Since moving to felixsalmon.com, I’ve tried to lay off the metajournalism.
This is meant to be a finance and economics blog, after all, and there’s no
reason why people who are interested in finance and economics should want to
read snarky prose about financial journalists.
But maybe I can spin Dan Gross’s
latest article for Slate not as a sign of journalistic innumeracy, but rather
as a sign of why people should buy when things look bad. Because things aren’t
nearly as bad as Dan says they are.
Here’s how the article starts:
Hey Sucker Banking Corporation
How a British bank blew it in America.
On Wednesday, the giant British bank HSBC
of huge potential losses because of problems in its U.S. subprime mortgage-lending
unit. The company, the nation’s second-largest subprime lender, had to set
aside $10.6 billion in 2006 to deal with rising delinquency and default rates
in its vast portfolio of loans to American homeowners with less-than-stellar
credit.
That’s the spin. Here’s the truth: On Wednesday, the giant British bank HSBC
said that its US subprime mortgage-lending unit was on track to make $2.3 billion
in 2006, even after settting aside an extra $1.8 billion to cover loan losses
in the unit.
HSBC never warned of "huge potential losses" – not only is
the bank highly profitable overall, but even its US subprime mortgage-lending
unit is highly profitable. And the $10.6 billion in loan-loss reserves is not
just related to subprime mortgages, it’s related to all of HSBC’s lending, anywhere
in the world – and HSBC has $1.74 trillion in assets, which means
that HSBC is provisioning just 0.6% of its assets.
In other words, if you’re looking for news that the sky is falling, you’ll
find it anywhere you want. But really, it isn’t that bad at all.
two things, first you should not take total assets but loans which account for aproxim. 50% of total assets, second it is suggestive, although HBBC is a conservative bank( it scares that it is the number 5th issuing derivatives) that those additional provisions are not related to those mortgage loans but it is targeted to its invesment in that unit, that is HSBC plc is valuing cero that investment.
Felix, you get one rather important little fact dead wrong: HSBC isn’t making $2.3bn on sub-prime mortgages. That would be an amazing amount, even at the top of the cycle. HSBC Finance (the old Household) is set to make $2.3bn. Sub-prime mortgages are part of the business, true, but not ALL of it!
HSBC Finance is making $2.3 billion, and it deals overwhelmingly with sub-prime borrowers. So if it’s losing money on its subprime mortgages, it must be making much, much more on its other subprime businesses, which I assume are mainly credit cards. Would that be right?
So now I have visions of borrowers racking up enormous credit-card bills, and eventually paying them off with a much cheaper subprime mortgage. HSBC, in that situation, has already made loads of money from the credit card — probably more than it will lose on the mortgage, even if the mortgage goes straight into default. On the other hand, if it wrote off the credit card rather than refinancing it, it would stand to lose a lot more money overall.
Do you see where I’m going here?
I didn’t say HSBC lost money on sub-prime morts. Not sure if it’ll even break that out in results. But I am a tad concerned that you don’t know what HSBC Finance does (er, mortgages credit cards, car loans, insurance, banking…). Rather undermines your belief that you are telling us “the truth”.
And yes, I do see where you are going – you’re assuming that sub-prime borrowers can, en masse, game low interest rates. But a) many have already taken out home equity to fund credit card purchases (that was the 2002-2005 game); b) tighter lending standards mean people with whacked out credit are gonna find it much tougher to get another sub-prime mortgage at all, let alone one they can afford.
I was talking about the lenders, more than the borrowers. But I certainly agree that HSBC’s underwriting standards — like underwriting standards everywhere else in the subprime sector — are much tighter than they were this time last year. That’s a good thing, right?
You can’t have one without the other.
Tighter standards are great – unless you have are an indebted credit card holder hoping to use another sub-prime mortgage to dig your way out of a hole.
Hi, almost 3 years later but this is an interesting article on Clusterstock:
http://www.businessinsider.com/heres-the-secret-of-how-one-hedge-fund-trader-spotted-the-housing-bust-and-made-a-fortune-2010-1