Theoretically Leeson had lots of supervisors; in reality none exercised any real control over him. Barings operated a 'matrix' management system, where managers who are based overseas report to local administrators and to a product head (usually based at head office or the regional headquarters). Leeson's Singapore supervisors were James Bax, regional manager South Asia and a director of BFS, and Simon Jones, regional operations manager South Asia, also a director of BFS and chief operating officer of Barings Securities Singapore. Jones and the heads of the support functions in Singapore also had reporting lines to the Group-wide support functions in London. Yet both Bax and Jones told the BoBS inquiry that they did not feel operationally responsible for Leeson. Bax felt Leeson reported directly to Baker or Walz on trading matters and to Settlements/Treasury in London for backoffice matters. Jones felt his role in BFS was limited only to administrative matters and concentrated on the securities side of Barings' activities in South Asia.
Leeson's reporting lines for product profitability are not clear cut since his supervisors have disputed who was directly responsible for him from January 1, 1994. His ultimate boss was Ron Baker, head of the financial products group. But who had day-to-day control over him? Mary Walz, global head of equity financial products, insists that she thought Fernando Gueler, head of equity derivatives proprietary trading in Tokyo was in charge of Leeson's intra-day activities since the latter's switching activities were booked in Tokyo. However, Gueler insists that in October 1994, Baker told him that Leeson would report to London and not Tokyo. He thus assumed that Walz would be in charge of Leeson. Walz herself still disputes this claim. Tapes of telephone conversations show that Leeson spoke frequently to both Gueler and Walz. (The bottom line however is that Gueler reported to Walz.)
Two important incidents vividly illustrate the cavalier attitude Barings had towards supervising Leeson. The first involves two letters to BFS from SIMEX. In a letter dated 11 January, 1995; SIMEX senior vice-president for audit and compliance Yu Chuan Soo, complained about a margin shortfall of about US$116 million in account '88888' and that Barings had appeared to break SIMEX rule 822 by previously financing the margin requirements of this account, (which appeared in SIMEX's system as a customer account.) SIMEX also noted that the initial margin requirement of this account was in excess of US$342 million. BFS was asked to provide a written explanation of the margin difference on account '88888' and of its inability to account for the problem in the absence of Leeson.
No warning lights went off in Singapore. No one investigated who this customer really was and why he was having difficulties in meeting margin payments or why he had such a huge position; or the credit risk Barings faced if this 'customer' defaulted on the margins that Barings had paid on its behalf. A copy of the letter was not sent to operational heads in London. Simon Jones did not press Leeson for an explanation; indeed he dealt with the matter by allowing Leeson to draft Barings' response to SIMEX.
The second incident did come to the attention of London but again was dealt with unsatisfactorily, perhaps because Barings' personnel themselves are unsure about what really happened. At the beginning of February 1995, Coopers & Lybrand brought to the attention of London and Simon Jones the fact that US$83 million apparently due from Spear, Leeds & Kellogg, a US investment group, had not been received. No one is sure how this multi-million dollar receivable came about. One version of events is that BFS, through Leeson, had traded or broked an over-the-counter deal between Spear, Leeds & Kellogg, and BNP, Tokyo. The transaction involved 200 50,000 call options, resulting in a premium of 7.778 billion (US$83 million). The second version was that an 'operational error' had occurred; i.e. a payment had been made to a wrong third-party in December 1994.
Both versions had very serious control implications for Barings. If Leeson had sold or broked an OTC option, then he had engaged in an unauthorised activity. Yet he was not admonished for doing so; nor is there any record of Barings' management taking any steps to ensure that it did not happen again. If the SLK receivable was an operational error, Barings had to tighten up its back-office procedures.
