HSBC Undervalued Losses by $30 billion

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ostrich So says activist shareholder Knight Vinke who accused the board of undervaluing subprime assets acquired by its purchase of Homecomings Financial. Yves Smith at Naked Capitalism has the angle on HSBC’s rather curious defense. Rather that standing strong on its accounting standards and portfolio performance the bank simply punted saying that the assets weren’t required to be marked to market because the loans are consumer loans and not mortgages.

Yves cites a Financial Times piece in which Vinke estimates that $23 billion of the potential $30 billion comes from the failing portfolio held by Homecomings Financial.

Knight Vinke, the activist investor, launched a fresh attack on HSBC yesterday, accusing Europe’s biggest bank of flattering its US sub-prime losses by failing to write down $30 billion (£15 billion) worth of mortgage assets.

The broadside came as HSBC revealed a $3.2 billion first-quarter writedown on loans by its US business to poor Americans.

HSBC’s investment bank also took a $2.6 billion writedown on credit investments for the first three months, pushing the group’s total losses on sub-prime to $25 billion…..

Knight Vinke said that HSBC should have been gloomier about its own prospects. The fund manager, which has been agitating for HSBC to sell HFC, said that the group was the only large bank not to make a fair value adjustment on its loans to customers and other banks.

If HSBC accounted for the loans at their market value, they would be worth almost $30 billion less than $1,218 billion book value that the bank ascribes them, Knight Vinke said. Of that loss, about $23 billion comes from HFC. Taking the writedown would have pushed HSBC into a $5 billion loss last year instead of a $24 billion pre-tax profit, the fund manager said.

You’ve got to love a bank that blatantly tells you that while yes, you are technically correct in calculating 10x larger loan-related losses, that they are going to stand by their overly-optimistic estimation on an arcane technicality that allows them to paint whichever reality they choose to accept.