HSBC Falls in Hong Kong on SIV Rescue

HSBC Falls in Hong Kong on SIV Rescue, Goldman Report (Update3)

By Chia-Peck Wong

Nov. 27 (Bloomberg) -- HSBC Holdings Plc fell to a 20-month low in Hong Kong trading after it announced a bailout of two investment vehicles and Goldman Sachs Group Inc. said the bank may have to set aside another $12 billion for bad debts.

HSBC, Europe's largest bank, traded 2.3 percent lower at HK$130.40 at the midday trading break, after earlier dropping as much as 3.1 percent. The company said yesterday it would take on $45 billion of the SIV assets to avoid a fire sale.

Banks are being forced to rescue SIVs, which are unable to finance themselves as investors shun higher-yielding debt following the subprime mortgage crisis that led to loan losses at HSBC. While HSBC said the bailout won't have a ``material'' impact on its earnings or finances, analysts at JPMorgan & Chase Co. said shareholders may end up paying.

``We remain skeptical given the reputation risk associated with letting investors absorb losses in what is in effect an HSBC-associated entity,'' JPMorgan analysts Sunil Garg and Carla Antunes da Silva said in a report today. ``Any credit losses on the two SIVs would eventually be borne by HSBC shareholders.''

SIVs, which borrow short-term debt to fund investments in high-yield securities, have lost as much as 30 percent of their net asset value because of the subprime contagion that Deutsche Bank AG analysts estimate may cause $400 billion in credit- market losses.

`Substantial Losses'

Goldman analysts led by Rod Ramos, in a note dated Nov. 24, said HSBC may suffer ``substantial losses'' into 2008 at its U.S. Household International Inc. unit. HSBC, which bought the U.S. subprime lender for $15.5 billion in 2003, set aside $1.3 billion more than it expected in the third quarter because of climbing customer defaults.

The market for asset-backed commercial paper shrank 29 percent over three months to $836 billion, according to the Federal Reserve in Washington.

Investors in Cullinan Finance Ltd. and Asscher Finance Ltd. will be allowed to exchange their holdings in the SIVs for debt issued by a new company and backed by loans from HSBC, the London-based bank said in a statement yesterday.

Standard Chartered Plc, the U.K. bank that gets most of its profits from Asia, ``may need to follow suit'' and absorb the less than $14 billion of assets in its SIV, Whistlejacket Capital Ltd., the JPMorgan analysts wrote. Standard Chartered fell 3.2 percent to HK$266.20 at the break in Hong Kong.

Gabriel Kwan, a Standard Chartered spokeswoman in Hong Kong, declined to comment when contacted today.

Citigroup Sale

SIVs set up by Dusseldorf-based lender IKB Deutsche Industriebank AG and London-based Cheyne Capital Management Ltd. defaulted last month after investors stopped buying asset-backed commercial paper. Moody's Investors Service has threatened to cut its ratings on some of the funds run by Citigroup Inc., the largest manager of SIVs, HSBC and WestLB AG in Dusseldorf.

Citigroup, the largest U.S. bank, said yesterday in New York it will sell as much as 4.9 percent of itself to the government of Abu Dhabi for $7.5 billion. Chief Executive Officer Charles Prince resigned this month after the bank said losses on subprime mortgages and related securities may cut income in the fourth quarter by $5 billion.