Trouble and strife

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By:
Abigail Hofman
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The lights were low at the Connaught bar. Outside it started to snow, white flakes gliding silently in to the darkened street. I sipped my Earl Grey tea and said: “I like trouble.” The stranger sitting opposite drained his large Jack Daniels. “My dear,” he drawled, “you don’t know what trouble is.”

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Homage to Raymond Chandler aside, the stranger’s words should resonate with HSBC’s executive chairman, Stephen Green. The ball of string is unravelling fast at the world’s local bank. And what’s most infuriating is that it was all so predictable. Predictable in the way that when a husband of 25 years starts drinking martinis instead of beer, you know that a woman and not a whim is involved.

Last week, HSBC issued its first ever profit warning. Provisions at the American unit, HSBC Finance Corporation, will be nearly £1 billion higher than analysts’ expectations. The source of this septicæmia can be traced to the acquisition of the American consumer lender Household International in early 2003. When the deal was announced in November 2002, US interest rates were nestling at a lowly 1.25% and it was BI (before Iraq).

Nevertheless, even at the time, the acquisition made me uneasy. I was a student in Paris and I remember reading the Financial Times in the Café de Flore and thinking: “This is out of character.” The culture of HSBC was low-profile, industrious and conservative. Household was none of these things: there were the ‘predatory lending’ lawsuits; the flamboyant chief executive William F. Aldinger III; and then there were the customers – sub-prime borrowers or, to be blunt, trailer trash.

In a press release dated November 14 2002, Sir John Bond, the former HSBC chairman, trumpets: “This is a great opportunity for us to strengthen both HSBC and Household’s businesses in a way that benefits both sets of shareholders and is consistent with HSBC’s strategic objectives.” I am reminded of the LP Hartley quote: “The past is a foreign country: they do things differently there.”

Dissonance

HSBC and Household have not been happy bedfellows. And you didn’t need to be a genius to predict the cause of this dissonance. Interest rates have risen, so customers are defaulting on mortgages. Simultaneously, the weaker US housing market has eroded the equity that HSBC might have claimed. We’re not talking rocket science here, we’re talking finance 101. And obviously if you’re lending to the under-belly of America, your casualties will be greater than if you are cultivating the hedge fund community in Greenwich, Connecticut.

One thing does puzzle me, however. When HSBC took over Household, the business focused on true consumer finance, such as credit cards, car finance and consumer lending. These businesses appear to have shown no deterioration in credit quality. The problem is with the newer, sub-prime mortgage business that, according to analyst Michael Helsby at Fox-Pitt, Kelton, has been developed since HSBC acquired Household. I wonder whose bright idea that was? Probably, we will never be told. There will be a muddled miasma of collective responsibility.

At the time of the acquisition, Sir John praised Household for having: “A talented management team that has created one of the best-in-class technology and marketing platforms in financial services.” These skills, it was claimed, could be exported to the bank’s emerging markets’ operations. I presume that this concept now has less credibility than a collapsed soufflé. Instead of strutting its stuff in the booming Bric [Brazil, Russia, India and China] economies, HSBC is mired in the mud of the mature American economy.

Distressed investors should take heart however. HSBC’s chairman, Stephen Green, told reporters: “We have a management team there [in the US] that is now being directed in a very hands-on way by Mike [Geoghegan, HSBC’s chief executive]. We will make sure the management is clearly lined up with the direction we want to go.” I smell the odour of a plump platitude. What do you think ‘direction in a very hands-on way’ means? Managing the managers or prowling around trailer parks discussing ghetto blasters and souped-up Chevys with potential customers? Let’s hope mighty Mike can turn things around. Unfortunately, powerful and capable as he may be, the vicissitudes of the US economy are outside his control. I’m not holding my breath.

Ennui

You could almost hear Deutsche Bank’s chief executive, Josef Ackermann, exhaling with relief when the bank announced excellent fourth-quarter results and record annual profits in early February. Last year was a yo-yo year for Jo. In October, he and five other defendants faced a retrial of the Mannesmann bonus case. A month later, the case was settled. Ackermann paid €3.2 million, though state prosecutors said this penalty implied no guilt. The stress of being embroiled in this lawsuit, which relates to events in 2000, is unimaginable. I would be a Valium-gulping zombie. Beneath that genial exterior, Ackermann must be tough. But investors remain resolutely sceptical – the share price hardly twitched on the good results. I wonder why? Anxiety about costs? A weak performance from the private clients and asset management division? Or a sense of ennui with the whole sector? There is a lot of “Is this as good as it gets?” around. And you know what? I feel like that myself.

Spotted this week: Jude Law’s ex-wife, Sadie Frost, and a gaggle of girlfriends swigging champagne. David Bailey’s ex-wife, Marie Helvin, toying with a plate of pasta. And then, there was the sad old man at Scott’s, London’s most fashionable eatery, who confided to his companion: “I’ve taken it all away and I’m going to invest it myself.” Is this an epitaph for our fund management industry?

Next week: Fortress and FIGJAM. Please send news and views to abigail@euromoney.com


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