While the world economy is in shambles more people want accountability. What company started original the subprime fiasco hurting the United states today? Regulators, or lack of regulation, certainly must bear part of the blame. As the blame game continues some analysts are getting closer to the truth.
According to Smart Brief in Washington DC, until 2002, when HSBC bought U.S. finance company Household Finance, lending money to homeowners who could not get credit from retail banks was seen as somewhat disreputable. HSBC provided the subprime business a measure of respectability and, as one hedge fund manager said, gave capital markets the “assurance that got this subprime-mortgage thing really rocking.”
The International Herald Tribune is more detailed, but the bottom line is the same. When HSBC bought Household, it thought its big competitive advantage was that it could borrow money much more cheaply, thus instantly giving Household higher profit margins. For a time, that strategy seemed to work. The ploy did not fool anyone.
There were warnings of trouble when the deal was done, but they were mostly off the mark. Could HSBC compete in that market without sullying its reputation? The fear essentially was that it would get caught making money by cheating its customers.
Instead, HSBC was in a market that was soon to soar and that later killed itself with its own excesses. All the money that was suddenly available to finance subprime mortgages - thanks to the wonder of securitization - meant that lending standards inevitably withered.
When HSBC diversified by buying mortgages that others originated toxic poisons started to spread like a plague that had previously been eliminated from the face of the earth.
The fact that HSBC held nearly all the mortgages it originated, rather than securitizing them, seemed to help HSBC. Many observers thought holding mortgages was wise, and well thought out through HSBC risk analysis. A detailed look at what really happened shows a different picture entirely.
Borrowers were given “side loans” which were personal loans for $10,000 to $15,000 at 18 percent interest rates in addition to a mortgage. Loan officers were not required to prove income for high interest, large personal loans, sometimes up to $15,000. Loan officers were allowed to use “stated income” which could be unverifiable or questionable.
If HSBC’s intent was to securitze the loans, therefore selling what Wall Street was buying, perhaps the business model would have made sense for a while, but that is how other companies committed suicide. If HSBC’s intent was to fund high interest loans with the bank’s own capital, HSBC should have seen the risk. The business model would have called for tighter lending standards, not loose standards without verifiable documentation.
Household International was dead when HSBC bought the company. The only reason Household’s predatory lending settlement was only $484 Million was because regulators thought a bigger fine would put the company out of business. William F. Aldinger killed Household International by preferring short-term gains and predatory tactics such as insurance packing. Aldinger killed Household’s credit card business with questionable payment processing and more lawsuits. Aldinger effectively killed Beneficial Finance when Household bought Beneficial.
As the current credit crisis continues many people want accountability and answers. If the International Herald Tribune is correct, Household International’s purchase by HSBC started the entire global financial crisis. Bringing predatory lending into a credible global bank therefore caused the mortgage bubble to burst, home prices to drop, unemployment to rise, and brought pain and suffering to many neighborhoods.
While some people argue that Household served a purpose, and the niche market will now suffer greatly, the point is that I agree with that assessment. However, HSBC upper management said, “This is what we want you to do, and we will pay you handsomely to do it,” and employees responded. Who can blame them?
HSBC knew they were buying a predator. The United States classified Household International as a predator. It was HSBC that failed to stop the predator, acting instead as an enabler. When other companies saw the business model, and recognized that the government was not going to do anything, the global route to American destruction began.
Perhaps it was not HSBC that started the global subprime financial meltdown, but William F. Aldinger and his slick salesmanship when selling Household International to HSBC. If that is true we have accountability, and traced the meltdown back to one man.
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