HSBC Chief Calls for Tougher Inflation Fight, Industry Changes

By , Money Morning •

By Jennifer Yousfi
Managing Editor

The chief executive officer of HSBC Holdings PLC (ADR: HBC), Europe's biggest lender, yesterday (Tuesday) called on the U.S. Federal Reserve and other central banks to make fighting inflation a priority.

"Inflation is a long-term problem because there is no long-term will to solve it," Chief Executive Officer Michael Geoghegan said during an informal shareholders meeting in Hong Kong.

He went on to criticize central banks that have kept interest rates low in response to curtailed economic growth and weak housing markets. But due in part to low interest rates, inflation has escalated as costs for food and energy soar, dampening consumer spending in such markets as the United States - and causing major food shortages in other markets around the world.

Geoghegan also said he expects that it will take three years for HSBC to return its U.S.-based consumer-lending unit to a profit. Its U.S. operations, acquired from Household International, was heavily exposed to the subprime-lending market and resulted in HSBC taking a $3.2 billion dollar write-down in the first quarter of 2008. That's on top of a $4.6 billion dollar write-down in the fourth quarter last year.

Back in November 2006, HSBC was the first bank to acknowledge losses on subprime mortgages.

The world's biggest banks have suffered about $383 billion in write-downs and credit losses since the subprime crisis began in earnest last year, and have raised about $270 billion to replenish capital, Bloomberg News reported yesterday.

Over the weekend, UBS AG (UBS) - the Swiss banking giant seeking to raise $15.6 billion from shareholders to replenish a capital base eviscerated by such write-downs - revealed that it faces more losses from its mortgage-related holdings in both the global and U.S. markets, Bloomberg said.

In a prospectus for the rights offering that was posted on its corporate Web site, the Zurich-based UBS said it had losses on non-U.S. residential and commercial real- estate securities in 2007 and in the first quarter of this year and said those losses "could increase in the future," the Bloomberg report stated.

In the United States, lending remains tight and home foreclosures are at a record high, as overextended homeowners are having difficulty obtaining favorable refinancing terms.

Almost two-thirds of U.S. banks have raised their lending standards for mortgages, even to their most creditworthy borrowers, Bloomberg reported. For those with limited or bad credit history - the so-called subprime borrowers - three-fourths of banks have raised lending requirements, according to a U.S. Federal Reserve survey of senior loan officers published May 5.

Lending also remains tight in the United Kingdom, where mortgage approvals continued to be low in April, the British Bankers' Association announced yesterday.

Home mortgage approvals increased to 38,704 in April from March's historic low of 35,546, however, approvals remain below the 42,000 six-month average.

"March was the record low and April is the second lowest ever, so you cannot call that a recovery," Michael Saunders at Citigroup Inc. (C) told Reuters.

Added Saunders: "The housing market remains extremely weak."

A Changing Industry

Inflation isn't the only problem facing the financial industry, according to the HSBC chief executive.

"The investment-banking model is flawed," Geoghegan said. "If banks aren't strong, they should be restructured or taken over."

HSBC has been able to weather the subprime crisis better than some of its competitors due to its heavy focus on the Asian and emerging markets. The London-based lender has only had to dismiss 90 employees, or 0.1% of its total staff, as a result of the global credit crunch, according to Bloomberg-compiled data.

The European lending firm's employee retention stands in stark contrast to The Bear Stearns Cos. Inc. (BSC), which has had to let 66% of its employees go as it eliminated 9,160 jobs in the process of being acquired by JPMorgan Chase & Co. (JPM).

Traditional financial centers such as New York, London and Tokyo are shedding jobs, while up and coming cities like Dubai and Hong Kong continue to add to their financial ranks.

Credit Suisse Group (CS), Deutsche Bank AG (DB), Morgan Stanley (MS) and Citigroup have all relocated top rainmakers to Hong Kong as investment bankers look to cash in on the large number of sovereign wealth, private equity and corporate deals occurring in Asia.

China and the other emerging Asian economies haven't been as adversely affected by the global credit crunch. While deals are slowing down in the United States and Europe, the pace of business is still fast and furious in the Pacific Rim.

"Investment bankers follow the money," Scott Moeller, a professor at the Cass Business School and former executive with Deutsche Bank and Morgan Stanley, told BBC News.

And even with the many job cuts and losses the financial industry has already suffered, some think the worst is still to come.

"We've never seen write-downs like we're seeing now and such big losses," John Challenger, chief executive officer of Chicago-based outplacement firm Challenger, Gray & Christmas Inc., told Bloomberg. "More job cuts will come. Even with the market's optimism recently, I don't think we can safely say that we're out of the woods yet."

News and Related Story Links:

  • Reuters:
    HSBC CEO calls for higher rates to fight inflation
  • Money Morning:
    Major Lending Pullback Predicted by Maverick Wall Street Analyst Could Have Dire Implications for U.S. Economy
  • Dow Jones News/Smart Money Magazine:
    HSBC CEO: U.S. Debt Write-offs Could Grow.