We're in trouble now. Arguably the healthiest bank in the FTSE 100, HSBC, is now running to its shareholders with its palm outstretched.
The banking giant said this morning that it's looking to raise £12.5bn from shareholders. It also slashed its dividend by nearly a third. Pre-tax profit for 2008 came in at $9.3bn, down 62% on the previous year, reports the BBC.
Now this isn't like the other big banks. HSBC isn't doing an RBS or a Lloyds it's not about to be bought by the taxpayer. And at least it's still paying a dividend, even if it's a sharply reduced one.
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But just because it's the best of a bad bunch, doesn't mean it's worth buying...
HSBC'srights issueis no surprise
The fact that HSBC is having to raise more money now shouldn't be too much of a surprise.
Quite apart from the trouble besetting the banking sector in general, HSBC was the first of the British banks to show up the strains of sub-prime. In February 2007, way before Northern Rock collapsed, HSBC issued the first profit warning in its 142-year history, as losses at its US sub-prime lending unit exploded.
The good news is that HSBC is able to raise money in the stock market. It's not being bought by the government, like RBS or Lloyds. And it's not pawning itself in desperation to overseas investors, like Barclays.
The new shares all five billion of them - are being offered to existing shareholders at 254p each on a five for 12 basis (for every 12 shares you own, you'll be offered five at the reduced price). That's a chunky discount on the 491p a piece the shares were trading at on Friday. But it'll be needed if they want to get the issue away.
Steer clear of banks, including HSBC
If I held HSBC, I wouldn't be buying into the rights issue (for more on rights issues in general, see Rights issues: should you play the dash for cash? if you're not a subscribersubscribe to MoneyWeek magazine). That's not a specific judgement on HSBC it remains one of the least ugly plays in a very ugly sector. But I simply wouldn't be keen to increase my exposure to any bank right now particularly as we're all already exposed to RBS and Lloyds through the sheer bad luck of being British taxpayers. There's just too much uncertainty out there, and that will last for a long time.
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The bank might be winding down its US consumer lending operations, but it's got far more than sub-prime to worry about now. One obvious issue is the stream of corporate defaults and rising consumer bad debts still to come. But more importantly, and less predictably, there's the fact that the dead hand of the government is all over the banking sector. Banks that remain privately owned over the next few years will face a minefield of state-subsidised competition and panic-measure, snap regulation.
That's not a recipe for creating or maintaining a profitable business. So why invest any more of your hard-earned money in such a business?
Why we should worry if Sir Fred loses his pension
If you're still not convinced, just take a look at the uproar over Sir Fred Goodwin's pension. People are rightly annoyed because the Government has stupidly allowed him to walk away with a pension worth nearly £700,000 a year. There's no question that he doesn't 'deserve' it. His bank would have gone bust, were it in any other industry, and it was his top-of-the-market ego-tripping deal for ABN Amro that scuppered it.
However, the deal's sealed. Lawyers consulted by the papers all seem to agree that his contract is pretty-much watertight, and there's not really much that can be done about it now. But instead of throwing its hands up and admitting it messed up, the Government can't stop digging. So we had Harriet Harman, deputy Labour leader, telling Andrew Marr on the BBC at the weekend that Sir Fred should not "count on" keeping his full pension, because "it is not going to happen."
Here's the bit you should be worried about. She went on: "it might be enforceable in a court of law, this contract, but it is not enforceable in the court of public opinion and that is where the government steps in."
Let's ignore for a moment, the fact that this is pure gibberish. After all, if the government really cared for the "court of public opinion" then Gordon Brown would have stepped down months ago. The real concern is this: if you start saying that legally-enforceable contracts can be overturned on the whim of the government, then you're setting a dangerous precedent.
Now, I don't believe this will happen. I think Ms Harman was probably just opening her mouth and sticking her foot in it. But it's this kind of short-term point-scoring, blame-shifting and rule-changing that clearly shows just how ill-matched politicians are to running any sort of business.
And now they're entrenched in our banking sector. I'd suggest that if you haven't already sold out, you do so now.
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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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