Posted on 03/01/2008 4:32:10 PM PST by TigerLikesRooster
March 2, 2008
Activist tells HSBC: drop US division
John Waples and Iain Dey
THE shareholder activist Knight Vinke has presented Stephen Green, chairman of HSBC, with four options to sever ties with HFC, its troubled American banking business.
The proposals have been made in a series of private meetings between Eric Knight, who heads the activist-investor group, and Green, ahead of HSBC’s full-year results, which are due to be published tomorrow.
These results will show record profits of $24 billion (£12 billion) for HSBC, but they will be scarred by the bank’s huge exposure to America’s sub-prime mortgage crisis.
Knight believes that each of his four solutions would “build a firewall” around HSBC’s future exposure. The bank has been one of the largest losers from America’s mortgage meltdown, having lent money to thousands of homeowners with poor credit histories.
The most dramatic of the four options involves HSBC walking away from HFC, leaving its bondholders with $150 billion of debt.
Knight Vinke says bondholders have no recourse to HSBC, although analysts say such a measure would badly damage the bank’s reputation in America.
Green has conceded that he wants to draw a line under HFC’s mortgage business, but he has not put a timescale on it.
Its American arm has cost it more than $11 billion this year from its exposure to stretched American consumers.
In the last two years the write-offs that have stemmed from HFC have topped the $14 billion price it paid for Household International five years ago. HFC formed the largest part of this acquisition. Knight called it a “catastrophic strategic error”.
Knight’s second solution involves HSBC asking HFC’s creditors to help restructure its $150 billion debt. This could involve asking them to undertake a debt-for-equity swap. HSBC could also swap its own $15 billion interbank loan with HFC into equity or write it off.
If this move is successful, HFC would still operate as a subsidiary, but HSBC would have no ongoing liability. It would allow HFC to carry on as a subsidiary company, but on a stand-alone basis with no further support from its parent.
Knight believes that if HSBC does walk away from its loan to HFC, it will quickly claw back the loss from a rapid rise in its share price. By shedding its American business, the majority of the group’s earnings would come from growth markets in Asia and Hong Kong, and this would give it a significantly higher market rating.
The third solution, according to Knight, is “for HSBC to recapi-talise HFC by injecting between $10 billion and $15 billion in cash or writing off its existing inter-company loan, and then selling the business”.
The fourth option involves recapitalising HFC and then demerging it into a stand-alone quoted company.
Green has been looking hard at the options for HFC. Last Friday he reconfirmed his strategy to move away from mature markets when he sold 400 bank branches in France to Banque Populaire for $3.2 billion.
Aside from the troubles in the bank’s American mortgage business, HSBC is expected to unveil a huge surge in impairments on its unsecured loan book. Across the group, total bad debt charges are expected to stretch to $16 billion – a 50% rise on last year.
HSBC’s profits have been boosted by the sale of its Canary Wharf headquarters building in London, and big gains on some of its Chinese holdings.
The bank’s stakes in Chinese insurance group Ping An, and the Bank of Communications have been marked up by more than $1 billion. It is also expected to announce board changes.
Ping!
I have a few cases against these clowns in my office. I must tell you that they have yet to NOT miss an opportunity to cut their losses. The incompetence of the American operation is astonishing. One judge asked an HSBC attorney if anyone over the age of 12 worked for the company.
Wow. The 'credit crunch' is so under reported.
Btw, 150Bil is the GDP of Malaysia.
Can you give some examples?
It is also less than the proposed 'stimulus package' from the govt. which has received so much press.
Cheers!
“Can you give some examples?”
Sure; just finished up a case where we had offered to agree to a rewrite of the mortgage in question at about a 33% discount off the principal balance. HSBC refused and went to trial with paperwork they knew was defective (problems with default notice)and pursuant to an assignment they knew was no good (the assignment was from an “assignor” which had no more legal interest in the mortgage than I did). There were other violations of our state laws. HSBC’s counsel, who is very good at what he does, told them they had problems and advised taking the offer. The 12 year old responsible for the case said no. HSBC lost and will be paying my attorney’s fees. I have other cases just like this one. The company’s attorney told me that “all the good people are gone and the one’s who are left neither care nor understand what is happening.”
Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish
So what happens in a case like this? Does the ‘homeowner’ get to keep the house without paying for it, or does someone with a legal interest in the mortgage eventually show up?
Surprising. Some lenders are going for the short sale. Apparently not HSBC. With document defects, the attorney was correct to take the offer. Economically, they should have taken the offer anyway.
“So what happens in a case like this? Does the ‘homeowner’ get to keep the house without paying for it, or does someone with a legal interest in the mortgage eventually show up?”
In the particular case we just tried, the company lost on the notice issue. We avoided the assignment issue as we knew we had a winner on defective notice. Has the case gone down on the assignment question, in theory the “rightful” lender could come along and try to foreclose. As it was, because the case was lost on the notice issue, the mortgage got discharged by the judgment. Defaulted homeowner got to keep her house free and clear.
Yup. They got good advice and didn’t take it. Years ago I was on the other side cleaning up mortgages for the RTC. Learned early on that sometimes a bird in the hand was indeed worth two in the bush. In the present cases, good bankers/lenders would understand that but there aren’t many of them left working these loans, if any and frankly, given to whom and how they made these loans and how the swapped traded them back and forth, they deserve what is happening to them. We don;t deserve being handed the bill for bailing either the lenders or the debtors out.
The incompetence of half the entire banking industry over the past 5 years is simply breathtaking. They simply threw all risk analysis out the window. Prison?
HSBC bought out NY State's Marine Midland bank as a 1980 US op. Added Republic and Household. US headquarters Buffalo.
About the same size as Citigroup.
- - -
My my my.
Buffalo NY is not a place known for business acumen.
Not vital, imo.
Sounds like a prepositioning to prevent Ping An from making a hostile takeover bid. HSBC is in reality tossing the liabilities of HFC onto the American taxpayer, the US banking system is being gamed.
I believe so.
By the way, do you think Ping An is after HSBC?
Commentators say Ping An will be on an acquisitions binge, not real sure how HSBC wouldn’t be the prime target.
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