:52.090 then how a complete lack of internal controls 00:02:52.090 --> 00:02:54.789 let one man burn the whole thing to the ground. 00:02:54.870 --> 00:02:56.789 And what we're going to find is that the seeds 00:02:56.789 --> 00:02:59.289 of its destruction. They were planted much, much 00:02:59.289 --> 00:03:01.689 earlier than anyone realized at the time. It's 00:03:01.689 --> 00:03:04.669 a story about hubris, about greed. And, you know, 00:03:04.669 --> 00:03:06.289 what happens when you let the fox design the 00:03:06.289 --> 00:03:08.169 security system for the hen house? OK, let's 00:03:08.169 --> 00:03:09.270 start at the beginning. We have to understand 00:03:09.270 --> 00:03:11.689 what was lost. We are setting the dial way back 00:03:11.689 --> 00:03:15.229 to 1762, London. The Seven Years' War is just 00:03:15.229 --> 00:03:17.509 winding down. The Industrial Revolution is starting 00:03:17.509 --> 00:03:20.629 to bubble up. And a man named Francis Baring 00:03:20.629 --> 00:03:23.849 establishes a company. Now, he was British born, 00:03:23.990 --> 00:03:26.830 but his family was originally German from Bremen. 00:03:27.769 --> 00:03:30.310 And it didn't start as a bank, right? They weren't 00:03:30.310 --> 00:03:32.129 immediately building vaults and issuing bonds? 00:03:32.310 --> 00:03:34.810 Oh, not at all. That's a very modern idea. In 00:03:34.810 --> 00:03:37.310 1762, it was the John and Frances Baring Company. 00:03:37.569 --> 00:03:39.650 And they were, for all intents and purposes, 00:03:39.949 --> 00:03:42.289 import -export merchants. What were they trading? 00:03:42.530 --> 00:03:45.870 They started with wool. Good, solid English wool. 00:03:45.990 --> 00:03:48.210 They were operating out of offices just off Cheapside 00:03:48.210 --> 00:03:51.289 in London. It was a very physical business. You 00:03:51.289 --> 00:03:53.129 buy the wool, you sell the dye, you ship the 00:03:53.129 --> 00:03:56.250 finished cloth. But Frances Baring was... He 00:03:56.250 --> 00:03:58.610 was incredibly ambitious. They gradually moved 00:03:58.610 --> 00:04:01.169 from just wool into all sorts of other commodities. 00:04:01.349 --> 00:04:03.210 And this is where we have to pause and address 00:04:03.210 --> 00:04:06.250 the darker side of that business right from the 00:04:06.250 --> 00:04:08.669 start. You can't really tell the story of 18th 00:04:08.669 --> 00:04:10.689 century British wealth without talking about 00:04:10.689 --> 00:04:13.210 where some of that capital came from. You can't. 00:04:13.210 --> 00:04:16.449 The sources are very clear on this. As they expanded 00:04:16.449 --> 00:04:19.230 into global trade, Barings provided financial 00:04:19.230 --> 00:04:23.310 services for the slave trade. It's a grim, inescapable 00:04:23.310 --> 00:04:26.350 reality of that world. The slave trade significantly 00:04:26.350 --> 00:04:28.670 enriched the Bering family and their business. 00:04:28.970 --> 00:04:32.329 That capital allowed them to expand, to take 00:04:32.329 --> 00:04:35.050 on bigger deals, to build their prestige. You 00:04:35.050 --> 00:04:37.350 really can't separate the accumulation of that 00:04:37.350 --> 00:04:40.129 early wealth from the mechanisms of the Atlantic 00:04:40.129 --> 00:04:43.089 slave trade. It was the engine of so much colonial 00:04:43.089 --> 00:04:45.329 wealth, and Bering's was right there in the gearbox. 00:04:45.930 --> 00:04:48.509 It's a very sobering context for the massive 00:04:48.509 --> 00:04:51.230 power we're about to see them use, because as 00:04:51.230 --> 00:04:53.550 they move from just trading goods to financing 00:04:53.550 --> 00:04:56.110 the trade of goods, they became what we now call 00:04:56.110 --> 00:04:58.550 a merchant bank. And to do that on a global scale, 00:04:58.730 --> 00:05:01.250 you need powerful friends. Their most important 00:05:01.250 --> 00:05:04.129 partner was a firm called Hope & Co. out of Amsterdam. 00:05:04.470 --> 00:05:06.189 Right, because Amsterdam was the financial center 00:05:06.189 --> 00:05:08.810 back then, not London. Not yet, no. Amsterdam 00:05:08.810 --> 00:05:11.569 was the heavyweight champion of the world. Hope 00:05:11.569 --> 00:05:13.589 & Co. was the most powerful merchant bank there, 00:05:13.689 --> 00:05:16.009 deeply involved with the Dutch East India Company. 00:05:16.970 --> 00:05:19.790 By partnering with them, Barings tapped into 00:05:19.790 --> 00:05:22.889 this huge network of European capital. And that 00:05:22.889 --> 00:05:26.329 network, that partnership, allowed them to pull 00:05:26.329 --> 00:05:28.970 off what is, I think, inarguably the biggest 00:05:28.970 --> 00:05:31.430 real estate deal in human history. The Louisiana 00:05:31.430 --> 00:05:36.220 Purchase. 1802, 1803, this is the moment where 00:05:36.220 --> 00:05:38.199 Barings goes from being just another successful 00:05:38.199 --> 00:05:41.100 London firm to being a genuine player on the 00:05:41.100 --> 00:05:43.480 world stage. This is where they become a superpower. 00:05:43.800 --> 00:05:45.660 I think most of us, you know, we remember the 00:05:45.660 --> 00:05:48.040 basics from history class. Thomas Jefferson bought 00:05:48.040 --> 00:05:50.279 a huge piece of land from France, doubled the 00:05:50.279 --> 00:05:52.879 size of the U .S. It sounds so simple. It sounds 00:05:52.879 --> 00:05:55.279 neat and tidy. The reality when you dig into 00:05:55.279 --> 00:05:57.540 the mechanics of the deal is incredibly messy. 00:05:57.959 --> 00:05:59.959 It's a geopolitical thriller. So set the scene 00:05:59.959 --> 00:06:02.220 for us. Okay, so you've got Napoleon Bonaparte 00:06:02.220 --> 00:06:04.540 in charge of France. He's looking at this massive 00:06:04.540 --> 00:06:07.000 territory in North America, Louisiana, and he's 00:06:07.000 --> 00:06:09.259 a pragmatist. He knows he can't defend it. The 00:06:09.259 --> 00:06:11.860 British Royal Navy, it controls the seas. He 00:06:11.860 --> 00:06:13.519 also knows he's about to go to war with Britain 00:06:13.519 --> 00:06:17.079 again, and he needs money. He needs cash for 00:06:17.079 --> 00:06:19.680 cannons, for ships, for paying soldiers. That 00:06:19.680 --> 00:06:21.800 land in America is just a liability waiting to 00:06:21.800 --> 00:06:24.199 be captured. So it's an asset he needs to liquidate 00:06:24.199 --> 00:06:27.100 fast. Right. And on the other side of the Atlantic, 00:06:27.199 --> 00:06:29.000 you have the United States. President Jefferson 00:06:29.000 --> 00:06:31.680 is terrified that Napoleon is going to block 00:06:31.680 --> 00:06:33.920 access to New Orleans and control the Mississippi 00:06:33.920 --> 00:06:35.939 River. Which would basically strangle the entire 00:06:35.939 --> 00:06:38.579 American economy west of the Appalachians. It 00:06:38.579 --> 00:06:41.160 would cripple them. So he desperately wants to 00:06:41.160 --> 00:06:44.759 buy it. The price tag was $15 million, which 00:06:44.759 --> 00:06:47.240 even then, for that much land, sounds like a 00:06:47.240 --> 00:06:49.660 steal. It is the bargain of the millennium. It 00:06:49.660 --> 00:06:51.259 works out as something like four cents an acre. 00:06:51.779 --> 00:06:53.759 But here's the problem, and this is why you need 00:06:53.759 --> 00:06:56.220 a bank like Barings. The United States government 00:06:56.220 --> 00:07:00.079 did not have $15 million in gold just sitting 00:07:00.079 --> 00:07:03.579 in a vault. And even if they did? Napoleon didn't 00:07:03.579 --> 00:07:05.959 want a check drawn on a U .S. bank. He didn't 00:07:05.959 --> 00:07:09.519 want American IOUs. He wanted gold in Paris yesterday. 00:07:09.939 --> 00:07:12.420 So you have a buyer with good credit, a seller 00:07:12.420 --> 00:07:15.740 with a desirable asset, but no hard currency 00:07:15.740 --> 00:07:18.480 to actually make the deal happen. A classic liquidity 00:07:18.480 --> 00:07:21.680 crisis. Enter Barings. This is where the whole 00:07:21.680 --> 00:07:24.600 sixth great power reputation begins. Francis 00:07:24.600 --> 00:07:27.699 Baring and his partners at Hope & Co. step into 00:07:27.699 --> 00:07:30.120 the middle. They bridge the gap between these 00:07:30.120 --> 00:07:32.540 two empires. How did they structure it? It was 00:07:32.540 --> 00:07:35.139 ingenious, really. The U .S. government issued 00:07:35.139 --> 00:07:37.579 bonds, basically government IOUs, to Barings. 00:07:37.819 --> 00:07:39.660 Barings then bought those bonds. But not for 00:07:39.660 --> 00:07:41.300 face value, I'm guessing. Oh, absolutely not. 00:07:41.459 --> 00:07:43.540 This is where the profit is. They bought the 00:07:43.540 --> 00:07:46.560 bonds at a very steep discount. The sources say 00:07:46.560 --> 00:07:50.379 they paid $87 .50 for every $100 of face value. 00:07:50.560 --> 00:07:53.600 So that 12 .5 % haircut, that's their fee, their 00:07:53.600 --> 00:07:55.779 risk premium. Exactly. Barry's is essentially 00:07:55.779 --> 00:07:58.079 saying, we'll give Napoleon the cash you need 00:07:58.079 --> 00:08:00.540 right now, and we will take on the risk of holding 00:08:00.540 --> 00:08:02.399 these American bonds and collecting the interest 00:08:02.399 --> 00:08:05.180 over the next 15 years. They're replacing a massive 00:08:05.180 --> 00:08:07.259 bet on the future of the United States. Which 00:08:07.259 --> 00:08:09.980 in 1803 was not a sure thing at all. The U .S. 00:08:09.980 --> 00:08:12.480 was basically a startup country. It was a risky 00:08:12.480 --> 00:08:14.699 venture. But here is the craziest part of the 00:08:14.699 --> 00:08:17.439 whole deal. The part that really shows you the 00:08:17.439 --> 00:08:20.779 kind of power Barings wielded. Go on. Britain 00:08:20.779 --> 00:08:24.040 and France were on the very brink of war. In 00:08:24.040 --> 00:08:26.779 fact, war did break out while this whole transaction 00:08:26.779 --> 00:08:28.660 was settling. Wait a minute. So you have a British 00:08:28.660 --> 00:08:33.620 bank, Barings, sending gold to Napoleon, which 00:08:33.620 --> 00:08:36.879 Napoleon is then immediately using to build ships 00:08:36.879 --> 00:08:39.809 and forge cannons. To attack Britain. Precisely. 00:08:39.889 --> 00:08:42.210 That sounds, I mean, isn't that treason? Here's 00:08:42.210 --> 00:08:44.629 the money to invade us, Napoleon. Good luck. 00:08:44.909 --> 00:08:47.909 Laughs. If you or I did that today, we'd be in 00:08:47.909 --> 00:08:50.850 a very dark room for a very long time. But back 00:08:50.850 --> 00:08:53.490 then, high finance operated on a different plane, 00:08:53.590 --> 00:08:55.730 almost above the nation state. The government 00:08:55.730 --> 00:08:58.529 must have known. Oh, they knew. The British prime 00:08:58.529 --> 00:09:00.789 minister at the time, Henry Addington, was fully 00:09:00.789 --> 00:09:03.490 aware. But his reasoning was, and I'm paraphrasing 00:09:03.490 --> 00:09:05.990 here. Yeah. It is arguably better that the money 00:09:05.990 --> 00:09:08.570 should be provided by a British merchant. than 00:09:08.570 --> 00:09:11.610 by anyone else. Wow. So the logic is, well, Napoleon's 00:09:11.610 --> 00:09:12.970 going to get the money one way or another. So 00:09:12.970 --> 00:09:14.549 a British bank might as well make the profit 00:09:14.549 --> 00:09:17.730 on the deal. That's it. It was profit over patriotism 00:09:17.730 --> 00:09:22.470 or maybe long term commercial pragmatism. Francis 00:09:22.470 --> 00:09:24.250 Baring and the British government believed that 00:09:24.250 --> 00:09:26.490 an expanding United States would ultimately be 00:09:26.490 --> 00:09:28.529 good for British trade. They were playing a much 00:09:28.529 --> 00:09:30.629 longer game. And what about the actual logistics? 00:09:30.870 --> 00:09:33.269 This isn't a wire transfer. How do you move that 00:09:33.269 --> 00:09:36.309 kind of value? You put your own people on boats. 00:09:37.140 --> 00:09:40.320 Francis Baring's son, Alexander Baring, personally 00:09:40.320 --> 00:09:42.379 traveled to Paris to negotiate with the French 00:09:42.379 --> 00:09:44.840 Treasury. Then he sailed to the United States 00:09:44.840 --> 00:09:47.440 to physically pick up the bonds and bring them 00:09:47.440 --> 00:09:50.419 back to Europe. That's incredible. The bank's 00:09:50.419 --> 00:09:53.360 own partner is sailing across the Atlantic, dodging 00:09:53.360 --> 00:09:56.419 storms and potentially Royal Navy patrols, carrying 00:09:56.419 --> 00:09:58.679 the paperwork that will double the size of America. 00:09:58.960 --> 00:10:02.000 It just shows their power. By 1818, after the 00:10:02.000 --> 00:10:04.840 wars were over, a French minister, the Duc de 00:10:04.840 --> 00:10:06.960 Richelieu, famously declared that there were 00:10:06.960 --> 00:10:09.480 six great powers in Europe. England, France, 00:10:09.759 --> 00:10:12.639 Prussia, Austria, Russia, and Bering Brothers. 00:10:12.820 --> 00:10:14.980 The sixth great power. That's not just a nickname. 00:10:15.120 --> 00:10:16.740 That's a geopolitical statement. They're ranked 00:10:16.740 --> 00:10:19.720 alongside empires. And they acted like one. They 00:10:19.720 --> 00:10:21.860 weren't just observing history. They were actively 00:10:21.860 --> 00:10:25.750 financing it. During the War of 1812, Barings 00:10:25.750 --> 00:10:27.649 was helping to finance the United States government. 00:10:27.830 --> 00:10:30.649 Again, with the irony, the War of 1812 was the 00:10:30.649 --> 00:10:33.029 U .S. versus Britain. The British burned down 00:10:33.029 --> 00:10:35.370 the White House and a British bank is funding 00:10:35.370 --> 00:10:37.909 the other side. Capital has no nationality, as 00:10:37.909 --> 00:10:40.809 the old saying goes. By 1843, they were the exclusive 00:10:40.809 --> 00:10:43.049 agent to the U .S. government in Europe. They 00:10:43.049 --> 00:10:45.730 were just deeply, deeply embedded in America's 00:10:45.730 --> 00:10:48.669 growth. They financed the railroads that built 00:10:48.669 --> 00:10:51.429 the West. There's a specific example in the notes 00:10:51.429 --> 00:10:53.950 about that with the Canadian Pacific Railway. 00:10:54.090 --> 00:10:57.090 Yes, Barings was instrumental in financing the 00:10:57.090 --> 00:10:59.669 completion of that railway, which is what really 00:10:59.669 --> 00:11:02.909 created the nation of Canada as a unified coast 00:11:02.909 --> 00:11:05.149 -to -coast entity. And there's even a town named 00:11:05.149 --> 00:11:08.090 after one of them. There is, Revelstoke in British 00:11:08.090 --> 00:11:10.509 Columbia. It was named after the senior partner 00:11:10.509 --> 00:11:12.730 of the bank at the time, Edward Baring, who was 00:11:12.730 --> 00:11:15.610 the first Baron Revelstoke. They also financed 00:11:15.610 --> 00:11:18.570 huge American railways like the Atchison, Topeka, 00:11:18.690 --> 00:11:20.779 and Santa Fe. So they're literally building the 00:11:20.779 --> 00:11:23.019 infrastructure of the new world. But it wasn't 00:11:23.019 --> 00:11:25.159 all triumphs. Closer to home, they had a more 00:11:25.159 --> 00:11:27.940 controversial chapter. The Irish famine. Yes. 00:11:28.419 --> 00:11:30.480 This is a difficult part of their story, and 00:11:30.480 --> 00:11:33.480 it really shows the flip side of that aristocratic, 00:11:33.539 --> 00:11:37.740 detached worldview. In 1845, the potato crop 00:11:37.740 --> 00:11:40.759 in Ireland failed. It was an absolute humanitarian 00:11:40.759 --> 00:11:43.039 catastrophe. And the British government stepped 00:11:43.039 --> 00:11:46.419 in. The prime minister, Sir Robert Peel, appointed 00:11:46.419 --> 00:11:48.929 Barings to be the government's agent. to supply 00:11:48.929 --> 00:11:51.850 Indian corn maize to Ireland for famine relief. 00:11:52.110 --> 00:11:54.549 And did they do it? They did, for a time. Between 00:11:54.549 --> 00:11:58.009 late 1845 and the summer of 1846, they acted 00:11:58.009 --> 00:12:01.509 as the purchasing agent. But then, in 1846, the 00:12:01.509 --> 00:12:04.309 government changed its policy and bearings. They 00:12:04.309 --> 00:12:06.389 just walked away. You walked away in the middle 00:12:06.389 --> 00:12:09.649 of a famine. Why? It was about reputation. They 00:12:09.649 --> 00:12:11.649 stated officially that they would refuse any 00:12:11.649 --> 00:12:13.750 future commissions in famine relief to avoid, 00:12:13.990 --> 00:12:16.490 and this is a direct quote, the blame this could 00:12:16.490 --> 00:12:19.289 so easily entail. That is unbelievably cold. 00:12:19.389 --> 00:12:21.629 We don't want bad PR if this goes wrong. So we're 00:12:21.629 --> 00:12:23.909 out. It's a stark look into the mindset of the 00:12:23.909 --> 00:12:26.549 institution. They were a business first, last 00:12:26.549 --> 00:12:29.769 and always. But despite these controversies, 00:12:29.769 --> 00:12:32.210 their cultural dominance in the 19th century 00:12:32.210 --> 00:12:35.169 was just absolute. This is where we get the Jules 00:12:35.169 --> 00:12:38.700 Verne reference. Yes. around the world in 80 00:12:38.700 --> 00:12:41.139 days. When Phileas Fogg makes his famous bet 00:12:41.139 --> 00:12:43.500 that he can circumnavigate the globe in 80 days, 00:12:43.639 --> 00:12:46.019 he guarantees it with a check for 20 ,000 pounds. 00:12:46.220 --> 00:12:49.039 And that check is drawn on. Barings bank. Exactly. 00:12:49.299 --> 00:12:51.419 Verne didn't even have to explain it. He used 00:12:51.419 --> 00:12:54.320 bearings as shorthand for money that was as solid 00:12:54.320 --> 00:12:56.120 as the ground beneath your feet. If your money 00:12:56.120 --> 00:12:59.220 was with bearings, it was safe. Period. And just 00:12:59.220 --> 00:13:00.879 to complete the picture of their establishment 00:13:00.879 --> 00:13:02.779 credentials, there's even a link to the royal 00:13:02.779 --> 00:13:05.639 family. There is. Ned Baring, the first Baron 00:13:05.639 --> 00:13:07.519 Revelstoke, the man Revelstoke is named after, 00:13:07.620 --> 00:13:09.720 his daughter Margaret was the great -grandmother 00:13:09.720 --> 00:13:12.519 of Diana, Princess of Wales. So the bank's bloodline 00:13:12.519 --> 00:13:14.500 is directly intertwined with the future King 00:13:14.500 --> 00:13:17.779 of England. Yes. It all paints this picture of 00:13:17.779 --> 00:13:21.980 utter invincibility, a power unto themselves, 00:13:22.320 --> 00:13:25.600 connected to royalty, financing empires. What 00:13:25.600 --> 00:13:28.860 could possibly go wrong? Well, as is so often 00:13:28.860 --> 00:13:33.539 the case, arrogance, hubris. And the first major 00:13:33.539 --> 00:13:36.639 crack in that invincible armor appeared in 1890. 00:13:37.120 --> 00:13:40.320 The Panic of 1890, also known as the Bering Crisis. 00:13:40.720 --> 00:13:42.480 It sounds like a prequel to what happened in 00:13:42.480 --> 00:13:45.080 1995. It's frighteningly similar. It's almost 00:13:45.080 --> 00:13:47.860 a perfect dress rehearsal. In the late 1880s, 00:13:47.860 --> 00:13:50.159 Bering's got a bit too hungry for high returns. 00:13:50.500 --> 00:13:52.879 They started underwriting a huge amount of debt 00:13:52.879 --> 00:13:55.100 in South America, particularly Argentina and 00:13:55.100 --> 00:13:57.669 Uruguay. Argentina seems to be a recurring character 00:13:57.669 --> 00:13:59.990 in the history of financial crises. It is indeed. 00:14:00.289 --> 00:14:02.710 There was a massive land boom going on in Argentina. 00:14:03.509 --> 00:14:05.830 Barings was heavily, heavily exposed. They were 00:14:05.830 --> 00:14:09.029 backing bonds for waterworks, drainage systems, 00:14:09.190 --> 00:14:11.429 new railways. And then the music stopped. The 00:14:11.429 --> 00:14:13.710 bubble burst. Political unrest hit Buenos Aires. 00:14:13.889 --> 00:14:15.309 There was a revolution. The president resigned. 00:14:15.990 --> 00:14:18.070 Argentina was on the verge of defaulting on all 00:14:18.070 --> 00:14:20.169 its debt. And Barings was holding the bag. They 00:14:20.169 --> 00:14:21.750 were holding the entire bag. They had guaranteed 00:14:21.750 --> 00:14:23.690 the bonds, but they didn't have the liquid reserves 00:14:23.690 --> 00:14:26.350 to actually make good on those guarantees. They 00:14:26.350 --> 00:14:28.850 were, for all intents and purposes, insolvent. 00:14:29.029 --> 00:14:31.549 But they didn't collapse. Why not? What was different 00:14:31.549 --> 00:14:34.970 in 1890? In 1890, Barings was considered too 00:14:34.970 --> 00:14:38.049 big to fail. Ah, that phrase. The governor of 00:14:38.049 --> 00:14:40.269 the Bank of England at the time, a man named 00:14:40.269 --> 00:14:43.070 William Litterdale. knew that if bearings went 00:14:43.070 --> 00:14:46.250 under, it could trigger a global financial meltdown. 00:14:46.450 --> 00:14:48.830 It would destroy the reputation of the city of 00:14:48.830 --> 00:14:52.870 London. So he organized a bailout. Who paid for 00:14:52.870 --> 00:14:55.070 it? A whole consortium of other banks, funnily 00:14:55.070 --> 00:14:57.629 enough, headed by the Guinness family firm. The 00:14:57.629 --> 00:15:00.070 Bank of England guaranteed the debts, and everyone 00:15:00.070 --> 00:15:02.570 else chipped in to keep bearings afloat. So they 00:15:02.570 --> 00:15:05.320 survived, but they must have been wounded. Deeply 00:15:05.320 --> 00:15:07.960 wounded. It came at a massive cost. The bank 00:15:07.960 --> 00:15:10.000 was forced to restructure from a private partnership 00:15:10.000 --> 00:15:12.919 into a public limited liability company. The 00:15:12.919 --> 00:15:15.860 Bering family themselves lost huge personal fortunes 00:15:15.860 --> 00:15:17.759 because their own wealth was pledged to the bank. 00:15:17.899 --> 00:15:20.240 And they lost their top dog status to rivals 00:15:20.240 --> 00:15:22.840 like the Rothschilds. It was a humiliating near 00:15:22.840 --> 00:15:24.600 -death experience. And I have to imagine that 00:15:24.600 --> 00:15:27.159 kind of trauma changes the culture of a place. 00:15:27.340 --> 00:15:29.460 Completely. Yeah. And this is so important for 00:15:29.460 --> 00:15:31.200 understanding what happened a century later. 00:15:31.610 --> 00:15:34.029 For the next 100 years, Barings became incredibly 00:15:34.029 --> 00:15:35.970 conservative. We call it the period of caution. 00:15:36.230 --> 00:15:39.169 They were just gun -shy. They became the boring 00:15:39.169 --> 00:15:41.970 bank. Which, ironically, probably saved them 00:15:41.970 --> 00:15:43.789 later on. It absolutely saved them during the 00:15:43.789 --> 00:15:46.169 Great Depression. Well, other banks in the 1920s 00:15:46.169 --> 00:15:48.549 were lending huge sums to Germany to help it 00:15:48.549 --> 00:15:51.850 recover from World War I. Barings refused. They 00:15:51.850 --> 00:15:54.190 remember the sting of Argentina. So when the 00:15:54.190 --> 00:15:56.570 crash of 29 came and all those German loans went 00:15:56.570 --> 00:15:59.500 bad, Barings was relatively safe. Okay, so let's 00:15:59.500 --> 00:16:02.299 fast forward to the 1980s and early 90s. We have 00:16:02.299 --> 00:16:05.600 this bank that is smaller, more cautious, but 00:16:05.600 --> 00:16:08.659 still incredibly prestigious. It's seen as blue 00:16:08.659 --> 00:16:12.370 -blooded, safe, maybe a bit dusty. But the world 00:16:12.370 --> 00:16:15.269 of finance is exploding. Yes, the Big Bang of 00:16:15.269 --> 00:16:18.429 deregulation in London in 1986 changed absolutely 00:16:18.429 --> 00:16:20.610 everything. Suddenly, the old gentleman's club 00:16:20.610 --> 00:16:23.090 was over. The markets were thrown open. Aggressive 00:16:23.090 --> 00:16:25.110 American banks were flooding in. Everything was 00:16:25.110 --> 00:16:27.809 getting faster, riskier, more lucrative. And 00:16:27.809 --> 00:16:31.250 Barings looked at this new world and felt left 00:16:31.250 --> 00:16:34.110 out. They had a serious case of what you might 00:16:34.110 --> 00:16:37.450 call prestige anxiety. They were the old aristocrats 00:16:37.450 --> 00:16:40.049 watching the loud, rich, new money have all the 00:16:40.049 --> 00:16:42.259 fun. They wanted to get back in the game. They 00:16:42.259 --> 00:16:44.759 wanted to be cool again. So they tried to modernize? 00:16:44.919 --> 00:16:47.440 They did. They started buying up stockbrokers 00:16:47.440 --> 00:16:49.639 and other firms to build a modern securities 00:16:49.639 --> 00:16:52.539 business, to sit alongside their old -fashioned 00:16:52.539 --> 00:16:54.519 banking arm. They were trying to catch up. And 00:16:54.519 --> 00:16:56.899 that desire to catch up, that brings us to Singapore 00:16:56.899 --> 00:17:00.220 and to the man of the hour, Nicholas Leeson. 00:17:00.399 --> 00:17:03.279 Nick Leeson. You couldn't invent a character 00:17:03.279 --> 00:17:05.039 more different from the traditional bearings 00:17:05.039 --> 00:17:07.519 man. He wasn't an aristocrat. He didn't go to 00:17:07.519 --> 00:17:09.990 Eaton or Oxford. He was a working class lad from 00:17:09.990 --> 00:17:12.750 Watford. His dad was a plasterer. A borrow boy, 00:17:12.910 --> 00:17:14.710 as they used to call them in the city. Exactly. 00:17:15.069 --> 00:17:17.289 But he was sharp. He was ambitious. He had a 00:17:17.289 --> 00:17:19.990 certain charm. In this new aggressive trading 00:17:19.990 --> 00:17:23.589 environment, that was seen as an asset. So in 00:17:23.589 --> 00:17:26.490 1992, Baring sent him out to Singapore to run 00:17:26.490 --> 00:17:29.150 their new derivatives trading operation on the 00:17:29.150 --> 00:17:31.730 SUMEX, the Singapore International Monetary Exchange. 00:17:32.240 --> 00:17:34.700 Now, this is really important. Before we get 00:17:34.700 --> 00:17:36.940 into the fraud, we have to understand what he 00:17:36.940 --> 00:17:40.319 was supposed to be doing. Because on paper, his 00:17:40.319 --> 00:17:43.680 job was meant to be boring, low risk. Oh, absolutely. 00:17:44.000 --> 00:17:47.339 He wasn't sent there to be a cowboy. In theory, 00:17:47.440 --> 00:17:49.299 he was there to run a money printing machine 00:17:49.299 --> 00:17:52.819 that was perfectly safe. He was tasked with arbitrage. 00:17:53.019 --> 00:17:55.380 Okay, let's break down arbitrage for everyone 00:17:55.380 --> 00:17:58.259 listening. Give me the simple, real world version. 00:17:58.480 --> 00:18:01.369 Okay. Imagine you're at a huge flea market. You 00:18:01.369 --> 00:18:03.809 see a vintage watch at one stall, and the price 00:18:03.809 --> 00:18:07.089 is $100. Right. You know for a fact that at a 00:18:07.089 --> 00:18:08.890 stall on the complete other side of the market, 00:18:08.950 --> 00:18:12.529 the exact same watch is selling for $105. If 00:18:12.529 --> 00:18:14.950 you can run fast enough, you buy for $100, spread 00:18:14.950 --> 00:18:17.910 across the market, and sell for $105. I've just 00:18:17.910 --> 00:18:20.990 made $5 risk -free. The key is you have to lock 00:18:20.990 --> 00:18:23.309 in both prices at the same time before they change. 00:18:23.509 --> 00:18:26.529 Speed and execution. That's all it is. Leeson 00:18:26.529 --> 00:18:30.369 was trading Nikkei 225 futures, basically, contracts 00:18:30.369 --> 00:18:32.450 betting on the future value of the Japanese stock 00:18:32.450 --> 00:18:35.049 market. These contracts were traded in two different 00:18:35.049 --> 00:18:38.029 places, on the Osaka Exchange in Japan and on 00:18:38.029 --> 00:18:40.349 the Cimex in Singapore. So it's like the watch 00:18:40.349 --> 00:18:42.569 being sold in two different stalls. The price 00:18:42.569 --> 00:18:44.490 might be slightly different for a split second. 00:18:44.789 --> 00:18:47.690 Precisely. Because of tiny time lags or market 00:18:47.690 --> 00:18:50.630 inefficiencies, the price would griefily diverge. 00:18:50.910 --> 00:18:54.230 Leeson's entire job was to spot that tiny difference, 00:18:54.410 --> 00:18:56.990 buy the cheap one in Osaka and simultaneously 00:18:56.990 --> 00:18:59.569 sell the expensive one in Singapore. And because 00:18:59.569 --> 00:19:01.609 he's doing this with millions and millions of 00:19:01.609 --> 00:19:04.470 the bank's pounds, those tiny little pennies 00:19:04.470 --> 00:19:07.609 on each trade add up to a huge, steady profit. 00:19:07.910 --> 00:19:10.180 It's a volume game. It's supposed to be like 00:19:10.180 --> 00:19:12.720 shelling peas. It's not gambling. It's just exploiting 00:19:12.720 --> 00:19:15.019 a mathematical certainty. If you do it right, 00:19:15.160 --> 00:19:17.599 you literally cannot lose money because your 00:19:17.599 --> 00:19:19.220 positions are hedged. You've bought and sold 00:19:19.220 --> 00:19:21.460 at the same time. It sounds perfect. Safe money. 00:19:22.099 --> 00:19:24.759 So how does a guy doing something so boring manage 00:19:24.759 --> 00:19:27.660 to destroy a 200 -year -old bank? Because of 00:19:27.660 --> 00:19:30.559 a fatal, unforgivable flaw in how Barings set 00:19:30.559 --> 00:19:33.180 up their Singapore office. This is the single 00:19:33.180 --> 00:19:35.559 most critical point in the entire story. In any 00:19:35.559 --> 00:19:37.839 properly run bank, you have the front office, 00:19:38.039 --> 00:19:40.059 the traders, the people making the bets, and 00:19:40.059 --> 00:19:42.539 you have the back office or settlements. They're 00:19:42.539 --> 00:19:44.519 the accountants, the people who check the records, 00:19:44.619 --> 00:19:47.019 confirm the trades, and make sure the money actually 00:19:47.019 --> 00:19:49.019 goes where it's supposed to go. A separation 00:19:49.019 --> 00:19:52.099 of powers. It is the absolute golden rule of 00:19:52.099 --> 00:19:55.319 banking. The person writing the checks cannot 00:19:55.319 --> 00:19:58.059 also be the person balancing the checkbook. The 00:19:58.059 --> 00:20:00.680 poacher cannot be the gamekeeper. But in Singapore? 00:20:00.920 --> 00:20:03.319 In Singapore, Barings was trying to save a bit 00:20:03.319 --> 00:20:05.259 of money on headcount. They thought it was a 00:20:05.259 --> 00:20:07.720 small, simple operation. So they allowed Nick 00:20:07.720 --> 00:20:10.220 Leeson to hold both jobs. He was the general 00:20:10.220 --> 00:20:12.500 manager of trading. And he was the head of settlement 00:20:12.500 --> 00:20:15.480 operations. Wait, wait. So he was, he was checking 00:20:15.480 --> 00:20:17.339 his own work. He was marking his own homework. 00:20:17.519 --> 00:20:19.660 He was the student and the teacher. It meant 00:20:19.660 --> 00:20:21.680 he could operate with zero effective supervision 00:20:21.680 --> 00:20:24.299 from London. He could make a trade. And if it 00:20:24.299 --> 00:20:26.920 went wrong, he could just bury it. Because he 00:20:26.920 --> 00:20:29.099 was in charge of the burial ground. That's just, 00:20:29.200 --> 00:20:31.640 that's insane. And that brings us to the infamous 00:20:31.640 --> 00:20:36.799 secret account. The 888888 account. The five 00:20:36.799 --> 00:20:39.839 eights account. In many Asian cultures, the number 00:20:39.839 --> 00:20:42.980 eight is considered lucky. It sounds like the 00:20:42.980 --> 00:20:47.539 word for wealth or prosper. For Barings, it was 00:20:47.539 --> 00:20:50.259 the number of their doom. What was this account 00:20:50.259 --> 00:20:53.160 originally for? It was set up as a standard error 00:20:53.160 --> 00:20:56.079 account. Every trading desk has one. If a trader 00:20:56.079 --> 00:20:58.700 makes a small mistake, buys when they meant to 00:20:58.700 --> 00:21:01.700 sell, you know, a typo. They put the erroneous 00:21:01.700 --> 00:21:03.819 trade in the error account to be sorted out later. 00:21:04.180 --> 00:21:07.019 It's for small administrative screw -ups. But 00:21:07.019 --> 00:21:09.799 Leeson used it as a secret dumping ground. It 00:21:09.799 --> 00:21:12.059 started small. Leeson's story is that it all 00:21:12.059 --> 00:21:14.200 began when one of his junior traders made a mistake 00:21:14.200 --> 00:21:17.380 that lost about 20 ,000 pounds. To protect her, 00:21:17.440 --> 00:21:20.440 to be the good guy boss, he hid the loss in account 00:21:20.440 --> 00:21:23.980 88888. His plan was, I'll just make a few good 00:21:23.980 --> 00:21:25.839 trades next week and earn it back. No one will 00:21:25.839 --> 00:21:28.000 ever know. But you can't make back 20 ,000 pounds 00:21:28.000 --> 00:21:30.569 quickly with safe arbitrage. Arbitrage makes 00:21:30.569 --> 00:21:33.049 pennies. Exactly. To make that kind of money 00:21:33.049 --> 00:21:36.029 back quickly, you have to gamble. And that's 00:21:36.029 --> 00:21:38.049 the moment he crossed the line. He stopped doing 00:21:38.049 --> 00:21:40.410 safe arbitrage and started taking naked positions. 00:21:40.890 --> 00:21:42.869 He wasn't hedging anymore. He was just making 00:21:42.869 --> 00:21:45.910 massive one -way bets on the future direction 00:21:45.910 --> 00:21:48.210 of the Japanese market. He was just guessing. 00:21:48.470 --> 00:21:51.269 He was guessing. And when he guessed wrong and 00:21:51.269 --> 00:21:55.630 lost money, he hid the loss in 88888. When he 00:21:55.630 --> 00:21:58.670 guessed right, he'd report the profit to London. 00:21:59.099 --> 00:22:01.640 Now, here's the technical trick he used. He was 00:22:01.640 --> 00:22:03.900 able to get into the computer system and alter 00:22:03.900 --> 00:22:05.960 the reporting so that the London office would 00:22:05.960 --> 00:22:08.359 never even see a report for that specific account. 00:22:08.559 --> 00:22:10.839 He essentially made it invisible to his bosses. 00:22:11.039 --> 00:22:13.119 So as far as London knew, he was this trading 00:22:13.119 --> 00:22:15.660 genius, this whiz kid making the millions in 00:22:15.660 --> 00:22:18.180 steady, safe profits. They see all the wins. 00:22:18.440 --> 00:22:20.940 But they're completely blind to the ever -growing 00:22:20.940 --> 00:22:23.819 mountain of losses in the secret account. He 00:22:23.819 --> 00:22:27.130 was hemorrhaging cash. By December of 1994, the 00:22:27.130 --> 00:22:30.089 secret losses in account 80 -80 -88 had ballooned 00:22:30.089 --> 00:22:33.789 to 200 million pounds. 200 million. But, and 00:22:33.789 --> 00:22:35.990 this is the scale of the deception, he officially 00:22:35.990 --> 00:22:39.130 reported a profit of 102 million pounds for the 00:22:39.130 --> 00:22:43.109 year. So there's a 300 million pound gap between 00:22:43.109 --> 00:22:45.650 what his bosses thought was happening and reality. 00:22:46.009 --> 00:22:48.690 And here's the real tragedy. If they had caught 00:22:48.690 --> 00:22:53.150 him then, in December 1994, the bank could have 00:22:53.150 --> 00:22:56.539 survived. They had about 350 million pounds in 00:22:56.539 --> 00:23:00.019 capital. Taking a 200 million pound loss would 00:23:00.019 --> 00:23:01.920 have been catastrophic. People would have been 00:23:01.920 --> 00:23:04.680 fired. It would have been a huge scandal. But 00:23:04.680 --> 00:23:06.819 the bank itself would have still existed. But 00:23:06.819 --> 00:23:09.319 they didn't catch him. And the bets he was making 00:23:09.319 --> 00:23:11.660 were getting bigger and bigger. You mentioned 00:23:11.660 --> 00:23:14.799 he was using a specific, very dangerous strategy. 00:23:15.279 --> 00:23:18.440 Yes. A short straddle. This is crucial to understanding 00:23:18.440 --> 00:23:20.900 how the losses exploded so quickly. Explain it 00:23:20.900 --> 00:23:23.680 to me like I'm five. Okay. A short straddle is 00:23:23.680 --> 00:23:26.339 a bet on boredom. You are betting that the market 00:23:26.339 --> 00:23:28.920 will stay flat, it won't go up very much, and 00:23:28.920 --> 00:23:30.779 it won't go down very much. You're betting on 00:23:30.779 --> 00:23:32.920 stability. And how do you make money from that? 00:23:33.099 --> 00:23:34.960 You effectively become an insurance salesman. 00:23:35.059 --> 00:23:37.480 You sell two types of options contracts to other 00:23:37.480 --> 00:23:39.819 traders, one that pays out if the market goes 00:23:39.819 --> 00:23:42.099 up a lot and one that pays out if it goes down 00:23:42.099 --> 00:23:45.160 a lot. You collect the cash, the premium. from 00:23:45.160 --> 00:23:47.500 selling this insurance. So Leeson is the insurance 00:23:47.500 --> 00:23:49.759 company. He takes all this cash up front and 00:23:49.759 --> 00:23:51.660 says, don't worry, folks, nothing exciting is 00:23:51.660 --> 00:23:53.559 going to happen. Exactly. And as long as the 00:23:53.559 --> 00:23:56.119 market stays calm and quiet, he just keeps all 00:23:56.119 --> 00:23:59.480 the premium money. It looks like free cash. It's 00:23:59.480 --> 00:24:02.279 a strategy often described as picking up pennies 00:24:02.279 --> 00:24:04.160 in front of a steamroller. You can pick up a 00:24:04.160 --> 00:24:06.579 lot of pennies. But if that steamroller ever 00:24:06.579 --> 00:24:09.349 actually hits you, you're flattened. The risk 00:24:09.349 --> 00:24:11.890 is unlimited. If the market makes a huge move 00:24:11.890 --> 00:24:14.509 in either direction, up or down, you lose a fortune. 00:24:14.849 --> 00:24:17.349 And Leeson had sold tens of thousands of these 00:24:17.349 --> 00:24:20.170 contracts. He had bet the entire bank that the 00:24:20.170 --> 00:24:22.589 Japanese stock market would remain quiet. And 00:24:22.589 --> 00:24:26.650 then, on January 17, 1995, the universe decided 00:24:26.650 --> 00:24:30.430 to call his bluff. The catalyst. The Black Swan 00:24:30.430 --> 00:24:33.400 event. The Great Hanshin earthquake hits the 00:24:33.400 --> 00:24:37.240 city of Kobe in Japan. A devastating 7 .3 magnitude 00:24:37.240 --> 00:24:39.779 quake. Buildings collapse. Highways fall over. 00:24:39.940 --> 00:24:42.000 Thousands of people are killed. And obviously, 00:24:42.180 --> 00:24:44.500 a disaster of that scale is not good for the 00:24:44.500 --> 00:24:46.839 Japanese economy. The steamrollers started to 00:24:46.839 --> 00:24:50.170 move. It moved very, very fast. The Nicky stock 00:24:50.170 --> 00:24:53.049 index plummeted. Market volatility went through 00:24:53.049 --> 00:24:56.069 the roof. Leeson's short straddle strategy was 00:24:56.069 --> 00:24:59.170 instantly massively underwater. All those insurance 00:24:59.170 --> 00:25:01.730 policies he had sold were suddenly being cashed 00:25:01.730 --> 00:25:04.950 in at once. Now, a normal, rational trader in 00:25:04.950 --> 00:25:07.069 that position would call their boss, confess 00:25:07.069 --> 00:25:08.890 everything and cut their losses immediately. 00:25:09.190 --> 00:25:11.750 Take the pain. But Leeson wasn't rational anymore. 00:25:12.009 --> 00:25:14.930 He was in a deep, dark hole. And his only thought 00:25:14.930 --> 00:25:18.349 was to dig deeper. He doubled down. He made a 00:25:18.349 --> 00:25:20.930 new, even bigger bet. He convinced himself the 00:25:20.930 --> 00:25:23.009 market would rebound quickly. He thought the 00:25:23.009 --> 00:25:24.869 Japanese government will step in. There will 00:25:24.869 --> 00:25:27.009 be a construction boom to rebuild. The market 00:25:27.009 --> 00:25:29.470 will bounce back. So what did he do? He started 00:25:29.470 --> 00:25:32.150 buying Nikky Futures contracts, not for arbitrage, 00:25:32.190 --> 00:25:35.390 just pure naked gambling. He started buying thousands 00:25:35.390 --> 00:25:37.849 and thousands of them, trying to single handedly 00:25:37.849 --> 00:25:40.259 prop up the market. At one point, Nick Leeson 00:25:40.259 --> 00:25:43.099 personally accounted for almost half of all the 00:25:43.099 --> 00:25:46.180 Open Nikki futures contracts on the entire Singapore 00:25:46.180 --> 00:25:48.859 exchange. He was trying to fight the entire global 00:25:48.859 --> 00:25:52.339 market with Barings money. He was. And to keep 00:25:52.339 --> 00:25:55.920 those massive positions open, he needed a staggering 00:25:55.920 --> 00:25:59.160 amount of cash every single day to pay what's 00:25:59.160 --> 00:26:01.779 called margin to the exchange. So where did he 00:26:01.779 --> 00:26:04.440 get the money? He asked London for it. And this 00:26:04.440 --> 00:26:06.180 is the part of the story that just defies belief. 00:26:06.829 --> 00:26:09.569 He would just call his bosses in London and invent 00:26:09.569 --> 00:26:13.250 a reason. I need 50 million pounds to fund a 00:26:13.250 --> 00:26:16.710 new trade for a big client. Or I need 20 million 00:26:16.710 --> 00:26:19.130 to cover a short -term timing difference. And 00:26:19.130 --> 00:26:21.359 London just sent it. No questions asked. They 00:26:21.359 --> 00:26:23.539 sent it. They wired hundreds and hundreds of 00:26:23.539 --> 00:26:25.839 millions of pounds to him in Singapore. But why? 00:26:25.960 --> 00:26:27.559 Why didn't they ask to see the client's name? 00:26:27.660 --> 00:26:29.460 Why didn't they check the paperwork? A combination 00:26:29.460 --> 00:26:32.720 of incompetence and confirmation bias. They thought 00:26:32.720 --> 00:26:35.339 Leeson was their golden goose. In their minds, 00:26:35.359 --> 00:26:37.619 if he was asking for huge sums of money, it must 00:26:37.619 --> 00:26:39.779 be because he was doing huge profitable trades. 00:26:40.329 --> 00:26:43.210 They interpreted the massive cash drain as a 00:26:43.210 --> 00:26:45.690 sign of incredible success. It's like a parent 00:26:45.690 --> 00:26:47.750 who keeps giving their kid money for college 00:26:47.750 --> 00:26:49.849 books because they can't bear to believe the 00:26:49.849 --> 00:26:52.230 kid is actually gambling it all away. It's a 00:26:52.230 --> 00:26:54.369 perfect analogy. And you have to remember the 00:26:54.369 --> 00:26:57.130 culture clash. The senior managers in London 00:26:57.130 --> 00:27:00.609 were these old school aristocratic bankers. They 00:27:00.609 --> 00:27:02.289 didn't really understand the complex mathematics 00:27:02.289 --> 00:27:04.490 of derivatives. They were intimidated by it. 00:27:04.549 --> 00:27:07.069 They didn't want to ask a stupid question and 00:27:07.069 --> 00:27:08.750 look foolish in front of this young whiz kid 00:27:08.750 --> 00:27:10.789 from Watford. So they just signed the checks. 00:27:11.150 --> 00:27:13.430 So the losses are just spiraling out of control. 00:27:13.490 --> 00:27:15.410 The market keeps falling. Leasing keeps buying. 00:27:15.609 --> 00:27:19.029 When did the music finally stop? Thursday, February 00:27:19.029 --> 00:27:22.960 23rd, 1995. Leeson finally realized the game 00:27:22.960 --> 00:27:25.599 was up. The bank's auditors were in the Singapore 00:27:25.599 --> 00:27:28.359 office, and they were finally asking specific 00:27:28.359 --> 00:27:32.440 pointed questions about the 88888 account that 00:27:32.440 --> 00:27:34.980 he couldn't deflect. The cash demands from the 00:27:34.980 --> 00:27:37.740 exchange were now so colossal that London had 00:27:37.740 --> 00:27:39.920 finally said, we literally have no more cash 00:27:39.920 --> 00:27:42.940 to send you. So what does he do? He runs. He 00:27:42.940 --> 00:27:44.799 leaves a note on his desk that says, I'm sorry. 00:27:45.180 --> 00:27:47.539 Walks out of the office, goes home, tells his 00:27:47.539 --> 00:27:49.319 wife Lisa they have to leave immediately. She 00:27:49.319 --> 00:27:51.480 had no idea about any of the fraud. And they 00:27:51.480 --> 00:27:53.680 drive to the airport. He just flees the country. 00:27:54.079 --> 00:27:57.559 Gets on a plane to Kuala Lumpur, Malaysia. He 00:27:57.559 --> 00:27:59.579 checks into the region hotel and just waits. 00:28:00.539 --> 00:28:03.000 He spends the weekend watching the news, waiting 00:28:03.000 --> 00:28:05.559 for the world to find out what he'd done. He 00:28:05.559 --> 00:28:07.680 then sends a fax from the hotel, a confession 00:28:07.680 --> 00:28:10.220 note, to Peter Bering, the chairman of the bank 00:28:10.220 --> 00:28:12.900 in London. Can you even imagine being Peter Baring 00:28:12.900 --> 00:28:14.839 at that moment? You're the head of this ancient, 00:28:15.019 --> 00:28:18.019 invincible institution. And you get a fax that 00:28:18.019 --> 00:28:20.279 says, so sorry, I seem to have lost the bank. 00:28:20.500 --> 00:28:23.630 It was pure chaos in London. The auditors in 00:28:23.630 --> 00:28:25.910 Singapore finally forced their way into the computer 00:28:25.910 --> 00:28:29.869 system and opened up the IDON88888 account file. 00:28:30.089 --> 00:28:33.490 The numbers were just horrifying. The final tally 00:28:33.490 --> 00:28:37.829 of the losses was 827 million pounds. 827 million. 00:28:38.130 --> 00:28:41.190 About 1 .3 billion U .S. dollars at the time. 00:28:41.269 --> 00:28:42.890 And how did that compare to the bank's total 00:28:42.890 --> 00:28:45.130 capital? It was more than double the bank's entire 00:28:45.130 --> 00:28:47.630 available trading capital. He had lost every 00:28:47.630 --> 00:28:50.009 penny the bank owned and then lost it all over 00:28:50.009 --> 00:28:52.569 again. The bank wasn't just broke. It was a black 00:28:52.569 --> 00:28:55.230 hole of debt. Utter annihilation. The Bank of 00:28:55.230 --> 00:28:57.490 England tried to orchestrate a rescue. Just like 00:28:57.490 --> 00:29:00.069 they did in 1890, the governor got all the heads 00:29:00.069 --> 00:29:01.950 of the other big banks together for a secret 00:29:01.950 --> 00:29:04.190 weekend meeting. They tried to put together a 00:29:04.190 --> 00:29:06.869 bailout package. But this time, the hole was 00:29:06.869 --> 00:29:10.730 just too deep. And crucially, the risk was unquantifiable. 00:29:11.089 --> 00:29:13.650 No one knew for sure if there were even more 00:29:13.650 --> 00:29:16.130 losses hidden somewhere. No one was willing to 00:29:16.130 --> 00:29:18.349 touch it. The too -big -to -fail principle didn't 00:29:18.349 --> 00:29:20.910 apply this time. Not this time. So on Sunday, 00:29:21.009 --> 00:29:24.410 February 26, 1995, the Bank of England announced 00:29:24.410 --> 00:29:27.609 that Barings Bank was insolvent. Done. Finished. 00:29:28.410 --> 00:29:30.490 Administrators were called in. And all the employees 00:29:30.490 --> 00:29:32.250 around the world. They showed up for work on 00:29:32.250 --> 00:29:35.029 Monday morning in London, New York, Tokyo, Hong 00:29:35.029 --> 00:29:37.049 Kong to find the doors locked and a notice on 00:29:37.049 --> 00:29:40.750 the door. Jobs gone. And for many senior people, 00:29:40.890 --> 00:29:43.210 their life savings gone because their bonuses 00:29:43.210 --> 00:29:45.630 were paid in Barings stock, which was now worthless. 00:29:45.890 --> 00:29:48.569 Just a brutal, brutal end. So the bank is dead. 00:29:49.450 --> 00:29:52.710 But the brand name, the client lists, it must 00:29:52.710 --> 00:29:54.970 have been worth something. It was. The Dutch 00:29:54.970 --> 00:29:58.230 bank ING saw an opportunity. They were interested 00:29:58.230 --> 00:30:00.109 in the asset management and corporate finance 00:30:00.109 --> 00:30:02.630 parts of the business, so they swooped in and 00:30:02.630 --> 00:30:05.430 bought the entire bank for the sum of one pound. 00:30:06.029 --> 00:30:07.990 There's that coin again? Of course, the real 00:30:07.990 --> 00:30:10.769 price was that ING also had to assume all of 00:30:10.769 --> 00:30:14.009 Bering's massive liabilities. But the symbolic 00:30:14.009 --> 00:30:18.069 headline price to buy 233 years of British history 00:30:18.069 --> 00:30:22.069 was one single pound coin. And Nick Leeson, the 00:30:22.069 --> 00:30:24.289 man who did all this, he's hiding out in a hotel 00:30:24.289 --> 00:30:26.509 in Malaysia. He didn't stay hidden for long. 00:30:26.670 --> 00:30:29.170 He tried to fly back to Europe, hoping he'd get 00:30:29.170 --> 00:30:31.829 a more lenient sentence in a British court. But 00:30:31.829 --> 00:30:33.730 he was arrested during a layover in Frankfurt, 00:30:33.869 --> 00:30:36.460 Germany on March 2nd. And extradited back to 00:30:36.460 --> 00:30:39.599 Singapore. Yes. And Singapore has a very, very 00:30:39.599 --> 00:30:42.359 tough reputation for financial crime. He was 00:30:42.359 --> 00:30:44.500 sentenced to six and a half years in the infamous 00:30:44.500 --> 00:30:46.819 Chengi prison. And did he serve the full term? 00:30:46.960 --> 00:30:48.980 He served about four years. He was released early 00:30:48.980 --> 00:30:51.559 in 1999 after being diagnosed with colon cancer 00:30:51.559 --> 00:30:54.519 in prison, which he survived. And then in this 00:30:54.519 --> 00:30:56.819 bizarre twist that only seems to happen in the 00:30:56.819 --> 00:30:58.660 modern world, he became a kind of celebrity. 00:30:58.859 --> 00:31:02.019 He absolutely did. It's wild. He wrote a book 00:31:02.019 --> 00:31:05.480 in prison, Rogue Trader. which was then turned 00:31:05.480 --> 00:31:07.880 into a Hollywood film starring Ewan McGregor. 00:31:08.059 --> 00:31:10.200 He became a fixture on the after -dinner speaking 00:31:10.200 --> 00:31:12.960 circuit, getting paid to tell his story. He was 00:31:12.960 --> 00:31:15.319 even briefly the CEO of an Irish football club. 00:31:15.599 --> 00:31:18.660 It's just incredible. And there's a detail in 00:31:18.660 --> 00:31:21.140 the notes that perfectly captures how strange 00:31:21.140 --> 00:31:25.440 this whole saga became. In 2007, his old trading 00:31:25.440 --> 00:31:27.599 jacket, the one he wore on the floor of the Cimex. 00:31:27.759 --> 00:31:29.579 The blue and yellow striped one. It was sold 00:31:29.579 --> 00:31:34.869 on eBay for £21 ,000. People love a villain, 00:31:35.009 --> 00:31:37.410 I suppose, or at least a souvenir from a famous 00:31:37.410 --> 00:31:40.210 disaster. It's a relic from one of the most spectacular 00:31:40.210 --> 00:31:42.710 financial crashes in history. We should mention, 00:31:42.769 --> 00:31:44.690 though, that one small piece of the Bering legacy 00:31:44.690 --> 00:31:47.369 did actually survive the crash. That's right. 00:31:47.450 --> 00:31:49.930 The Bering Foundation. It's a charitable foundation 00:31:49.930 --> 00:31:52.210 that the family had established back in 1969. 00:31:52.829 --> 00:31:55.569 And because its assets were legally ring -fenced 00:31:55.569 --> 00:31:57.670 and separate from the bank, it was untouched 00:31:57.670 --> 00:31:59.910 by the collapse. It's still around today. giving 00:31:59.910 --> 00:32:02.670 out millions in grants. So some of that historic 00:32:02.670 --> 00:32:04.930 wealth, which, as we discussed, has a complex 00:32:04.930 --> 00:32:08.529 history. A very complex history, tracing all 00:32:08.529 --> 00:32:10.849 the way back to wool and the slave trade and 00:32:10.849 --> 00:32:14.069 empire. Some of it is now being used for good 00:32:14.069 --> 00:32:17.650 causes. A small silver lining, I suppose. A very 00:32:17.650 --> 00:32:19.970 small one. So let's step back. We've gone from 00:32:19.970 --> 00:32:22.750 financing the Louisiana Purchase to a guy in 00:32:22.750 --> 00:32:25.109 his 20s hiding losses in a computer account named 00:32:25.109 --> 00:32:27.190 after lucky numbers. What's the big takeaway 00:32:27.190 --> 00:32:30.549 here? For me, it's the fragility of it all. We 00:32:30.549 --> 00:32:32.789 think of these huge ancient institutions as being 00:32:32.789 --> 00:32:35.269 permanent fixtures of the world. Bering survived 00:32:35.269 --> 00:32:37.650 Napoleon. It survived two world wars and the 00:32:37.650 --> 00:32:39.990 Great Depression. It had traditions and connections 00:32:39.990 --> 00:32:41.950 that seemed unbreakable. But it couldn't survive 00:32:41.950 --> 00:32:44.869 one unsupervised employee with a computer. Exactly. 00:32:45.259 --> 00:32:48.259 Technology is a force multiplier. In the 1800s, 00:32:48.259 --> 00:32:50.680 if a partner made a bad bet in Argentina, it 00:32:50.680 --> 00:32:52.720 took weeks for the ship to sail back to London 00:32:52.720 --> 00:32:55.299 with the bad news. You had time to react. In 00:32:55.299 --> 00:32:57.960 1995, and even more so today, you could lose 00:32:57.960 --> 00:33:00.119 a billion dollars in the blink of an eye. It 00:33:00.119 --> 00:33:02.539 really raises a pretty provocative question for 00:33:02.539 --> 00:33:04.839 all of us now, doesn't it? We like to think our 00:33:04.839 --> 00:33:07.180 modern financial system is safer. We have better 00:33:07.180 --> 00:33:09.579 regulations. We have compliance officers. We 00:33:09.579 --> 00:33:12.599 have AI monitoring trades. We've learned the 00:33:12.599 --> 00:33:16.400 lesson of bearings. But have we? Really? That 00:33:16.400 --> 00:33:18.940 is the multi -trillion dollar question. Because 00:33:18.940 --> 00:33:20.700 if the person who is supposed to be watching 00:33:20.700 --> 00:33:23.500 the system is also the person who can manipulate 00:33:23.500 --> 00:33:27.099 the system, history would suggest no institution 00:33:27.099 --> 00:33:30.140 is ever truly safe. The tools get faster, the 00:33:30.140 --> 00:33:32.759 money gets bigger. The basic human psychology, 00:33:33.000 --> 00:33:35.660 the greed, the fear, the desperate need to hide 00:33:35.660 --> 00:33:38.140 a mistake, that hasn't changed one bit since 00:33:38.140 --> 00:33:41.319 1762. Does the speed of information today just 00:33:41.319 --> 00:33:43.440 mean that a 200 -year -old institution can be 00:33:43.440 --> 00:33:46.119 destroyed even faster than Barings was? I think 00:33:46.119 --> 00:33:48.059 the answer is almost certainly yes. In a digital 00:33:48.059 --> 00:33:50.819 world, trust and capital can evaporate in seconds. 00:33:51.460 --> 00:33:53.740 Barings was really the first great casualty of 00:33:53.740 --> 00:33:55.619 the digital trading age, and I very much doubt 00:33:55.619 --> 00:33:57.640 it will be the last. On that slightly terrifying 00:33:57.640 --> 00:33:59.380 note, I think I'm going to go check my own bank 00:33:59.380 --> 00:34:01.759 balance just to be on the safe side. Probably 00:34:01.759 --> 00:34:03.779 not a bad idea. Thanks for listening to this 00:34:03.779 --> 00:34:05.460 deep dive. We'll see you next time.