In 1995, Nick Leeson, a 28-year-old trader for Barings Bank, brought down the City’s oldest finance house by, among other things, betting that the Bank of Japan (BoJ) couldn’t keep rates low after a financial crash led to a government borrowing spree. The devastating Kobe earthquake was the final blow. The BoJ cut rates, bond prices rose and his losses spiralled to $1.4bn. His failed gamble that markets would beat Japan sank Barings.
Barings’ collapse is perhaps a spectacular example of the “widowmaker” trade, where speculators think they can outsmart Japanese authorities. They’ve ended up with egg on their face as their gamble on Japan losing fiscal control proved misguided. Japan, with its own currency and a central bank working with the government, shows how the state shapes markets, not the other way round.
