Household HSBC Watch

The Cerberus private equity group recently bought Chrysler. Cerberus already owned 51 percent of GMAC. Chrysler Financial is the only part of Chrysler that makes money. The handwriting is on the wall for Cerberus to strip and flip Chrysler, keeping the profitable finance portion. HSBC Finance Corporation may look attractive to Cerberus at this point because subprime losses drove down the net value of the consumer finance division. Look for Cerberus to make a move that would also strip and flip parts of HSBC Finance consumer lending that would be redundant or unprofitable.

Automobile lending made of up of the best and brightest stars from Chrysler Finance and GMAC, and access to the HSBC Auto Finance infrastructure, could be a blockbuster deal. Credit card operations could also be profitable. GMAC also has ResCap and last year, Residential Capital was the third-largest originator nationwide of so-called Alt-A loans, which are typically somewhere in between subprime and prime in terms of credit quality. That would be a step up from HSBC’s subprime.

In the ‘buy low, strip and flip, sell high’ business model, HSBC’s consumer finance business would be a good fit for Cerberus. Most of the layoffs would happen at HSBC Finance Corporation, with some coming from Chrysler. Cerberus wants the customer base, the software, models, and infrastructure. Cerberus does not need the stigma of predatory lending, the HFC name, nor the Beneficial Finance or Decision One names. Look for those to disappear from the American landscape forever, along with most of the employees.

Actually we must ask the big question. What does Cerberus know about designing cars? The answer is ‘not much.’ That part of Chrysler would bet stripped and flipped too. Cerberus is also looking at H&R Block’s Option One subprime lending division. Some analysts predict Cerberus will package the entire subprime assets of Option One, GMAC, and HSBC Finance. After the subprime crisis is over they might be sitting on some money, albeit a fluid dynamic would drive the investment strategy. If the assets are worth anything they might collateralize.

On the other hand if Cerberus can generate enough to give Charles Schwab and other stock brokers some serious competition perhaps some of the real estate can be turned into a valuable commodity. Let watch and see how this supposition plays out.