A Stock Exchange announcement by HSBC on Wednesday, February 7, 2007 was the moment the credit crisis began. It was only 351 words long but it was devastating.
“HSBC Holdings plc wishes to update the pre-close trading statement issued on 5 December 2006 in respect of a single matter.” Only 351 words later, HSBC revealed that repayment problems of homeowners, and in the business sector, were worse than expected.
Household International became a massive hit to HSBC’s reputation as a global giant. HSBC is already tainted with failure in the US because Midland Bank, the UK lender it bought in 1992, had itself been fatally wounded due to its disastrous purchase of the unfortunately named Crocker Bank in the 1980s.
By mid-summer 2007 the entire Household International ‘house of cards’ started crashing to the ground.
When John Bond, of HSBC bought predatory lender Household International, Bond called Household: “One of the world’s largest generators of assets.” The statement gives insight into the problem with subprime. Generating assets because Wall Street was buying those assets was not sustainable.
Warning signs were there. History taught us, and therefore warned everyone, that the amount of a resulting crash was directly proportional to the amount of debt distortion. Nobody ever thought the amount of debt distortion would poison the entire world.
Customers and HSBC insiders were amazed by an investigation of Countrywide in 2008. “HSBC is worse than Countrywide ever thought of being,” said one person.
Now it is March 2009, and HSBC Finance is finished. HSBC is not defaulting on Household’s bonds. Unwinding all of HSBC’s remaining $62 billion exposure will take time. Twenty-seven months and billions of dollars later, HSBC is changing course.
Looking back over the years before HSBC, Household International was charged with predatory lending in 2002, and settled the debt for $484 million with a nationwide settlement. After HSBC bought the company Household International was renamed as HSBC Finance. With HSBC’s backing the company started generating more assets.
Employees were used as pawns. As a pay-for-performance company HSBC encouraged production, while regulators slept. Surely HSBC Finance must be doing everything legally, after being sued for predatory lending – or at least that is what people thought.
Encouraged by Wall Street, and unhampered by regulators, and without seeing the overall economic impact, employees were abused just like HSBC’s customers. Reflecting the high interest rates it charged customers, in the first few years after its acquisition, Household proved to be a cash cow for HSBC, generating almost $10bn in profits. To encourage employees Executive Chairman Stephen Green resisted calls to shut down HSBC Finance, claiming it offered good opportunities to lend to Hispanics and Chinese in the US.
One of the major areas of concern is over the way HSBC accounts for Household’s assets. The bank carries Household’s loans at “book value”, an approach that looks at their worth over the course of the loan. Many of the loans are worthless, and have either a subordinated position or are otherwise uncollectable. Some loan balances are suspect, having been inflated through questionable tactics.
Household International was among the first to enter the arena, and the last to leave. I suggest to you that we have indeed discovered ground zero in this horrific game of debt distortion.
Only HSBC credit card operations remain, where even this month payments will be declared ‘late’ even if they are not. Profits from Household International and HSBC Finance perhaps were not profits at all, but merely duplicity and abuse.
This era in American finance where predatory lending became the norm, and was simply referred to as subprime, must come to an end. The resulting crash did indeed prove to be relative to the amount of debt distortion. With encouragement from London, anyone who took advantage of what eventually turned out to be “too good to be true” was duped and used, later to be cast aside, fired, or evicted. Others saw their credit scores drop, as is currently the case with HSBC credit cards.
This is an obituary for HSBC in the United States. Never again will Americans permit predatory lending to bloom in a garden tended by lawmakers, regulators, and lobbyists, nor harvested by HSBC in London.
Employees and customers expected much more. Employees and customers expected HSBC to do the right thing. Now we are all in this together, as honest men and women with families and loved ones. It is a dark day in America, not because we discovered the truth, but because London missed the chance to get it right.
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