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The Lion Aches

27 February 2015 By Peter Thal Larsen

On March 3 it will be exactly 150 years since the Hongkong and Shanghai Banking Corporation opened for business. Normally such a milestone would prompt celebration: after all, the bank founded by colonial merchants now ranks among the world’s largest financial institutions. However, any merriment is likely to be mute. For HSBC the birthday brings challenges as great as any it has ever faced.

The bank was already on probation by the U.S. government for failing to stop money-laundering by Mexican drug barons. Now a row about Swiss tax evasion is at the top of what Chairman Douglas Flint admits is a “terrible list” of lapses and misdemeanours. Chief Executive Stuart Gulliver was this week forced to explain in excruciating detail why he set up an offshore bank account more than a decade ago. Despite three years of retrenchment, investors are wondering whether a bank of HSBC’s size and spread can be properly governed – and earn a decent return for shareholders.

This predicament was not one that John Bond, HSBC’s former chairman, foresaw when he opened up the bank’s archives to financial historians Richard Roberts and David Kynaston in 2006. “The Lion Wakes,” published to coincide with the anniversary, is a meticulously researched and documented account of HSBC, in particular its expansion over the last three decades.

Readers hoping for new revelations about dealings with drug cartels or tax evaders will be disappointed. Nevertheless, armed with the benefit of hindsight, the 662-page tome offers some insights into how the bank lost its way.

For most of its history, HSBC operated like a financial variation of a diplomatic service. Local subsidiaries were overseen by powerful “country managers” who interpreted orders from head office as they saw fit. Executives were drawn from a cadre of “International Officers” – mainly white British men – who could be dispatched to foreign operations at short notice. This federal structure was poorly equipped to cope with rapid acquisitive growth.

In 1980, HSBC was a predominantly Asian lender with assets worth $47 billion and 35,000 staff operating from 800 offices and branches. By 2008, it had nearly 10,000 locations, almost ten times as many employees, and its balance sheet had grown to a staggering $2.5 trillion. The expansion was the result of a series of increasingly far-flung and opportunistic acquisitions. After absorbing Britain’s Midland Bank in the early 1990s – the move that required HSBC to shift its head office to London – the bank went on a global shopping spree, snapping up lenders in Brazil, Mexico, Argentina, France, Turkey, as well as several big deals in the United States.

The rationale was vague at best. HSBC craved more diverse income, and was eager for a foothold in the United States, the world’s largest financial services market. It also had an unhealthy obsession with keeping up with Citigroup, its main rival.

Several senior executives were associated with the strategy, such as it was. But the main architect was Bond, who as chief executive and then chairman presided over the most breakneck phase of expansion. Though the authors offer little direct criticism, Bond does not emerge well. “Fit on paper is superb” was his scribbled assessment of the 1999 takeover of Edmond Safra’s Republic Bank – which included the Swiss unit whose clients have caused HSBC so much recent embarrassment. As he was finalising the acquisition of Household International, the subprime finance group, Bond told the board: “I’d rather lend to 50 million clients of Coca-Cola than to Coca-Cola itself.” Those borrowers left HSBC with losses worth tens of billions of dollars when the U.S. housing market crashed.

Not all chapters offer the same insight. Most readers will find little to interest them in discussions of HSBC’s computer systems and training programmes. The book also disappointingly glosses over the boardroom bust-up that led to the ouster of Michael Geoghegan as chief executive in 2010.

However, Roberts and Kynaston do offer a perspective on Gulliver’s drive to dismantle HSBC’s federal structure by giving business units more power and control over the bank’s operations. It’s an aspect of the shake-up that has received less outside attention than the multiple fines, scandals and cost-cutting. However, its success or failure will go a long way to determining whether HSBC is still around in another 150 years.

 

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