Extract - HSBC's first profit warning ushered in the crunch
March 03, 2009
A STOCK Exchange announcement by HSBC on Wednesday, February 7, 2007 was the moment the credit crisis began.
Former HSBC chairman Sir John Bond. Picture: Bloomberg
It was only 351 words long but it was devastating.
The statement opened innocuously enough: "HSBC HOLDINGS PLC wishes to update the pre-close trading statement issued on 5 December 2006 in respect of a single matter." From there, though, the red ink started to flow. The statement went on to admit that slowing house prices had led to higher delinquency rates among American mortgage customers and that bad debts in the business would be 20 per cent worse than expected.
It was HSBC's first profits warning in its 142-year history and a profound shock to a proud organisation.
Mike Geoghegan, its chief executive, told the market that he was taking personal responsibility, announcing: "It's an embarrassment to me and I want it sorted out. I'm not happy that this has happened on my watch and know that I will be judged on how I deal with it."
Within days, shares of New Century Financial, Fremont General and NovaStar Financial, all specialist sub-prime lenders, went into freefall. As New Century said that it might not be able to stay in business, both Barclays and UBS admitted having exposure to it, while City analysts were starting to wonder about which banks had exposure to the sector through trading parcels of sub-prime mortgages that had been securitised.
By May that year, UBS had closed its hedge fund division because of sub-prime related losses. A month later Bear Stearns was engulfed in speculation it was struggling amid its exposure to mortgage-backed bonds.
By July 2007 Ben Bernanke, chairman of the US Federal Reserve, was telling Congress: "A lot of the sub-prime mortgage paper is not, you know, as good as was thought originally." A month later, the FTSE 100 had come rattling back under 6000 points and the European Central Bank and others were pumping liquidity into the money markets, which were showing signs of strain as banks - seeking to avoid the problems their US peers had with sub-prime - cut back on lending to each other. Then came September and Northern Rock.
Some of those crucial events that led to the actual GFC
- April 11 2007 Citigroup announced on April 11, 2007, that it would eliminate 17,000 jobs, or about 5 percent of its workforce. Warnings had been sounded back in June 2006 when Senior Vice President Richard Bowen, the chief underwriter of Citigroup's Consumer Lending Group, began warning the board of directors about the extreme risks being taken on by the mortgage operation. Many of the mortgages were not only defective, but were in fact fraudulent.
- June 22 2007 Bear Stearns pledges $3.2 billion in loans to bailout a hedge fund (and a related fund).
- July 10 2007 Standard and Poor's and Moody's downgrade hundreds of mortgage-backed bonds. Finally, finally, from many traders' perspectives.
- July 31 2007 Both of those Bear Stearns bailout funds file for bankruptcy. Bear Stearns effectively liquidated all of the holdings.
- August 6 2007 American Home Mortgage Investment Corporation files for bankruptcy.
- August 9 2007 BNP Paribas freezes redemptions of $2.2 billion on three investment funds. It was barring investors from redeeming cash as it was "impossible to value certain assets fairly, regardless of their quality or credit rating," it said in a statement.
- September 14 2007 Run on UK bank Northern Rock as their shares crash in value. Millions of pounds withdrawn by worried customers.
- October 2007 "Big Short" Howard Hubler, senior bond trader at Morgan Stanley, resigns ( though with a $10 million payment in back pay). Back in 2003, Morgan Stanley had created a proprietary credit default swap (CDS) insurance for the purpose of trading "short" (high-risk) or "long" (low-risk) mortgage bonds.
Trading "long" in this instance means to sell insurance on the low-risk bonds, expecting those bonds to be safe. Trading "short" means to buy insurance on high risk bonds, expecting those bonds to go to default.
Hubler co-opted management of this enterprise. He made a successful short trade in risky subprime mortgages, but to fund his trade he sold insurance on AAA-rated mortgages that also turned out to be worthless. It resulted in a massive net loss, roughly US$9 billion during the 2007–08 financial crisis, the largest single trading loss in history.
- November 3 2007 Citigroup's Senior VP Richard Bowen emailed Chairman Robert Rubin and the bank's chief financial officer, head auditor and the chief risk management officer to again expose the risk and potential losses, claiming that the group's internal controls had broken down and requesting an outside investigation of his business unit.
- January 2008 Countrywide Financial, the nation's largest mortgage lender winds up and merges with Bank of America.
Citigroup announces that it was considering cutting another 5 percent to 10 percent of its 327,000 member-workforce.
- March 2008 Bear Stearns taken over by J P Morgan at a pittance of $2 per share after its share price crashes.
Notes from IMDB regarding 2010 movie "Wall Street 2/Money Never Sleeps"
The fictional bank Churchill Schwartz is based on both Goldman Sachs and J.P. Morgan/Chase. Apparently J. P. Morgan/Chase originally purchased Bear Stearns for two dollars per share on the direction of Treasury Secretary Henry Paulson, only to be later changed to ten dollars per share. Frank Langella's character Louis Zabel (partly based on Bear Stearns chairman Alan Greenberg) was told he would initially receive the same amount for his company during the scene of the New York Federal Reserve meeting. When Louis Zabel accuses Bretton James of exacting revenge for refusing to bail out James' Churchill Schwartz during the market crash of 2000, this is loosely based off Bear Stearns decision not to assist Goldman Sachs and other investment banks to do the same for infamous hedge fund Long Term Capital Management following the Russian bond default in 1998.
- September 7 2008 Mortgage giants Fannie May and Freddie Mac taken over by the US Government.
- Mon September 15 2008 Lehmann Brothers, having $639 billion in assets but $619 billion in liabilities, files for bankruptcy protection, click here to read their thoughts 10 years later. Same day, Bank of America agrees to buy Merrill Lynch for $50 billion. The Dow Jones closed down just over 500 points (-4.4%) the same day, at the time the largest drop by points in a single day since the days following the attacks on September 11 2001.
- Monday September 29, 2008 That previous drop on September 15 was now exceeded by this even larger 777 points -7.0% plunge.
- Monday October 13 2008 US Federal Reserve offers unlimited dollars to the central banks of England, Switzerland and the European Union to flood the global banking system with liquidity.
- November 2008 Citigroup found to be insolvent. On Sunday November 23 the US Government agrees to shoulder most losses on about $306 billion of the bank's risky assets.
- November 28 2008 US Federal Reserve kicks off quantitative easing.
- March 2011 Citigroup has the dubious honour of topping the list of recipients of bailout funds at $476bn, Bank of America second at $336bn, Morgan Stanley third at $135bn.
About The Big Short, it was based on real life characters who made millions of dollars betting against the sub-prime market. Their characters are below, with some help from Wikipedia.
- Lewis Salieri of Salomon Brothers. In 1977 with the Bank of America Corp. (BAC ) developed the first private mortgage-backed securities (MBS) — bonds that pooled thousands of mortgages and passed homeowners' payments as a batched total through to investors. Obviously some bonds repaid investors better than others, where there were adjustable interest rates following a "teaser" period, they could reduce to a fraction of their value, as the repayments were then far too high for borrowers to repay. Forcing land and homes to be sold for a fraction of their initial valuation.
- Michael Burry played by Christian Bale started his own hedge fund company Scion Capital in 2000. In 2005 he started shorting the subprime mortgage market by persuading Goldman Sachs to sell him credit default swaps (third party insurance) against subprime deals he saw as vulnerable. It took him until 2007 to start making money. During 2007 and up to April 2008 when he liquidated those short positions, he earned a personal profit of $100 million and a profit of more than $700 million for his remaining investors who didn't bail out because of the "Big Wait" .
- Jared Vennett played by Ryan Gosling and based on Greg Lippmann, a low-level salesman at Deutsche Bank stumbles upon Burry's interpretation of the housing market, and persuades Mark Baum at FrontPoint Partners to buy credit default swaps from his bank, collecting commissions and fees by doing so. Vennett is egotistical, highly vain and serves as the narrator of the film. Also introduces Mark to Wing Chau at Merrill Lynch, a manager of CDOs (structured mortgage-backed high-yield and high-risk or "Junk" bonds) but often having a "AAA" rating.
Though not in the film (but in the book) Eugene Xu at Deutsche Bank who worked with Greg was a quantitative ("quants") analyst who created the first CDO market by matching buyers and sellers.
- Mark Baum is played by Steve Carell and based on Steve Eisman, a fund manager who joined FrontPoint Partners, a hedge fund unit of Morgan Stanley in 2004. Made millions of dollars betting against subprime mortgages in 2007. Assets under management at FrontPoint had doubled in size to $1.5 billion by the end of that year.
- His employees include Porter Collins played by Hamish Linklater as the most objectively normal, Danny Moses played by Rafe Spall as a rampant optimist and Vincent Daniel played by Jeremy Strong as the most rash and impulsive.
- Ben Rickert played by Brad Pitt is based on Ben Hockett, a paranoid and germaphobic retired former trader who, like Mark Baum, despises the financial world but goes back into work at the Brownfield Fund (based on Cornwall Capital) as a favour to the co-owners. Charlie Geller played by John Magaro is based on Charlie Ledley, one of the co-owners who asks Ben to help them get a seat at the 'big-boy' table. Jamie Shipley played by Finn Wittrock is based on Jamie Mai, the other co-owner. They started a hedge fund in their garage with $110,000 and built it into $120 million when the market crashed
- Other characters include a morally bankrupt mortgage broker who specialises in conning immigrants into taking on high risk debt. Another one specialises in conning strippers into "bad" (high risk) debt.
** End of report