The ECB opted to leave interest rates as is yesterday, and the Bank of England followed suit, triggering a major sell-off in the British pound against the U.S. dollar, euro and Japanese yen.
This sell-off against the dollar was intensified by a WSJ report, released yesterday, saying that the United Kingdom's #1 bank, HSBC (LON: HSBA), is being forced to set aside 20 percent more capital to cover delinquencies in the U.S. subprime mortgage market.
Interesting…as we delve a bit deeper into this story, we ran across this headline from Sydney Morning Herald: "How the HSBC Bet the Household and Lost".
Well, well…look what we have here. Seems that HSBC's subprime lender, the aptly named 'Household,' isn't doing too hot. In fact, the lender, which they bought in 2003 for $27.7 billion is "experiencing mortgage portfolio problems that are threatening the group as a whole."
The Aussie paper continues: "HSBC's first profit warnings in its 142-year history will be hard to pick out on a share price graph. The shares dropped just 1.5 percent on Thursday after the banking giant said it would be taking an extra $US1.7 billion provision for 'cocking up' in the United States, according to one insider."
While you can bet investors are praying that this will just about do it for problems at Household, not everyone is entirely sure of that. "Mike Trippitt, an analyst at Oriel Securities, estimates there could be as much as $US7 billion of 'very, very high risk' mortgages in the total $US50 billion U.S. mortgage portfolio."
Chief executive Michael Geoghean admits, "we chased volume instead of quality."
HSBC goes on to divulge that they are "embarrassed" that they didn't identify the risks that go along with the subprime market. Well, no argument here. It is slightly 'embarrassing' to think that the guy manning the fries at Hungry Jacks could cover the mortgage on a $250,000 house.
And this is just the tip of the iceberg. We have been saying for some time now - defaults will rock the lenders, and have a trickle-down effect on the rest of our economy…and even the global economy, as this story shows.
FXStreet.com echoes our sentiment in saying, "…the blowup in the sub prime market has even greater significance. We are sure that HSBC, who is the world's third largest bank, is not the only ones to suffer from the growing delinquencies in the US sub-prime lending market. If this problem exacerbates, it may be the first sign that the US economy is in trouble."
So as HSBC slinks back with their tail between their legs, don't think that this will be the last time we hear some version of this sad tale. It is just one of many to come in the wake of a bursting real estate bubble.
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About the Author
Kate Incontrera is the managing editor of The Daily Reckoning. She is also the author of The Daily Reckoning's Weekend Edition, a weekly wrap-up of contrarian investment analysis.
Comment by Geoff Shapowloff on 12 February 2007:
Could it be that Mr Geoghean was in nappies when the last real estate boom & bust occurred?
Comment by T. Blake on 7 March 2007:
We've monitored Household International since 1991, and continue to monitor HSBC and HSBC Finance Corporation. Household was in serious trouble before HSBC bought the company. All three top executives that came to HSBC with the Household acquisition are now gone, as two were summarily dismissed last week. The tree were only in it for the money, and were in over their heads.
The problems HSBC is currently seeing are only the tip of the iceberg. As we monitor complaints from HSBC customers one can clearly see that HSBC is padding accounts with unfair and shady fees, holding payments until they are late, and other tactics to offset huge losses at HSBC Finance Corp and HSBC USA.
In 2004 HSBC paid an $11 million (USD) settlement for this tactic but HSBC never stopped the practice. You can see live complaints which support that position. The US government is looking at New Century Mortgage. Expect them to look at HSBC next, where huge lawsuits and settlements have the potential to be greater than Household International's $484 million (USD) settlement of 2002.