The world between Finance and Ethics: Looking back at Barings Bank and Libor Scandal

The world between Finance and Ethics: Looking back at Barings Bank and Libor Scandal

About Author:

Mayukh Sen, currently pursuing his post-graduate in Economics at Symbiosis School of Economics, Pune. He has always been optimistic learner, having a pragmatic viewpoint on the diversified domain of economics, politics and finance. An energetic debater with enthusiasm in sports, he has an innate acknowledgement of garnering experience through the intricacies of daily life

Overview

In the world of finance, profit becomes a personality, the client becomes assets and success becomes integrity. Often the co-existence between success in the domain of finance and ethical responsibility is blurred due to competitive environment structure. Taking an analogy, it is imperative to understand that a child growing in a social framework where his or her peer is determined to be successful based on achievements in becoming a doctor or engineer, will likely to grade himself/herself in the same metric. Meticulously, in the sphere of finance, it revolves around a similar aura. Working at an environment where more value is given to profit-making skillset, especially for traders, than financial pragmatism, makes a person dwindle between the world of finance and ethics. Sometimes, to run the extra mile, ethical consideration takes a back seat. Pragmatic viewpoint is hindered, so much so that once the line is blurred, the financial world stays afloat on greed with no insight on accountability. Over the discourse of the time, the ideology reverberating with financial pundits has always been about deliberating whether there lies a field where finance and ethics co-exists. Looking back at two of the biggest frauds in the history of finance proves to be a prolific case study for the future generation dwelling to enter the financial spectrum. 

The Discourse

The history of finance has been scared with scandals, be it the fraudulent workings of Societe General or the wrongdoings of the legendary investor in the India market – Harshad Mehta, but the fall of Barings Back in the early ’90s remains one of the cases which shook the financial world. The regulators realized the power of a trader, on the other hand, people all over the world realized the intensity of exploitation. Nick Leeson, a name which stood the test of time. He is the cynic in the financial domain, worked at Barings Investment bank in Singapore dealing in futures, an instrument of the derivative. Derivatives appear as just another financial instrument, just like a stock or foreign exchange but the ambition of the derivative instrument is highly significant in the financial market. It provides hedgers with the opportunity of hedging, it provides arbitragers with the opportunity of profit-making and lastly, it provides the greedy with the opportunity of exploiting their greed. Due to the nature of derivatives, Warren Buffet refers to it as “financial weapons of mass destruction”. Derivatives are essentially contracts between two mutual parties who wish to buy and sell an underlying asset at future date for a pre-determined price. No one predicted derivatives to become the nightmare of Barings Bank in the year to come. 

Nick Leeson was trading at a particular segment of derivatives known as futures. Although, the nature of futures is such as that it is traded on exchanges which says a lot about security rather any deal taking place under the table, however, the fall of Barings Bank showcased that even the most secured financial instrument has major flaws in the way it is regulated. Margin payments, a terminology which fascinates the traders, is the means which Nick Leeson exploited to the core which ultimately led to the collapse of Barings Bank in 1995. 

Much has been said about the case, but the underlying philosophy revolves around the workings of the Barings Bank. Internal management was weak. The problem arose when Nick was made in charge of both the accounting and trading department of Barings Bank in Singapore. It was a child’s play for him to extort the nature of his deals and change the accounts of margin payment accounts. 

Over the discourse of the time, the technological integration in the financial corporations in the form of Artificial Intelligence, Machine Learning has made fraudulent activities much more stringent with computers analysing your behaviour at every second of the day but back in 1995 when Jeff Bezos initiated the process of forming Amazon, technology was not utilized as it is today. The underlying asset that was dealt with by Nick Leeson which was Nikkei 225, a stock market index of Japan, he placed bets sometimes against as well as the movements of the market. But the Kobe Earthquake in 1995, ruined his chances of turning his losses and returning as the genius he was referred to us by his fellow traders. 

Ten years from then began a large scale scandal and this time, it was not a trader or an investor, this time it was the major banks who took undue advantage of the financial system. Name the banks and they were involved in the scandal, ranging from Barclays to UBS. In financial literature, it is termed as the Libor Scandal. London Interbank Offered Rate (LIBOR), a benchmark interest rate which determines the cost of borrowings of the banks. The highlight of this rate is that most of the banks in the United States, United Kingdom uses this rate to determine the rate at extended to the public in the form of auto, school, consumer or personal loans. Well, it must sound fascinating at first to know that Libor rate which is internationally accepted rate even today, was manipulated but then soon the realization of the intensity of this exploitation hits the financial understandings which conform the saying “Anything is possible” and “Everything is fair”. Thomas Hayes worked at UBS, and again there exists a striking similarity with Nick Leeson, that he was a trader of a derivative. In between 2005 and 2008, along with Thomas Hayes, the representatives of different banks manipulated the interest rate showcased as Libor rates to the global banking sector. Well, the biggest frauds in the history of finance never go for long. In the end, it unravels.

Ethical Consideration in the domain of Finance

Even before the Barings Bank fraudulent case or the Libor Scandal, various frauds of undue intensity was committed. But the question remains that people often find the faults in the financial system and they exploit it till it is busted. However, the fraudsters have never been acquitted or convicted to the intensity that they commit the fraud. Finance is an area which resonates with each and every individual in the global world and a fraud exploits billion of people. It is time that with the combined efforts of the international financial corporations, a common citizen must be given the cherry on the top of the cake when a fraud of such intensity occurs. In the end, it is our hard-earned money at stake.

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