HSBC's Loop-holes and Lies

We have been reporting the most conservative HSBC write down numbers (those of HSBC itself), but the stench of something rotten -- something covered-up -- kept on rising. Yesterday that rotting carrion of the deception laid out by Michael Geoghegan, HSBC's chief executive was skillfully uncovered by activist investor Knight Vinke, after the bank reported profits along with seemingly acceptable subprime related write downs.

Vinke pointed out the Enron-esque accounting loopholes by which the bank avoided recording a $5 billion fiscal first quarter 2008 loss. Knight Vinke said that

HSBC should have been gloomier about its own prospects. The fund manager, which has been agitating for HSBC to sell HFC, said that the group was the only large bank not to make a fair value adjustment on its loans to customers and other banks.

If HSBC accounted for the loans at their market value, they would be worth almost $30 billion less than $1,218 billion book value that the bank ascribes them, Knight Vinke said. Of that loss, about $23 billion comes from HFC. Taking the writedown would have pushed HSBC into a $5 billion loss last year instead of a $24 billion pre-tax profit, the fund manager said.

The banks response was technical, lawyerly and perhaps a bit condescending:

Douglas Flint, HSBC's finance director, said that Knight Vinke's claims were based on a misunderstanding of accounting rules. He said:

“Customer loans are accounted for differently to trading assets. We wouldn't be permitted by current rules to account for our loan book in the way Knight Vinke suggests we should.”

But we suggest to Mr. Flint that a full disclosure would have included just such information rather than the above dodgy rebuttal. Here is how Yves Smith puts it:

Amazingly, HSBC's denial was weak, arguing that the losses were in consumer loans and therefore weren't required to be marked to market. In other words, if HSBC kept its books on the same basis as a US bank, its losses would indeed be much higher. However, HSBC is also claiming to have only moderate delinquencies on its mortgage book.

HSBC is gambling that there really are no long-term impairments on that consumer loans book. If they are wrong, then at best the losses will bleed out over a period of years rather than all at once. Seems to us it would be better for investors long-term to get it over with.

On the other hand, this way works better if insiders want to sell up front...