On Wednesday, the giant British bank HSBC warned of huge potential losses because of problems in its U.S. subprime mortgage-lending unit. The company, the nation's second-largest subprime lender, had to set aside $10.6 billion in 2006 to deal with rising delinquency and default rates in its vast portfolio of loans to American homeowners with less-than-stellar credit.
HSBC's woes are the most highly visible evidence that the real estate-credit orgy of recent years is coming to an unhappy end. The announcement—coupled with reports of trouble at No. 3 subprime lender New Century Financial—shows that the low end of the housing sector has yet to touch bottom. But HSBC's troubles are interesting for another reason. The bank is the latest in a long line of foreign chumps who bought into a hot U.S. market near the top.
HSBC has a long and proud history. It started life in 1865 as the Hong Kong and Shanghai Banking Corporation: hence HSBC. (The woes have led several wags at Barry Ritholtz's blog to propose alternate and apropos definitions for the bank's acronym. My nomination is: Holy S***! Bad Credit!) The company grew and thrived, and was among the contributors to Anglobalization—historian Niall Ferguson's term for the process by which the British empire ushered in global trade and finance.
In recent years, HSBC has tried to boost its presence in the United States. It opened branches in New York and California and built up its investment-banking presence. The company also made a splash by acquiring mortgage lender Household International for about $14.2 billion in 2003. HSBC continued Household's practice of extending credit to people with spotty credit histories, which has led to its current problems.
HSBC joins the roster of foreign investors that have been seduced by the manic entrepreneurship rampant on these shores and by the promise that, somehow, in the new world, the laws of economics are suspended. In the 1990s, Japanese venture-capital firm Softbank invested heavily in American dot-coms. It bought a big stake in the online broker E-Trade near the top and shrewdly sold out at the bottom. It also invested in a parade of stinkers, plunging $30 million into Kozmo.com in early January 2000 and paying $275 million for a 6.5 percent stake in the online grocer Webvan in 1999—a stake that turned out to be worthless.
In the 1980s, a unit of Japanese conglomerate Mitsubishi paid a ton of money to purchase Rockefeller Center, helping inspire the Rising Sun-era fear that Japan was invading the United States by paying obscene prices for trophy properties. Six years later, having invested even more in Manhattan's art deco masterpiece, the unit went bankrupt.
The meme goes all the way back to the 1880s and 1890s, when British, German, and Dutch investors plunged billions of dollars into a sector then in the midst of a bubble: railroads. Between 1865 and 1900, European investors bought an estimated $2.5 billion in U.S. securities, the overwhelming majority of which were stocks and bonds issued by railroads. Like the telegraph promoters before them, and the fiber-optic promoters after them, the railroad barons of that era used the money to build sprawling, redundant, and competing networks—and then bankrupted one another by competing viciously for the small amount of traffic. By 1894, about one-quarter of the railroads were in bankruptcy. The foreign investors were among the biggest losers, and J.P. Morgan and other American consolidators picked up the pieces.
Why do foreigners get seduced into plunging their funds into American bubbles? At root, they're motivated by the same impulses that drive American investors to plunge their funds into American bubbles. They get taken in by the prospects of quick profits. They succumb to the promotional message that a booming market is big enough for 10 or 15 huge competitors to thrive—it's not like there was a shortage of mortgage lenders in this decade, or dot-coms in the 1990s, or railroads in the 1880s. And they're drawn to the economic version of American exceptionalism. Here's a country with a large geographical footprint, a vast and wealthy population, and a culture of frenetic borrowing, spending, investing, and growth. Who wouldn't want to be a player here? Of course, HSBC has learned that the U.S. market may not be so exceptional after all. Still, Americans shouldn't be so smug in making sport of HSBC's failure. As we write, U.S. banks like Citigroup and Goldman Sachs are rushing into China—HSBC's historical home turf—seeking to stake a claim in a huge, frenetic, rapidly growing, wealth-producing market.
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