The document summarizes three cases related to international finance: 1) The collapse of Baring Bank due to rogue trader Nick Leeson's unauthorized speculative trading which accumulated over $1.2 billion in losses. Recommendations include improved oversight and investigation of large funding requests. 2) The potential use of weather derivatives by an electric utility to hedge revenue from temperature dependent demand. A proposed weather swap with Enron is described. 3) The failed merger of Vivendi Universal and Seagram due to huge debt levels and poor cash management after Vivendi's acquisition spree in media and telecom.

1. The Pre-course Assignment of
International Finance
Group members
Magdy A.Sattar
Abd El-Hameed Mohamed
Yasser Kortam

2. Group Objectives
 To analysis the three cases.
 To recommend what implementations should
have been done in order to avoid the collapse of
BARING BANK.
 To create either a futures, an option of a swap
linked with weather for ENRON WEATHER
DRIVATIVES.
 To answer the questions at the end of the
VIVENDI & SEAGRAM case and to find what
has been happening lately for Vivendi Universal.

3. Presentation Elements
 The BARING BANK case presentation
 The ENRON WEATHER derivatives case
presentation.
 The VIVENDI & SEGRAM case
presentation.

4. First Case
 The Collapse of Baring Group.

5. First Case Elements
 BaringGroup presentation..
 Current situation & key names.
 Case summary.
 Account 88888.

6. First Case Elements
 Identified
facts & indicators.
 How did Leeson deceive
everyone?
 Conclusions & reasons.
 Recommendations.

7. 1-Baring Group Presentation
 The Baring Group was undergoing an
organizational restructuring, creating the Baring
Investment Bank Group (BIB), to be an
integrating structure to conduct both the
banking and the securities business of the
Group. The group functioned on a matrix
management structure. They were selling and
buying money, money value is their core
business.

8. 2- Current Situation & Key Names
 Baring Futures (Singapore) BFS,
Sep. 1986.
 Baring Securities Limited “BSL”.
 Singapore International Monetary
Exchange Ltd (SIMEX).
 BFS start trading on SIMEX July
1992.

9. 2- Current Situation & Key Names
 Mr. Lesson joined BSL in 1989 in the
settlement department.
 In April 1992 Mr. Leeson was posted by
BSL to BFS to establish the settlement
operations of BFS.
 It was decided that Mr. Leeson would also
be involved in trading at BFS, as its floor
manager at SIMEX.

10. 2- Current Situation & Key Names
 Mr. Leeson was reporting to a local
manager in BFS, and to his product
manager in London.
 “ALCO” the high-level Asset & Liability
Committee that monitor the Baring
Group’s risk positions, trading limits,
trading performance, and the allocation of
funding.
 Mr. Norris the CEO of the Group.

11. 3- Case Summary
 The senior managers of BG did not take firm
actions to address the problem?
 The matrix management structure of BFS did
not work in practice.
 In 1994 the Group Treasury proposed a
regional Treasurer to coordinate and resolve
the funding problems, Mr. Norris, resisted
this on the ground of cost?

12. 3- Case Summary
 October 1994 the internal auditor highlighted a
significant risk, that Mr. Leeson could override
internal controls.
 January 1995 two letters send by SIMEX
questioned BFS to meet its financial obligations.
 BFS answer on Feb. 10, 1995 that the entire
assets of the Group were available to enable
BFS to meet its financial obligations.

13. 3- Case Summary
 This letter singed by Mr. Hawes (Group
Treasurer), and approved by ALCO?
 In 1994 Dec. the external auditors discovered
a discrepancy of (70m $).
 When reported to London Mr. Norris
downplayed the significance of the matter, and
discouraged all independent investigations?

14. 3- Case Summary
 Mr. Norris took no action against Mr. Leeson,
and instead allowed him to increase the size of
the positions he managed?
 One week before the collapse a supervisor with
BSL discover a discrepancy of 128m $, on
Feb.17 1995.
 Between Feb. 17 1995 and Feb. 23 (the night
Mr. Leeson Fled Singapore) BSL remitted to BFS
a sum of over 300m $.

15. 4- Account 88888
 The transactions were distinguished by:
 The large size of positions.
 Not hedged by matching positions.
 Consistently reflected losses.
 Cumulative losses, Sep. 1992 (6m $).
 Cumulative losses, Oct. 1993 (8m $).
 Cumulative losses, Dec. 1994 (24m $).
 By the collapse Feb. 1995 losses are, (1.2 billion $)

16. 5-Identified Facts & Indicators
 Mr. Leeson was a 25-year old settlements’
officer with no experience when he first
came to Singapore.
 Mr. Leeson opened account 88888 and
booked large volume of transactions in it
(July 1992).
 Mr. Leeson innovated a series of measures
to conceal the true nature of the account
from the external auditors and his
superiors.

17. 5-Identified Facts & Indicators
 The net effect of these transactions was to
artificially inflate the Baring Group’s reported
profits which were attributed to his
performance.
 Information related to account 88888 and the
margin calls on the account was available in
London at all times.
 In spite of the growing discrepancy between the
funds remitted to BFS and the transactions in
respect to which the funds had been requested,
other Baring Group companies continued to
remit funds to BFS.

18. 6- How did Leeson Deceive
Everyone?
 Break down the total number of cross-trade
contracts into several different trader at prices
different to those transacted on the floor, but
still reconciling to the total originally traded.
 Entry of fictitious trades which were never
crossed on the floor of the exchange.
 These abovementioned actions were
necessary to the create the deception that the
reported profitability in the switching accounts
was a result of authorized arbitrage activity.

19. 7- Conclusions & Reasons
 This is classical case of lack of control and poor
financial management.
 Barings collapsed because it could not meet the
enormous trading obligations, which Leeson
established in the name of the bank.
 Barings had outstanding notional futures positions
on Japanese equities and interest rates of US$ 27
billion.

20. 8- Recommendations
 The collapse could have been avoided if:
 The group had questioned the integrity and
competence of Mr. Leeson having twice made false
statements that there were no unsatisfied judgment
debts against him.
 The group has thoroughly and promptly investigate
the growing difficulty in recording Mr. Leeson's
funding request.
 Steps had been taken to overcome the inability of
Group Treasury and BSL settlements since 1994.

21. 8- Recommendations
 The significant risk highlighted by the
internal auditors had been addressed.
 Initiatives such as the Asian Regional Treasurer
or the middle office person had been effectively
implemented.
 ALCO had taken Me. Leeson to task for
increasing his positions, despite it’s instructions,
that he should reduce it.

22. 8- Recommendations
 The external auditor discovery of discrepancy
had been fully investigated and resolved.
 The reasons behind the requests for very large
amounts of funds by Mr. Leeson, in January and
February 1995, had been analyzed and
understood.
 ALCO had understood and effectively addressed
the concerns expressed by SIMEX in its letters to
BFS.

23. Second Case
 The ENRON Weather Derivatives
Case.

24. Second Case Elements
 Firm presentation.
 Current situation.
 Measuring Weather Risk.
 Motives and instruments for hedging
weather risk.

25. Second Case Elements
 Structures of Weather protection products.
 The Market for weather protection.
 A swap Contract Elements.
 Conclusions & Recommendations.

26. 1-Firm Presentation
 Pacific Northwest Electric (PNW) is a
significant producer of electric power
 It covers the Pacific Northwest region of
USA
 Marry Watts, the chief financial office of
PNW

27. 1-Firm Presentation
 Company revenue affected by winter temp
 the colder the season the greater the revenue.
 Enron Corporation is the world’s leading
integrated natural gas and electricity company
 The Co. delivers Physical commodities, risk
management and financial services to provide
energy solutions to customers around the world

28. 2- Current Situation
 Marry Watt is reviewing the financial plan
for PNW 2000 – 2001 for winter season,
 PNW revenue in 1999 $11 Billion, net
income $800 million and Earning per share
(EPS) was $1.04
 Last few years weather was warmer than
average which resulted adverse financial
results for PNW

29. 2- Current Situation
 The firm reported no EPS growth from 1995
($1.03) to 1999 ($1.04) which affected its stock
price.
 The weather advisors predicting another warm
winter
 Securities analysts were reluctant to advocate
holing PNW share.
 Its debt rating had slipped from A-to BBB+

30. 3- Measuring Weather Risk
 The utility industry measured weather conditions
in term of heating or cooling degree-days (HDD,
CDD)
 Degree-days were determined by the deviation
of the average daily temp. 65 Fahrenheit
 Weather conditions for a particular season were
stated in terms of degree-days accumulated
across the entire period.

31. 4- Motives and instruments for hedging
weather risk
 Smooth revenues
Or compensate for loss of demand through
insurance
 Cover excess costs
Through hedging against it
 Reimburse loss opportunity costs
Insurance against stock outs due to high
demands

32. 4- Motives and instruments for hedging
weather risk
 Stimulate sales
By using weather derivatives to back up their “
money back guarantee” of consumer satisfaction
 Diversify investment portfolios
Exploit the low correlation between returns
associated with weather and returns from other
financial instruments. Weather derivatives could
potentially reduce risk, and/or increase return in
a portfolio

33. 5- Structures of Weather protection products
 A floor
Provide the customer with compensation if
the underlying weather variable such as
degree-days falls below the established
threshold. The upside opportunity remains
unconstrained.
 A ceiling cap
Provide the customer with compensation if
the underlying weather variable such as
degree-days goes above the established
threshold

34. 5- Structures of Weather protection products
 A collar
Is a two-part transaction in which a
customer buys a cap or a floor to provide
financial protection against adverse
weather conditions, and simultaneously
sells a floor or a cap at a different strike
price that limits its financial upside if
weather is favorable. The second par (the
sale) helps to finance the first part (the
purchase of the insurance)

35. 5- Structures of Weather protection products
 A swap
Allows the customer to generate a fixed revenue
stream. If actual degree days were less (grater)
than the threshold, the utility receives a payment
equal to the degree day differential times an
agreed upon price per degree day ($/dd) if
actual degree-days were greater (less) than the
threshold, the utility pays the seller. A swap was
generally similar to the collar in its economic
effect except that it offered a single trigger level,
whereas the collar offered two.

36. 5- Structures of Weather protection products
 Futures contracts
Can be purchased on the Chicago mercantile
exchange and were introduced for trading in
1999. A futures contract is a legal agreement to
deliver or accept a commodity at a specified time
and an agreed price, the CME contracts are
specially designed around temperature variation.
Variation in temperature above or below the
value lead to a daily cash settlement between the
buyer and the seller.
 Option on futures contract
The CME also permitted trading in options on
Futures

37. 6-The Market of weather protection
 Insurance
The insurance industry provided weather related
protection typically for catastrophic events such
as hurricanes, flood and tornados.
 Capital and commodities markets
In 1997 Enron had organized contracts in weather
protection that were relatively liquid securities
and dealt with standard variation in weather. In
1999 the CME began trading in weather futures
and options, which also were standardized
contracts. The rise of this market as a second
source for weather protection reflected the
growing trend of securitization of assets through
capital market

38. 7- Swap contract for PNW
Reasons for Swap not Futures
 Futures contract usually done to hedge
Price risk
 PNW needs to hedge volume risk against
the lack of demands due to HDD in winter

39. 8- Conclusions & Recommendations
 A swap Contract Elements
 Option type, HDD weather Swap
 Payment, For both sides after the floating
amount for the determination period is
determined
 The seller, Enron
 The Buyer, PNW

40. 7- Conclusions & Recommendations
 Reference degree, 65 Fahrenheit
 The average temperature is less than 65
PNW pays Enron amount of ??/days-
degree
 The average temperature is greater than
65 Enron pays PNW amount of ??/days-
degree

41. Third Case
 The Merger of VINENDI & SEAGRAM

42. Third Case Elements
 Vivendy Presentation.
 Seagram Presentation.
 Reasons for Failure.
 What Was Kept/Sold of Seagram by Vivendi?
 What is Happening Today ?

43. 1-Vivendy Presentation
 Originally CGE, a company established in 1853
for Water distribution.
 Jean-Marie Messier turns around the firm from a
waste management company to a multimedia
conglomerate, concentrating around activities
such as, utilities – water, power – transport and
communication – pay TV – telecom – internet
(spending more than € 15 billion in the latter
area).
 He also relaunched the firm under the name
“Vivendi” (from the Latin verb vivere: meaning
“to live”) in 1998.

44. 2- Seagram Presentation
 Headquartered in Montreal, the Seagram
Company Ltd, operates two core, global
businesses: beverages and entertainment/
communications.
 The company employs 30 000 people
worldwide.

45. 2- Seagram Presentation
 Seagram’s distilled spirits, wines, fruit
juices, coolers and mixers are sold in
more than 150 countries and
territories. Affiliates and joint
ventures in 41 countries comprise the
largest distribution system in the
spirits and wine industry.

46. 2- Seagram Presentation
 Seagram’s entertainment/communications
company, MCA Ins., makes motion
pictures, television and home video
products, publishes books, produces
recorded music and operates theme parks.

47. 3- Reasons for Failure
 Huge debt level.
 Bad management (especially cash
management).
 Excessive and disorganized
communication.
 Doubts on the firm’s accounts.
 Pessimism of financial analysts.

48. 3- Reasons for Failure
 Information given to public was
insufficient. Messier lost credibility.
 Too many diversified assets, too many
different industries.

49. 4- What was kept/sold of
Seagram by Vivendi?
 The spirit end of the business was sold off
to French Pernod-Ricard and British
Diageo for € 7.5 billion.
 Sale of healthcare and business publishing
units for € 1.2 billion.
 Sale of group Express-Expansion,
l’Etudiant and Comareg to Hersant’s
Socpresse for € 330 million.
 Stake reduction in Vivendi Environment to
40.8%.

50. 4- What was kept/sold of
Seagram by Vivendi?
 Sale of Elektrim Telekomunikacja stake.
 Sale of Vivendi’s 50% share of Vizzavi for
€ 142 million.
 Sale of 89% of Canal + Technologies to
Thomson Multimedia for € 190 million.
 Sale of EU and Latin American publishing
units to Hachette for € 1.2 billion.

51. 4- What was kept/sold of
Seagram by Vivendi?
 Further sale of 20.4% Vivendi
Environment for € 1.8 billion.
 Sale of US film studios, theme parks
and cable TV channels TO NBC.
 Sale of MP3.Com to CNET.

52. 5- What is Happening Today ?
 US investors have filed a securities fraud
lawsuit against VU and its formal chairman
J.Messier, that alleges the ousted chief
executive inflated the value of the group’s
shares by concealing a financial crisis.
 Vivendi names new CEO at Houghton
Mifflin, Mr. Hams Gieskes, effective July 1.

53. 5- What is Happening Today ?
 Further steps towards cutting its debts burden
by announcing the sale of a 49.9 % stake in its
Sithe North America Energy business to PECO
energy for $680m.
 Also the sells of its stake in Monaco Telecom for
169 million Euros.
 The performance of the first quarter of 2004
showed significant progress compared to a year
ago.

54. 5- What is Happening Today ?
 May 2004, NBC and VU entertainment unit
to create NBC Universal.
 VU withdrew its case against Mr. J.Messier
and Mr. E.Licoys at the Paris commercial
court.
 June 1, 2004, standard & Poor's raises
Vivendi Universal back to investment
grade.

55. Questions ?

56. Thank you