Monday, March 2, 2009


The singer Lulu says the sixties were not about "sex & drugs"; they were about "rock & roll"! What would be a comparable statement about the credit boom decade and the credit crunch disaster years? Maybe Lulu has already summed it all up.
The noughties, the years that gave us the Credit Crunch (are defined in the HSBC 2008 annual report out today - Chairman Stephen Green's Statement - who did so without any new insight to offer!) nothing new, that is not until Green, on BBC radio 4 today, called those years "the GO GO years"! Green is also a Church of England reverend and was saying that while banks had always had a moral obligation governing their behaviour, it had "not always been honoured in the observance".
"I think there is an important need to underscore the critical necessity of good ethical principles in banking and in the markets," adding that there will be a reversion to some older principles of banking, in terms of "a simpler sense of providing good customer service, good relationship management, and a sensible approach to liquidity". he mentioned St.Paul before using the expression GO-GO years - a gift to the headline writers when Green has personally just let 16% of his bank's share value go, or was it just bad luck to announce a rights issue on such a sensitive day hit by the huge write-down at AIG, which needs another $30bn. Or, despite the respect for Stephen Green and Michael Geoghegan (let's call them G&G) among analysts, can they any longer be the right traffic-light KRI for HSBC? Is calling for a rights issue and the reasons given for this a major error and unnecessary blow to shareholder value and to confidence in HSBC?
G&G were admired for having maintained market and shareholder confidence in the bank, for the bank's transparency about write-downs at Household, and improved risk management and sound strategy. But G & G were able to do that also by doing nothing that risked confidence such as seeking government funding or rights issues - until now?
Why should a bank making substantial $9bn profits now decide to dilute its shareholder capital at a deep discount to get $12bn at this highly stressed sensitive time? One reason is that just as short-sellers claim they don't drag down bank shares, rights-issuing banks don't believe they drag down the share price either. You've got to laugh - till it hurts! Even if the logic makes sense, has the business risk of a rights issue and possible reputational risk been fully considered? Did anyone suggest this could trigger a 20% share price fall?
[Note: next day Tuesday,after writing this blog on Monday, HSBC shares dropped to their lowest in nearly 10½ years, dragging down the Hang Seng index as Hong Kong investors had their first chance to react to the bank’s discounted share sale plan and dividend cut that hit the stock in London overnight. The bank's shares fell 18.8% in Hong Kong to close at HK$46.25 after being suspended from trading prior to the announcement. The fights issue represents 41.7% dilution of existing issued ordinary share capital.] Is the answer that HSBC's G & G do not believe their own bank's share value (clearly under-pricing the bank) and care less at this time about share movements when prices are so volatile (a favourite word of Green's)? Is it just a matter of getting the money in and hope for the best, trading on the confidence and respect that bank has already won for itself? But, when other truly great banks can be dragged so low, when markets are not behaving rationally, however the rights issue is computed it is a risk, and I suggest not one worth taking! This is not helped by having opposing reasons for the right issue - on the one hand to shore up capital reserves, on the other to build an acquisition pot. Banks that have grabbed the carpet-bagger opportunities to buy other banks at fire-sale prices have not prospered from this so, notably Citigroup, Bank of America, Lloyds Banking Group. Does HSBC full appreciate the confidence factors in various solvency definitions and measures? Has he strategy been fully scenario stress-tested? How do reputational and business risk stack up against the Basel II capital ratios (that Green does know about and yet oddly describes as also "volatile")? Does he understand the banks full working capital picture given how it is spread across so many business units and countries - of course he does? OK, so 2008 was back to 2006 profit performance, 20% worse than 2007, plus a third off the profits because of goodwill write-downs. That is a great result - so why blow it on a paltry rights issue?
If the bank can say it is generating capital well internally, and when distressed bank assets can be share purchases, why go for a rights issue? If the result of this is severe dilution and share price falling down to what i call 'postage stamp prices' maybe the bank should just go to Government now and ask for 20% nationalisation - why wait? This is obviously the risk of what could happen later this year, maybe by mid-summer - so get it over with now and spare shareholders further shameful abuse! How might the share price have behaved differently, positively, if the bank had not announced capital-raising measures? Here is the 2007 picture. For 2008 see numbers in the attached comment below or on where this essay is easier to read. G & G say the following directly self-contradictory things to characterise their strategy and excuse why they are diluting share-value at this extremely sensitive time for all and any banks:
1. generating capital internally remains strong
2. financials are highly stressed, but HSBC competitiveness is gaining
3. capacity of financial firms is constrained by capital funding
4. all are focusing more on domestic markets
5. more HSBC capital will absorb impacts of economy and unforeseen events?
6. giving HSBC options re. opportunities which present themselves to superior banks.
All the above are precisely reasons that absolutely do not justify a rights issue! Either a rights issue is a forced choice that the bank must resort to to get desperately needed capital to repair its reserves, or (as G & G are trying to say) this is a 'nice-to-have' sensible option to get a bit more fuel in the tank to take in more of the scenery on this rough ride - and do some carpet-bagging - some acquisitions to be paid for in cash! This is madness and if you want to know how I can say that, it's simple; Chairman's report reads like it was written by a Rumsfeldian -wordsmith. Read the HSBC report and compare it with RBS and LBG. HSBC's mindset of what and where banking is today is stuck in the past - you can tell that from the language, the hackneyed phrasing, outmoded cliches, complete failure to say one thing new or different, G & G write their reports like wind-up automatons, talking 'speak-your-weight' language of an era that is now past, over, gone, but they don't see that. They are living on the heights and really that's all they know. Why should a bank making half a billion declarable net profit a month and with only a 12% 'funding gap' need to take the second to last, least attractive, option for capital-raising? Can this $2-3 trillion assets bank not squeeze £12 billion out of its net of its net assets and apply them to capital reserves. Of course, it can. Despite $41bn write-downs, mainly in US, the confidence in HSBC and its share price remained stubbornly strong. HSBC did not know how lucky it was to only fall to 750p from 900p in the 3 months after Lehman collapsed. Then in the last two months the share price falls from 750p to 480p, and today to under 430p with 350p as the next support level, maybe? Rights issues by banks are like pouring blood into a piranha shoal.
G & G don't like volatility and here they are inviting all that directly onto themselves. Maybe they know they can't hold on any longer to their management positions and it's best to go now while there's still a chance of multi-million pension top-up and contract-severance deal.
So now the market rightly assumes the bank has hidden major problems, whether the bank knows that itself or not, who cares now, its figures are no longer to be trusted, the markets will see to that, and HSBC's hard-won, or very lucky, but extremely valuable, credibility is blown - 20% of its share value, all its intangible goodwill as reflected in net unsecured borrowing - all heading for the cliff! HSBC, led by a cash-flow man and a marathon runner, is now just another lemming running with the pack. HSBC was a bank apart and above nearly all others, but G & G did not seek to understand that properly and how to build the lessons of that into their strategy! Whoever are the business-planning boffins in the bank, can they compute external hurdle rate risks as well as internal hurdle rates across the group, in the context today of no bank being too big to fall over a capital hurdle. HSBC only needed to keep a firm grip on the tiller, head down, least said the better, stick the toxic Household US mortgage business into a bad bank for long term work-out, fix up the accounts and accounting system, further improve economic capital risk systems, remain conservative, and manage all other non-performing and under-performing loan-books better.
Green is right, yes, it was Go Go years, but now they are gone, is his bank still wanting to play GO, GO by buying other banks' assets because that is cheaper than expanding via new loans? This is high risk and if it fails and the share price hits the postage stamp level alongside many others who are there already, then (in a famous Irish reverend doctor's words) Green & Geoghegan must Go!" Shareholders may as well call for that now - why wait - get the embarrassment over with. The rights issue may be a corporate suicide note, and for G & G become a "sack or resign issue". Just unbelievably risk-taking, so disappointing - making shareholders nervous in one of the few banks where they were least anxious until now!

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