Household HSBC Watch

Look for signs of consolidation and streamlining as HSBC possibly looks to clean up their United States image by unloading predatory lender Household International, now called HSBC Finance Corporation. The North American division accounted for almost two-thirds of HSBC’s $10.6 billion in loan-loss provisions for 2006. HSBC earned $4.7 billion before tax in North America last year (2006). Never fully accepted by reputable bankers and shunned in part by investors and shareholders, HSBC Finance Corporation still has a profitable, albeit questionable, private label credit card business. HSBC paid $14 billion for Household International in 2002-2003.

Since HSBC on March 5 reported an 87 percent plunge in second-half earnings in North America, a report has shown delinquencies on risky U.S. mortgages rising to a four-year high in the fourth quarter. Escalating defaults have touched HSBC. “There are clearly concerns'’ about the U.S. business, said Richard Peirson, who helps oversee $8.2 billion at Framlington Investment Management in London, including HSBC stock. “There have been well-voiced concerns about how current management has got the group into this position.'’

The problem is there are very few buyers as other companies seek to unload their sub-prime units, or simply go bankrupt or out of business. In fact HSBC was buying when others were selling mortgages and portfolios. Defunct sub-prime lenders include New Century Financial Corporation, ResMae and People’s Choice. By April 6, 2007, more than two-dozen subprime lenders have gone out of business. Some say NovaStar Financial might be next.

When subprime borrowers began defaulting on loans in high numbers investors get nervous and so do the big investment banks that created the securites, including New Century’s financial partners Morgan Stanley, Goldman Sachs, Credit Suisse and others. Those banks cut off funding to New Century, which in turn stopped buying loans. HSBC cannot cut off funding to HSBC Finance Corporation, and in fact some of recent profits resulted from lower cost of funding to HSBC Finance as opposed to the cost of funding once seen by Household International. Those profits have been erased.

Clearly William F. Aldinger packaged 5 pounds of crap in a 2 pound bag, wrapped it nicely and called it Household International. Presenting his gift to John Bond and HSBC, the Brits appraised it as the good looking sweet smell of success. Welcome to the old American trick of setting fire to the bag on your doorstep on Halloween. This trick or treat was just an Aldinger trick.