Bank boss admits sub-prime blunder

By SIMON DUKE FOR MAILONLINE
Updated: 17:43 EST, 2 March 2009

HSBC admitted yesterday that its assault on America's trailer park mortgage market has been a massive blunder.

The bank is winding down its ailing US consumer loans wing - with the loss of more than 6,000 jobs - after losing billions in the sub-prime meltdown.

The bank splurged over £10billion in 2003 on Household International - a major credit card, car loan and mortgage provider.

Life belt: HSBC is raising £13billion from investors in the UK's biggest ever fundraising push

But after taking a further £7.5billion bad loan charge last year, HSBC has now written down the value of the division to zero.

Executive chairman Stephen Green said: 'With the benefit of hindsight, this is an acquisition we wish we had not undertaken.'

The humiliating admission came as HSBC unveiled a record-breaking rights issue of nearly £13billion, including fees. It wants to fatten its cash cushions ahead of an expected surge in customers defaulting on loans.

The cash call could also give Green the firepower to swoop on stricken rivals, such as Royal Bank of Scotland, which are looking to exit HSBC's far east heartland.

Green said: 'Any acquisitions are likely to be bolt-on deals in areas where we are already strong.'

Although rumours of a capital raising swirled around the stock market last week, investors were nevertheless stunned at its size.

HSBC shares plunged 92¼p, or 19 per cent, to close at 399p, having earlier lost a quarter of their value.

Investors will have the chance to buy five new shares for every 12 they already own at 254p each - a 48 per cent discount to last week's closing price.

Underwriters at Goldman Sachs and JP Morgan will earn around £340million for guaranteeing the cash call, which is the largest private fund raising in UK corporate-history.

Investors are also bracing themselves for much lower future payouts from the hitherto bullet-proof HSBC.

The bank slashed its full-year dividend by 29 per cent to $0.64 per share, and has 're-based' this year's award to reflect its more straitened circumstances.

Pretax profits tumbled 62 per cent to £6.5billion last year following an alarming 45 per cent jump in losses from soured loans to £17.5billion.

But with the global economy heading for its worst year since the Second World War, bad debts are likely to spiral yet higher, especially at its stricken US division.

HSBC is keeping hold of its credit card business, but will run down a £70billion portfolio of car and home loans over the next five to seven years.

Knight Vinke, a rebel investor and long-time critic of HSBC's foray into the US, fears that loans currently valued at £24billion on the bank's balance sheet may actually be worthless.