HSBC faces crisis over US credit cards

Generali

It's a bit strong to take a story about one division (that made a profit last year in a really tough environment despite writing off 10% of its loans) and extrapolating it to HSBC being in huge trouble.

HSBC may still go bust, who knows, but it isn't going to be as a result of anything in that story. If the rest of their business remained the same and they wrote off a further 20% of loans, HSBC would still make a profit this year. Once you factor in the fact that Governments, by slashing interest rates and allowing banks to use even derrivatives such as AORs* as collateral to borrow money from the Central Banks then the operating banking environment should be pretty profitable, before writeoffs, this year.








*Any Old Rubbish

tomterm8

michaels wrote: »

Same piece also said that according to their internal models even in a worse case scenario their US loan book was worth more than mark to market - again hmm...

If you believe that, I've got a old Amstrad CPC 464 to sell you... market says it's worth 50p, but I'm willing to sell it to you for a sweet £1,000.

Degenerate

tomterm8 wrote: »

If you believe that, I've got a old Amstrad CPC 464 to sell you... market says it's worth 50p, but I'm willing to sell it to you for a sweet £1,000.

You're wrong on two counts:

1. Old computers don't provide an income stream like debt assets do. Your only way to get money from an old computer is to sell it for whatever you can get. With debt assets, banks can sit it out and let the repayments come in - that is their business, after all. Depending on the default rate, this "hold to maturity" value could be much more than the price the market is currently offering.

2. Amstrad CPCs are now firmly into vintage computing territory and will fetch a lot more than 50p on Ebay.

tomterm8

Degenerate wrote: »

You're wrong on two counts:

1. Old computers don't provide an income stream like debt assets do. Your only way to get money from an old computer is to sell it for whatever you can get. With debt assets, banks can sit it out and let the repayments come in - that is their business, after all. Depending on the default rate, this "hold to maturity" value could be much more than the price the market is currently offering.

2. Amstrad CPCs are now firmly into vintage computing territory and will fetch a lot more than 50p on Ebay.

Firstly, the CPC is quite thorughly broken, and 50p is probably more than its worth :rotfl:

For a loan to be marked down at mark to market, it also must be broken. A credit card loan where the debtor can't even afford to pay turnips, isn't an asset. If these loans were performing, the market would recognise that. They aren't performing, and they are worth precisely what the market says they are worth.

Degenerate

tomterm8 wrote: »

For a loan to be marked down at mark to market, it also must be broken. A credit card loan where the debtor can't even afford to pay turnips, isn't an asset. If these loans were performing, the market would recognise that. They aren't performing, and they are worth precisely what the market says they are worth.

So markets are always right, is that it? How then do you explain the over-valuation of banking assets in the first place? Market fundamentalism is exactly what got us into this mess. Or do you think that markets are only right when they are going down?

Explain to me how the market performs a thorough analysis of the future income performance of these assets to arrive at a soundly-based valuation? They don't, of course. The market price is purely a function of what buyers are willing to pay and how desperate sellers are to sell. The option of holding on to income-producing assets is a perfectly sound one if you think market conditions are unfavourable. If we had markets full of Warren Buffett types making sound appraisals of asset performance, then they would always produce rational market valuations, but if this were the case, Buffett would not have been able to become a billionaire by betting against them.

tomterm8

I don't have much faith in HSBC, or other banks judgement in terms of mark-to-model. When events that are supposed to happen only once every twenty billion years are happening twice a day, and three times on friday, it's a dead give away the models are wrong.

the bottom line is, why should I trust HSBC to tell the truth about how much these assets are worth? If HSBC was to mark all their loans to market, they'd be bankrupt. So, they have every incentive to lie, and no incentive to tell the truth.

Degenerate

tomterm8 wrote: »

I don't have much faith in HSBC, or other banks judgement in terms of mark-to-model. When events that are supposed to happen only once every twenty billion years are happening twice a day, and three times on friday, it's a dead give away the models are wrong.

the bottom line is, why should I trust HSBC to tell the truth about how much these assets are worth? If HSBC was to mark all their loans to market, they'd be bankrupt. So, they have every incentive to lie, and no incentive to tell the truth.

Um, excuse me, but you have completely moved the goalposts here. You were arguing that market valuations are always correct. You said:

If these loans were performing, the market would recognise that. They aren't performing, and they are worth precisely what the market says they are worth.

Let's apply that to another market valuation... Say the valution of RBS shares back in March 2007:

If these shares weren't performing, the market would recognise that. They are performing, and they are worth precisely the £6.75 each that the market says they are worth.

Of course, with hindsight, that would have been complete bo**ocks.

tomterm8

Degenerate wrote: »

Um, excuse me, but you have completely moved the goalposts here. You were arguing that market valuations are always correct. You said:

If these loans were performing, the market would recognise that. They aren't performing, and they are worth precisely what the market says they are worth.

I didn't say anything about share prices, which generally don't reflect much more than market sentiment, and are pretty much always wrong.

Bond Prices are pretty easy to value. they are a function of future income streams, and recovery rate in the event of default. They don't have the option value of a share price (they can't significantly outperform).

There is no reason to think that the bond prices are significantly under valued.

Degenerate

tomterm8 wrote: »

Bond Prices are pretty easy to value. they are a function of future income streams, and recovery rate in the event of default.

Like mortgage-backed securities? Keep digging.

tomterm8

Mortgage-backed securities are pretty easy to value. The problem is, it turns out many of them are worthless.