Knight Vinke, the activist investor, launched a fresh attack on HSBC yesterday, accusing Europe’s biggest bank of flattering its US sub-prime losses by failing to write down $30 billion (£15 billion) worth of mortgage assets. Knight Vinke may have a point, as HSBC claims to have US losses under control, while almost every other economist says the worst is yet to come, the economy is in a recession, and foreclosures are at the highest rate since the great depression of 1939. Who is right?

Obviously bondholders want to know who is right. HSBC did not guarantee the debt of predatory lender Household International when they bought the troubled company in early 2003. Since then the division, now called HSBC Finance, has caused nothing but trouble for HSBC. The first public embarrassment was a $10 million (USD) payment to settle allegations that Household / HSBC Finance was applying payments after the due date. While HSBC still appears to apply payments as late payments the bank admitted to nothing when they paid the fine in 2003.

Losses continue. What evidence supports Knight Vinke’s position? At the end of March 2008, HSBC’s portfolio of adjustable-rate mortgages stood at $US17.1 billion. About $US2 billion of those will have their first interest rates reset in 2008 and double that will reset in 2009. ARM loans require higher monthly repayments after the first reset. HSBC Finance’s portfolio of “stated income loans” – loans given out without verifying borrower’s income – stands at $US7.2 billion. And finally – and possibly the bottom line – is that HSBC Finance cannot be trusted. The question is whether they can be trusted to tell HSBC USA and HSBC Plc the actual truth. If so, is HSBC Plc telling the truth, or is Knight Vinke exposing the truth? Time will tell.

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