A great scam

[fuji]

Here is a great scam / business opportunity:

Find an opportunity that returns about 3.5% per year, and leverage it up 10x so that you earn a 35% per year return on it 14 years out of 15. However, you face a 99% loss of your investment one year out of every fifteen. Do this with other people's money and pay yourself a fat bonus every time you earn them a positive return--14 years out of 15. When you lose money of course you don't get paid.

Actually with those odds your business loses money over time, so you don't really deserve a bonus. Actually, those odds are very close to the odds you would get at a craps table in Vegas--the house always wins in the end, but you do get lucky a few times along the way.

However most people won't figure that out, so 14 out of 15 years you can pay yourself a fat bonus for doing nothing better with their money than gambling it at the craps table in Vegas.

What am I talking about?

This is fundamentally the model that investment banks run on. It IS the business model of an investment bank: Take really risky positions that more or less break even over time, but which post healthy returns in most years, and every now and then bankrupt you.

The fat bonuses paid to people in financial companies over the past 14 years were not really earned--they were always simply gambling away people's money in a game with near break even odds.

 

[Uzo]

nice...sounds like working at WaMu or LEH...

 

[alexmst]

Anybody remember Nick Leeson and the early to mid 1990's? The idea of using the bank's own accounts to basically gamble about what might happen tomorrow. Will the Tokyo market go up or down, etc? It is gambling, not investing. Huge profits if you win (for you and the bank). Welcome to the casino, where you bet money that isn't yours and get a cut if you win. LEH was doing the majority of it's trades not for clients but for itself.

This wasn't a Warren Buffet way of picking a company with growth potential and holding your investment in it as it grows...this was spin the roulette wheel at Atlantic City type investing, Fuji is right in his casino remark. Despite the problems now, a lot of the players made millions and parked that money in mansions, art, vacation homes, the Cayman Islands, etc. The unlucky ones at LEH kept all their bonuses in stock...The Times said one LEH trader had 100 million worth of LEH stock a few months ago that is now worth not much.

From Wikipedia:

Leeson was born in Watford, north-west of London. He attended Parmiter's School. After leaving school in 1984, having been in the Sixth Form, he landed a job as a clerk with the exclusive private bank, Coutts, followed by a string of jobs with other banks, ending up with Barings in the early 1990s; by 1992, he was appointed general manager of a new operation in futures markets on the Singapore International Monetary Exchange (SIMEX).[2] Barings had held a seat on SIMEX for some time, but did not activate it until Leeson came aboard.

From 1992, Leeson made unauthorized speculative trades that at first made large profits for his employer, £10 million which accounted for 10% of Barings' annual income. He earned a bonus of £130,000 on his salary of £50,000.

His luck soon went sour, and he used one of Barings' error accounts (accounts used to correct mistakes made in trading) to hide his losses. The account was numbered 88888 -- a number considered very lucky in Chinese numerology. Leeson claims that this account was first used to hide an error made by one of his colleagues; rather than buy 20 contracts as the customer had ordered, she had sold them, costing Barings £20,000.

However, Leeson used this account to cover further bad trades. He insists that he never used the account for his own gain, but in 1996 the New York Times quoted "British press reports" as claiming that investigators had located approximately $35 million in various bank accounts tied to him.[2]

Management at Barings Bank also allowed Leeson to remain Chief Trader while being responsible for settling his trades, jobs that are usually done by two different people. This made it much simpler for him to hide his losses from his superiors.

By the end of 1992, the account's losses exceeded £2 million, which ballooned to £208 million by the end of 1994.

There were clues in Leeson's life choices off the trading floor that he was headed for trouble. In October 1994 he was bailed out of a Singaporean jail after an incident in which he exposed his buttocks in public.

His superiors at Barings persuaded The International Financing Review to re-write a planned reference to the incident in its gossip column.

The beginning of the end occurred on January 16, 1995, when Leeson placed a short straddle in the Stock Exchange of Singapore and Tokyo stock exchanges, essentially betting that the Japanese stock market would not move significantly overnight. However, the Kobe earthquake hit early in the morning on January 17, sending Asian markets, and Leeson's investments, into a tailspin. Leeson attempted to recoup his losses by making a series of increasingly risky new investments, this time betting that the Nikkei Stock Average would make a rapid recovery. But the recovery failed to materialize, and he succeeded only in digging a deeper hole.

Realising the gravity of the situation, Leeson left a note reading "I'm Sorry" and fled on February 23. Losses eventually reached £827 million (US$1.4 billion), twice the bank's available trading capital. After a failed bailout attempt, Barings was declared insolvent on February 26.

After fleeing to Malaysia, Thailand and finally Germany, Leeson was arrested and extradited back to Singapore on March 2, 1995, though his wife Lisa was allowed to return to England. While he had authorisation for the January 15 short straddle, he was charged with fraud for deceiving his superiors about the riskiness of his activities and the scale of his losses. Several observers (and Leeson himself) have placed much of the blame on the bank's own deficient internal auditing and risk management practices. Indeed, the Singapore authorities' report on the collapse was scathingly critical of Barings management, claiming that senior officials knew or should have known about the "five eights" account.

Sentenced to six and a half years in Changi Prison in Singapore, he was released from prison in 1999, having been diagnosed with colon cancer, which he has survived despite grim forecasts at the time.

While in prison, in 1996, Leeson published an autobiography, Rogue Trader, detailing his acts. A review in the financial columns of the New York Times stated, "This is a dreary book, written by a young man very taken with himself, but it ought to be read by banking managers and auditors everywhere."[2] In 1999, the book was made into a film of the same name starring Ewan McGregor and Anna Friel

 

[Berlin]

Nick Leeson that MOFO ? Ha !

Sure I remember. I also recall Queen of England expressing sadness over Barings' going kaput ...


Didn't know that mofo wrote a book though.