Interest Rate Roundup

Monday, March 02, 2009

The death of consumer finance?

There's a lot of news out there this morning -- on AIG and others. But what stood out to me was the announcement from HSBC Holdings that it would need to raise $17.7 billion via a massive rights offering. The multi-national bank also announced that profit plunged 70% in the most recent quarter to $5.73 billion from $19.1 billion a year earlier.

More importantly, HSBC said it was finally throwing in the towel on consumer finance. The company owns the old Household International and Beneficial consumer lending businesses. They made higher-risk personal, auto, and home equity loans to borrowers with weaker credit profiles. It is planning to completely exit that business over the next five to seven years, shutting down 800 branches and slashing more than 6,000 jobs.

I've been following this industry a long time, and I remember during the late 1990s and early 2000s how consumer finance was the place to be. Companies like Beneficial, Household, the Associates, and others were all pursued by traditional banks, and loved by investors, for the higher returns they generated by extending credit to crummy borrowers. Now? Not so much. In addition to HSBC getting out of the business, Citigroup is trying to dump the albatrosses that are CitiFinancial (which includes units of the old Associates) and CitiMortgage. I guess you could call it the "Death of Consumer Finance."

2 Comments:

  • Mike,
    Banking should be treated like any other industry. Many cry over the auto industry bailout while the banks keep gaming the American public. Gimme a break. Yes, we need reduced spreads, yes we need liquidity, yes we want lending. Last year (llooking for link), Bloomberg mentioned that financial services accounted for 4.6% of total economic activity in 63' - up to 40% plus in 07'. Nuff said. Like the blog, Dave

    By Anonymous Anonymous, at March 2, 2009 at 9:25 AM  

  • My favorite HSBC loan throughout the years was a client of mine, age 21, no job, not a student, no assets, not even a bank account, and lived at home with the parents; walked into a Best Buy in 2004 and said "I want that 52 inch plasma TV but I don't have any money." Best Buy said here, fill out this Best Buy credit card application and walk out of here with a new plasma. In my estimation my client's FICO was probably b/w 550-600.

    Nevertheless, she filled out the application, truthfully and honestly, with no false or inaccurate information. I saw the application with my own eyes (years later of course) and it was stamped "Approved". The TV was about $2,500. Not only did HSBC lend her enough to purchase the tv, HSBC also approved her for an additional $500, 'lending' her monies to buy a DVD player and a few of the newest DVD releases.

    Of course, if you 'lend' to any random person who walks off the street $2,500 to buy a tv and some dvds, of course the borrower will accept the loan. And, with predictable results, my client never made a single payment to HSBC. Not a single payment. Six months later her account became a 'charge off' and HSBC sold it for pennies on the dollar to some debt purchaser. A few years later the debt purchaser filed a lawsuit against my client hoping to recover some astronomical amount, around $6,000, which included 'accrued interest' over the years. I demanded trial in order to fight the accrued interest. On the day of trial the assignee of HSBC dismissed its case because it didn't have a witness to testify that HSBC in fact loaned my client the money to purchase the tv.

    Of course HSBC was going to fail miserably; and they deserve to do so. I've been saying this for years. The sheer stupidity of lending standards over this decade of irrational exuberance will be one for the ages.

    By Anonymous Anonymous, at March 2, 2009 at 11:18 PM  

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