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Confirmation that Banks are going to become Banks again

People will have to start going to see their Manager again to undertake a stiff loan interview.

However, before that happens people are going to have to go to see their manager to explain why they cant pay their mortgage!

So Robert is this a bank that avoided the 'credit crunch' by its deliberate banking policy or is it a bank that happened to be positioned, by the nature and locality of its business, outside the western housing market?

Anyway now the flow of lenders has been turned off, those who would like to access funds can't. Market interest rates rise and industry gets hurt. Prudent governments, who saved for a rainy day spend to easy the economic landing? Imprudent government can't spend and the landing is hard?

Robert: A banker saying they got it wrong??? I need a stiff drink.

I dimly remember very similar warnings and analysis after the early 1990s housing bust from bankers and regulators of the "we cannot allow these mistakes to be repeated again". It leads me to think such warnings from HSBC mean little. More analysis of whether any lessons really were learned from previous busts would be very helpful.

That is one view here, that HSBC are doing OK. By by many view they are not. I think they will be in the for a long time to come yet.

This comment was removed because the moderators found it broke the house rules. Explain.

Are we meant to feel sorry for a bank that "only" made 拢5bn profit in 6 months?

My heart bleeds...

This comment was removed because the moderators found it broke the house rules. Explain.

HA! I expect the share price will be buoyed by their buddies in the pension funds NOT selling as the crisis broke. And thus losing MY money!

I've just been reading Liar's Poker by Michael Lewis. It charts the 1980s rise in securitisation of mortgages, and its collapse. I rather suspect that the current chairman is making the right noises, and before I retire in 30 years time, we will have seen at least another one of these debt bubbles.

In the commentary on HSBC's results, there seems to be an assumption that emerging economies are a safe haven.

That has been the case up to now but spillover effects take time.

Emerging economies are export-led and have been relying on Europe to offset the US.

With Europe now slowing, the ripple effects are getting wider.

I'm not convinced that those factors that made emerging economies relatively risky have disappeared into thin air.

If exports slow sharply, the lending practices in emerging economies may become a story in itself.

Its nice of a bank chairman to finally admit that the mess we are in is all the big banks fault.
Well done to him.
Of course its going to get a lot worse.
But he has forgotten the role played by the Chancellor of the Exchequer, the Bank of England and the FSA, all of whom sat on their hands and used no control.
I expect that the Chinese government has learned a lesson over this too, and some control of this bank may well drift back to China.

So HSBC has weathered the storm.

The other Banks have boosted their balance sheets and changed their ways (presumably).

But it still must leave the Shareholders wondering what their Shares are actually worth.

The Banks especially those in Rights Issue should make this clear.

Then if their Net Asset Values are worth more than their Share Prices (as per an article on FT dot com ) the Shareholders will feel happier chipping in.

Otherwise, they and the Market are left guessing, and wondering why the Directors are keeping quiet!

Perhaps bidders are sitting in the wings after a bargain ?

Small Shareholders beware !

Reminds me of a supersize casino only this
time the punters won and broke the bank.

Unfortunately the losers don't know how much they've lost yet.

People never understand economic cycles.

They expect house prices and bank and building society profits to keep rising for ever. Investors now expect a higher yield, so don't expect cheap mortgaes to return.

So HSBC dropped 28% and still made ten billion dollars in six months.

Nice work if you can get it.

A banker talking sense! May the so-called "crunch" bite long enough to create really long lasting memories!

Back in February, many posters on his blog were vehemently scathing of Robert Peston's pessimistic opinions on the outlook for British banks (for example, see /blogs/thereporters/robertpeston/2008/02/bank_boom_ends.html and /blogs/thereporters/robertpeston/2008/02/bothered_and_bewildered_by_rbs.html%29. Given the results statement froms banks that we have seen in the past few days, I trust those responsible are now man (and woman) enough to apologise to Mr Peston for their inappropriate and misplaced criticisms.

But I would guess not.

It is very agreeable to see Stephen Green echoing remarks I have made. I won't sent him an invoice for stealing my intellectual property rights as what he has said is best described as the Department of the B****ing Obvious.

Given that my business uses his bank extensively in our international trades one feels a certain satisfaction at the reasonable result posted. Last year was a very good year, this year is going to be the first of some pretty ghastly years so some decline in profitability was expected.

I never understood why they purchased Household International. It seemed a daft idea at the time and it is even dafter now. I never understand people when they talk about `market-share'. Are you making a good return on capital invested is a far better concept.

You cannot make money by lending to people who cannot pay you back - the lesson of the credit crunch.

It's all very well for Stephen Green to explain to us which decisions were poor ones but until we are also told why these decisions were made the way they were, we are in danger of having learned nothing from the d茅b芒cle.

So, let's start from the position that Green does, a series of decisions that today would be judged as having been poor ones. Let's ask:-

1. Without the benefit of hindsight, which of these decisions ought quite clearly to have been classed as poor at the time they were made? Classed as poor, that is, because they were made negligently or incompetently without an acceptable level of assessment of their consequences.

2. How much should we expect human decision-makers to ignore the prevailing mood? How unacceptable is it for someone, in assessing the correctness of a decision, to allow himself to give too much weight to the stance that the mainstream is taking over similar decisions?

3. In the short term, how much is the measurement of success determined by the closeness with which one follows the general mood, and how much by the making of solid decisions irrespective of the general mood? Is "being in the flow" far more important a generator of short-term value than is making objectively competent decisions?

4. Are there significant anomalies between the consequences of the standard system of personal incentives and (a) the health of the companies to which those incentivised belong and (b) the general well-being of the society which the financial sector is there to serve. Does normal incentivising create additional motive that stimulates good decision-making?

5. How many of the poor decisions were in fact made by competent professionals, aware of the foolishness of what they were doing, but who were operating under force majeure, in so far as to have turned ones back on the mainstream "opportunities" for enrichment would have been to write ones own resignation letter.

Surely it's the case that we've got more chance of preventing a reoccurrence of this failure if we take action based on a full understanding of its causes?

I wonder how much of the current crisis can be put down to the fact that many of the people making the decisions were not yet working during the last couple of downturns, in the early nineties and before that the early eighties, because youth is more valued than experience. They thus didn't recognise the warning signs.

Of course, the fact that many bank managers look young to me could just be a sign that I am getting old, even though I haven't hit fity just yet!

What HSBC鈥檚 results do show is the benefits of a diversified portfolio, yes with hindsight the purchase of Household was a bad move but you should also take into consideration the contribution Household has made to HSBC鈥檚 profits over the last 5 years which has not been insignificant, at the time of purchase HSBC鈥檚 exposure to the mortgage market was small and if they had not made this investment there would be many shareholders wanting explanations for why they were not involved in the booming/profitable mortgage market at the time.
I think when you say Green said banks lent too much to borrowers with scant chance of repaying and that they did so in such a complicated way that they couldn鈥檛 understand the risks they were running, you are over simplifying his comments, I know for a fact that there are many in the banking fraternity that fully understand the risks in these investments but ,where they went wrong was to underestimate the severity of the downturn in the market , coupled with the fact that some organisations were willing to put all their eggs in one basket.
It is also fair to say that in the UK the demand for long dated highly rated instruments by pension funds increased demand in this area, these funds took comfort from the rating agency鈥檚 AAA rating of these instruments which seem to be arrived at simply on the mathematical basis that as the investor was immune from the first x% of losses the market would never so bad that they would see a capital loss, which may well still be the case for surely unless every mortgagee defaults combined with every property being totally worthless these instrument will still have some value.

Comment 22 : sadbloke

"What HSBC's results do show is the benefits of a diversified portfolio, yes with hindsight the purchase of Household was a bad move but you should also take into consideration the contribution Household has made to HSBC's profits over the last 5 years which has not been insignificant ..."

It's creating a false picture, I think, to look at recent history as being a succession of bumper profits followed by huge write-downs. I see it as more appropriate to look at the whole cycle in nett terms, and from this we will see that important parts of the "new-age" financing philosophy for house mortgages was flawed from the outset. It's wrong to see it as an unquestionably brilliant idea that was working fine until it hit the rocks in a way that was completely unpredictable.

"...at the time of purchase HSBC's exposure to the mortgage market was small and if they had not made this investment there would be many shareholders wanting explanations for why they were not involved in the booming/profitable mortgage market at the time."

I think you have a point here, and if you read my Comment 22 you'll see that Question 5 raises this very thing. How much does shareholder expectation cause Boards to be under force majeure in these situations?

The point being that focusing on management shortcomings, or that of their incentive structure, or, indeed, of the general regulatory system, is a waste of time if institutional financial decision-making is largely driven into the "flavour of the month" preferences of shareholders who are short-term gain seekers.

"It is also fair to say that in the UK the demand for long dated highly rated instruments by pension funds increased demand in this area, these funds took comfort from the rating agency?s AAA rating of these instruments ..."

I take your point that mortgage bundling was partly in response to pension funds needing to move out of equities. But is it really the case that highly-paid executives in the insurance/pension industry are able to trim the judgment they are required to make over major tranches of their investment portfolio to "What does the rating agency say?"? This can't be true, can it?

Meanwhile, what's happening at the rating agencies? What terms of reference are they given in order to make their judgments? How much pressure are they under to tweak the rules and/or the assumptions so as to allow the desired volume of the "right" instruments to be made available to the market?

" ... [AAA Ratings] which seem to be arrived at simply on the mathematical basis that as the investor was immune from the first x% of losses the market would never so bad that they would see a capital loss, which may well still be the case for surely unless every mortgagee defaults combined with every property being totally worthless these instrument will still have some value."

Mmmm. Some value, yes. But it's not all-or-nothing, is it. It's not a question of the instrument either being full-value or zero-value.

Yes, as far as I understand it, AAA-rated instruments are "guaranteed" to be immune to losses upon certain assumptions about default rates and collateral valuation. If these assumptions are no longer valid, as I expect is increasingly the case with the collateral value assumptions, then the predicate for the hypothesis of zero-risk, that allows the AAA rating, is false.

Comment 23 : ExcellenceFirst


鈥淚t's creating a false picture, I think, to look at recent history as being a succession of bumper profits followed by huge write-downs. I see it as more appropriate to look at the whole cycle in nett terms, and from this we will see that important parts of the "new-age" financing philosophy for house mortgages was flawed from the outset鈥�
I agree we do need to look at the whole cycle in net terms, but we have not seen this, these instrument have a maturity of 20-30 years in line with the underlying mortgages so until they have matured or been amortized down to zero due to early repayments we will not have the full picture and the philosophy may well prove not to be flawed.


鈥淚 take your point that mortgage bundling was partly in response to pension funds needing to move out of equities. But is it really the case that highly-paid executives in the insurance/pension industry are able to trim the judgment they are required to make over major tranches of their investment portfolio to "What does the rating agency say?"? This can't be true, can it?鈥�

You may be surprised but many investors (Pension funds in particular being way down the learning curve) do not have the expertise in particular instruments so they will look to the rating agency鈥檚 for guidance, in many cases the funds supposedly prudent own rules pushed them down this path demanding that they have AAA rated investments when outside of government bonds, one or two banks and a handful of corporations (none of which paid the required yield) there was very little to invest in that had a AAA rating and a reasonable return

鈥淢eanwhile, what's happening at the rating agencies? What terms of reference are they given in order to make their judgments? How much pressure are they under to tweak the rules and/or the assumptions so as to allow the desired volume of the "right" instruments to be made available to the market?鈥�
None rating agencies only remit is too try to quantify the likelihood of default


鈥淵es, as far as I understand it, AAA-rated instruments are "guaranteed" to be immune to losses upon certain assumptions about default rates and collateral valuation. If these assumptions are no longer valid, as I expect is increasingly the case with the collateral value assumptions, then the predicate for the hypothesis of zero-risk, that allows the AAA rating, is false鈥�
You seem to be making the same mistake as the investors the only guarantees given were that the first x% of defaults would be taken elsewhere, in most cases this was done by making the underlying pool of assets larger that the bonds issued, the difference being a buffer zone for the investor, the underlying collateral (the properties themselves) would only been seen as a percentage loan to value number.
You are right that the assumptions鈥� made when the rating were given are no longer valid but this is no different to buying a bond in a company that was rated AAA and has now fell down the rating scale due to poor earnings, ratings are not cast in stone they go up and down over time.
As for ZERO risk there is no such thing that is not what a AAA rating means, AAA is just a measure of the likelihood of default which we still have not seen and are unlikly to see and after all even goverment bonds are not without risk however small.