What’s Good Value in Green’s Household?

July 2, 2009

REUTERS– Neil Collins is a Reuters columnist. The views expressed are his own –

Stephen Green, the chairman of HSBC, published his latest book on Thursday. Green is a passionate Christian who devotes considerable energy to disproving that it is easier for a camel to pass through the eye of a needle than for a rich man to enter the Kingdom of Heaven.

His latest offering is entitled Good Value and immediately raises two questions: Is a slim volume really good value at 25 pounds? and Good Value for whom?

HSBC has come through the banking crisis in much better shape than most of its western competitors. A combination of luck (its roots in the far east, where they save first and borrow later) and judgment (it elected not to join the financial arms race that was investment banking) allowed it to escape meltdown. The ignominy of state aid was avoided.

Yet HSBC does have a serious blot on its escutcheon, in the shape of Household Finance Corporation, a sub-prime lender of U.S. mortgages described by its critics as “predatory”. HSBC bought the business in 2003, seduced by the thought that its own credit rating would dramatically cut the cost of the finance Household needed to support its lending.

The HSBC bankers had no experience in sub-prime, and almost no presence in the United States. They may have had no idea what they were doing, but their regulators did. Neither the Hong Kong Monetary Authority nor the U.S. Federal reserve would allow HSBC to guarantee Household’s debts, because the risk was too great.

How right they were. HSBC now admits that the purchase was a terrible mistake. The assets have turned out to be illusory, but the debts are still there, and the Rev Green says he’ll keep paying them even though HSBC is not legally obliged to.

Of course, he won’t be paying them himself. The shareholders will. They have just contributed 12.5 billion pounds for Britain’s biggest-ever rights issue, and have seen their iron-clad dividend slashed. The shares have lost (only) half their peak 2007 value.

The activist investors at Knight Vinke have been banging away at this particular target for ages, and recently HSBC’s biggest investor, Legal & General, has recently signaled sympathy, if not quite outright support.

I can’t pretend to have read every word of the Rev Green’s 200-page sermon, but I can find no mention of the morality of obliging others to pay for one’s errors, when there is no legal obligation to do so. The bank has a justification for winding down Household, instead of walking away, that does not rely on Green’s moral code. It argues that America is jolly important, and it doesn’t pay to upset the world’s biggest financial players.

This would be more convincing were memories here not so short. Whatever Green might think, the prospect of making money usually overcomes even recent memories of having lost it, as Argentina and Russia have both demonstrated.

As for whether Good Value is good value, here’s the conclusion: “In the final analysis, we confront our globalizing future, individual and collective, material and spiritual, with hope — not with despair, and not with uncritical optimism.” You decide.
(Edited by David Evans)

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