HSBC A Prime Example Of Why TBTF Means TBTM (Too Big To Manage)

In an earlier series of articles (Parts I, II and III can be found at the respective links) this blog set out the specific reasons why TBTF means TBTM. The troubles of HSBC in the US are a prime example of this maxim.

HSBC has been on a mission to be the “World’s Local Bank” and that sentiment is very proudly and profoundly expressed in its adverts—which by the way are very good. It is a pity that the same cannot be said for the bank.

In trying to achieve its global ambitions HSBC has had many missteps. In 2011, a subsidiary of HSBC was fined millions for selling products that had a minimum period of investment that was beyond the life expectancy of the pensioners they were sold to. The fact that the mis-selling went on for five whole years, from 2005 when HSBC acquired the company to 2010, speaks volumes about the bank’s ability to manage its affairs.

As distasteful as this was it pales in comparison to other HSBC missteps. In 2003 HSBC acquired the American subprime lender Household International. Phillip Inman of The Guardian wrote in an article entitled HSBC counts the cost of US housing market collapse:

A little research would have turned revealed how unpopular Household was with many of its customers. In 2003 it was defending a long-running claim by thousands of borrowers that they were subjected to high-pressure selling. Another class action centered on claims that Household deliberately delayed attributing repayments by credit card customers to trigger fines and late-payment fees.

Household International was fined US$484 million by the SEC for high-pressure selling. However, there were a lot more losses to come. Having bought a US subprime lender almost at the peak of the market, when the financial crisis erupted, HSBC lost some US$30 billion on a company which it had acquired for only US$15 billion.

When writing Clearing The Bull, I took a long and hard look at the reasons for TBTF and concluded the following in respect of HSBC:

HSBC has been on a mission to be the “World’s Local Bank.” The problem is that in trying to get there, it appears that HSBC has been pursuing growth over the speed at which they are able to develop their people and their organization. Who knows what other surprises awaits that organization.

Unfortunately for HSBC these words have now proved prophetic as the bank is now cited as being responsible for one of the largest money laundering operations in US history. Shahien Nasiripour writing in the FT in an article entitled HSBC ignored drug money fear, Senatenoted:

The bank moved billions of dollars in cash from its affiliate in Mexico to the US, more than any other Mexican bank, despite concerns raised by law enforcement agencies with HSBC that such sums could only involve the proceeds from dealings in illegal narcotics, the Senate permanent subcommittee on investigations report said.

Anyone who has worked in financial services knows just how important anti-money laundering or AML legislation, policies and procedures are. Every bank that I have ever been in or worked on behalf of ensures that everyone undergoes thorough AML training. Yet, from all reports it appears that HSBC’s AML procedures were extremely lax. Thus it violated just about every law relating to the laundering of drugs money and doing business with sanctioned countries such as Iran.

For all intents and purposes that is not only unbelievable it is also unforgiveable.

However, I do not honestly believe that the senior management of HSBC was not committed to ensuring that the bank operated at the very highest standards. The real problem is that TBTF does indeed mean TBTM and that is the root cause of the failure of the management of HSBC.

HSBC in its current guise is one reason why Point 2 of the 9 Point Plan For Transforming The Banking Industry previously published in this blog reads as follows:

2.  Exemplary Leadership and Management

Management’s primary responsibility is to exemplify and reinforce the mission and values. In the long term that is the basis on which management and the organization will be assessed.

In pursuit of their responsibility management will work to develop, integrate, and sustain the organization’s human ecosystem. This includes a commitment to never growing the organization beyond a scope and size which would diminish management’s ability to excel in that duty.

HSBC and other TBTF organizations need to take very careful note but one must confess that the omens are not particularly good.

Jonathan Ledwidge is the author of the book Clearing The Bull: The Financial Crisis and Why Banks Need a Human Transformation. Use this link to give your opinion on the performance of banks post the financial crisis.

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