Worries over HSBC hit markets

Worries over HSBC hit markets
Peter Thal Larsen in London and David Wighton and Richard Beales in New York
Copyright The Financial Times Limited 2007
Published: February 8 2007 20:29 | Last updated: February 9 2007 15:50



Financial markets on Thursaday reacted strongly to HSBC’s admission that it failed to supervise its US consumer lending arm properly as it ran up big losses lending to sub-prime mortgage borrowers.

HSBC’s revelations came as New Century, the second-largest US provider of mortgages to borrowers with patchy credit histories, also said it had underestimated the number of bad loans.

The combined warnings unsettled investors, sending the cost of insuring sub-prime mortgage bonds soaring. “There has been a very violent bearish reaction,” said Alex Pritchartt, a bond index trader at UBS.

Meanwhile, Toll Brothers, the luxury housebuilder, added to concerns about wider weakness in the housing market by saying it would write down land values amid plunging orders.

The warning raised doubts about whether the market is recovering as quickly as hoped from its recent slump. The Federal Reserve has been signalling confidence that the economy is heading for a soft landing. But it said recently there were only “tentative” signs of stabilisation in housing, which is a driver of the broader economy.

Stephen Green, who took over as HSBC chairman in May, acknowledged on Thursday that risk management and other controls were not up to scratch at Household, the consumer lending group HSBC bought for $14.7bn almost four years ago.

“This wasn’t supervised as closely as it should have been,” he said of the US mortgage book, which has expanded rapidly since the end of 2005.

HSBC warned on Wednesday night that the prospect of rising defaults in US mortgages meant provisions for bad debts in 2006 would be $10.56bn, $1.76bn higher than previously expected.

Shares in HSBC fell only 1.5 per cent on the news, suggesting that many investors had already discounted increased bad debts, but New Century shares plunged by more than a third. The ABX index for mortgage bonds rated BBB- widened about 100 basis points to a record level above 750bp on Thursday.

Jamie Dimon, chief executive of JPMorgan Chase, said last week that sub-prime mortgages was the one area of the economy “which looks like a recession”. Most of the problems have related to loans originated in the last couple of years and Mr Dimon said JPMorgan had sold off most of the loans it had taken on in 2006.

The rising number of sub-prime loans in default is also likely to attract official scrutiny. Regulators have already questioned lending practices in other part of the mortgage market, and in September issued guidance to lenders, requiring them to use relatively conservative assumptions when qualifying borrowers. That approach could now be applied to sub-prime lending.