Results of Stress tests - who sailed through and who needs more capital

The results of the SCAP were out on 7th May 2009 and the 19 Bank Holding Companies will require an additional 74.6 billion dollars to make the financial system sail through without collapse if the economic situation worsens.
Here's the summary of results:

Bank	Additional capital needed (billion dollars)
AmEx	0
BofA	33.9
BB&T	0
BNYM	0
CapOne	0
Citi	5.5
FifthThird	1.1
GMAC	11.5
Goldman Sachs	0
JPMC	0
KeyCorp	1.8
MetLife	0
Morgan Stanley	1.8
PNC	0.6
Regions	2.5
State Street	0
SunTrust	2.2
US Bancorp	0
Wells Fargo	13.7
Total	74.6

Can Lehman manage any further blow?

Market has always been flooded with people who look for prudent investment as well as those who look for easy money. While the investors approach is to get consistent return in long term investment with proper risk management, speculators trying making short term profit by betting on the price of the asset.

Speculation brings great volume to the daily trading with high liquidity which indirectly helps the investors in looking for counterparty. With high liquidity, the price discovery becomes easier because of lot of players being available in market. This also brings down the impact cost significantly. But on the other side, when speculators come with negative prediction about a particular company; because of their larger volume, they have great impact on the stock price of such firms. Recently in March, speculation against Bear Stearns Cos. made its clients and creditors stop doing business with this bank and that subsequently led to the collapse of this relatively smaller investment bank.

The most talked about speculation of March this year after the fall of bear Stern, led to spread rumour of Lehman Brothers Holding Inc., once the largest U.S. underwriter of mortgage-backed bonds, facing difficulty in maintaining its’ solvency and struggling for its survival. After that Lehman had to really fight to get back to normal business. But that was not the end; once again as the home-loan financing companies Fannie Mae and Freddie Mac dropped further on credit woes, Lehman stock fell to an eight-year low in New York trading. The stock was further hit by the speculation of its biggest customers avoiding business with this firm. Pacific Investment Management Co. (PIMCO), manager of the world's biggest bond fund, and hedge fund SAC Capital Advisors LLC both had to publically make it clear that they are continuing trade with Lehman and the speculation is unfounded. The constant pounding of company’s stock with one speculation after other, sometime makes the client doubting the performance of the firm and impacts business.

The above chart shows that the March speculation led the stock fall from $45.99 to $31.75 in a span of just 2 days, a plummet of almost 31%. The firm found it really difficult to cope up with such unexpected fall. The financial sector all over the world is in bad shape this year. The credit contraction has forced brokerages and banks to writedown as much as $408 billion this year alone. After the March debacle, it did change its strategy to fight against the odds. Lehman boosted it’s cash holding and reduced dependency on short-term loans. That led to a stable stock price for a few months from then till May, 2008. But by the end of May, with negative news all over the world and high inflation index all over the world came down and Lehman was on target again. With the recent speculation of its client staying away, it further fell by 22% again in just 2 days. At its eight years low current trading price of $17.3 per share, this year alone counts for more than unprecended 72% fall. The market cap of the company has come down from $34.3 billion in the starting of this year to a mere $9.5 billion at present.

Time will decide if this is a concerted effort of bringing Lehman down or is the wrongdoing of business. But if it continues to follow current trend, then it is not far when this will become another Bear Stern.

Nick Leeson and late Barings bank :)

The Britain’s oldest merchant bank, Barings bank, had financed the Napoleonic wars, the Louisiana purchase, and the Eire Canal and Queen Elizabeth’s personal bank. Once one of the biggest banks, it grabbed attention of the world in 1995 for the action of a single trader from the small office in Singapore.

Nick Leeson joined Barings bank after working with Morgan Stanley for short period. His work on clearing the mess in Jakarta was highly appreciated and he was made General Manager with authority to hire traders and back office staff in Barings Securities (Singapore) Limited (BSS). After joining BSS in 1992, Leeson soon took necessary exam to trade in SIMEX (Present Singapore Exchange) along with his team of traders. Leeson and his traders got authority for two types of trading –

1. Transacting futures and options orders for clients or for other firms within the Barings organization, and
2. Arbitraging price differences between Nikkei futures traded on the SIMEX and Japan’s Osaka exchange.

As a trader, Leeson had extremely hard luck. He started losing money since very beginning and increasing his bets made his position worse. By the end of 1992, he was losing GBP 2MM which increased to GBP 23MM in a year. By 1994 he had lost total of GBP 208MM and surprisingly Barings management was till unaware of this. For all such furtive trading Leeson used account number 88888. Generally neither trader, nor employer prefers to publicize the loss. But by the time the unauthorized speculative trading of Leeson was discovered, Barings bank was bankrupted after such a huge loss.

Such a staggering loss caused by Leeson speculation went unnoticed in the Barings management because of ongoing merger of two parts of Barings organisation. Barings had started forming risk management function, but Singapore went without having any risk controller. There was no single person within Baring responsible for supervision of Leeson’s activity. Baring had adopted Matrix structure in 1993 and lines of reporting were not clear most of the time.

Leeson tried every possible act to keep the management unaware of such mismanagement of funds. He falsified records, fabricated letters and concocted stories to deflect management attention, auditors and even SIMEX. A few concerns from other employee couldn’t attract attention of management and Leeson remained celebrity within Barings. He secretly kept making loss in 88888 account, but publicly recorded profit in three arbitrage accounts.

By February 1995, when the management discovered the fraud, the total loss of Barings had reached $1.4 billion. Barings was unable to meet SIMEX’s margin call and was declared bankrupt. On 3’rd March 1995, the Dutch bank, ING, purchased it for £1 and assumed all its liabilities.