Harry Potter and the structured investment vehicles

I wrote yesterday about HSBC and a dissident investor, Eric Knight, and promised I'd get back to the subject today. That, as it turns out, was a good bit of timing.

At about the time I was writing that post, HSBC's London office was making an announcement: its going to bail out two of its structured investment vehicles (SIVs). Those of you who don't know the jargon: please don't let those eyes glaze just yet. This is big.

An SIV is sponsored by a larger organization, but its assets and liabilities are kept off the larger institution's balance sheet.

The sponsoring organization isn't required to rescue SIVs. The fact that HSBC has voluntarily done so, and is taking their troubled assets ($45 billion in mortgage-backed securities) onto its own balance sheet means something because it is the first of the world's major banks to do so in the current credit crunch.

HSBC isn't acting altruistically of course. It's protecting its brand name. Outsiders are often confident in investing in, or becoming the counter-party of, an off-balance-sheet vehicle with a big name sponsor, precisely because they feel that the big sponsor won't allow it to default. HSBC wants them to continue to feel that way -- at least, when it's the sponsor. This is worth what may end up being a big hit.

Still, HSBC's brass deserve some credit for corporate statesmanship here. They're the first of the major banks to take this hit. An alternative might have been for their troubled SIVs to liquidate themselves into the market, with an asset fire sale. But that might have triggered imitators, and a rush for the exits.

What happens in a building with narrow doors when everyone tries to exit at once?

This time, the world of finance might not have to find out.

All that said, what were Mr. Knight's contentions about the failings of the bank? His ad in yesterday's WSJ said that HSBC has perennial stock market underperformance compared to its peers. It has pursued geographical diversification instead of comparative advantage, it has never achieved the optimal scale in key markets -- the UK, the USA, and France. According, he thinks, HSBC should play to its strength and its origins. It should move its headquarters away from London, into China. The People's Republic has rules limiting the activities of "foreign" banks and the HSBC could have much more freedom of action in the region it knows best if it ceased to be "foreign" there.

He is also unhappy with the way in which the top execs of HSBC decide upon their compensation. He wants the bank to make public minutes of all meetings in which they discussed their bonuses. So far, they've refused.

As far as I can tell, if they have helped avert the worsening of the credit squeeze by their announcement yesterday, they've earned something of a bonus.

Okay, the "Harry Potter" reference above was a bit misleading. Still, I was going to write "HSBC and the structured investment vehicles" but that just triggered the association to the characteristic Rowling's titles and I couldn't resist.

HSBC Critic Buys Ad Space

The founder, principal, chief-cook-and-bottle-washer of Knight Vinke Asset Management (KVAM) has renewed his criticism of HSBC. Today's Wall Street Journal contains Eric Knight's indictment of the giant global bank, taking up two thirds of page B6.

HSBC traces its history back to 1865, when a Scot named Thomas Sutherland decided that there was money to be made in providing banking services along China's coast. He set up a bank in Hong Kong in March and another in Shanghai in April -- hence the name, "Hongkong and Shanghai Banking Corporation," which gave rise eventually to the more economical name: HSBC.

Skipping forward a bit ... HSBC shares are traded on four exchanges: Hong Kong, Paris, London and New York. It isn't literally true that trading never stops -- a really persistent trader/specialist might allow himself a bit of sleep after the New York close and before the Hong Kong opening bell. But not much.

Sticking to New York and to US dollar denominations: HSBC's stock was trading in a range between $96 and $98 for much of October. Through November, it has broken decisively out of that range -- downward. The price is now in the mid $80s. This is unsurprising, given the credit turmoil in the US especially. Why shouldn't investors in HSBC simply ride out that turmoil and wait for a rebound? What in particular makes Mr. Knight unhappy with management?

I'll leave that as my cliffhanger. More in tomorrow's entry.