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HSBC’s conglomerate discount

The bank has changed. Now Green and Geoghegan’s challenge is to manage investors’ different expectations.

Suddenly, HSBC group chairman Stephen Green and Michael Geoghegan, chief executive, can do no right. Since a rapid credit deterioration emerged last December in US mortgages that the bank acquired in 2006, analysts have been picking apart the group’s strategy of the past five years, investors have been attacking the way the bank is run, and the valuation and stock price have fallen.

Is all this starting to smack of an over-reaction?

“HSBC walking blindfold in a mine field” was the title of the note Keefe, Bruyette & Woods put out last December to underline its concerns about losses on US mortgages originated just six months earlier. The markets quickly became gripped by the worry that the losses had revealed the 2002 acquisition of sub-prime lender Household to have been a colossal mistake, along with HSBC’s strategy of taking Household’s supposedly cutting-edge credit modelling and deploying it across the bank’s consumer finance businesses in emerging markets.

What if the models were fatally flawed?

In fact, the most surprising thing about the bank’s US mortgage woes is that investors were surprised by them. HSBC acquired these mortgages rapidly in the robust markets of 2005 and the first half of 2006 from a nationwide network of unaffiliated lenders.

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