The sudden downturn in the US subprime mortgage market claimed more victims on Thursday when HSBC ousted two of its most senior North American executives.
The banking group, which this month shocked investors with the first profit warning in its modern history, said Bobby Mehta, chief executive of its North American operations, and Sandy Derickson, head of the bank’s US retail operations, were both stepping down.
The shake-up comes as HSBC grapples with its portfolio of US mortgage loans made to customers with patchy credit histories. The bank has been the highest-profile victim of the collapse in the market for subprime mortgages, triggered by rising interest rates and declining house prices in some parts of the US.
The slowdown has prompted warnings from other lenders, and sent tremors through the US capital markets. H&R Block, the US tax preparer, said on Thursday it had posted a $44.7m loss in the quarter ending in January after setting aside $111m to cover losses on loans underwritten by its Option One subprime mortgage business.
A derivatives index that tracks the credit risk of high-risk mortgage-backed bonds also hit record wide levels. The cost of insurance against default on the ABX subprime index reached 12 per cent, and has quintupled since problems surfaced late last year.
Thursday’s shake-up at HSBC is a sign that executives at the bank, led by chief executive Michael Geoghegan, are tightening their grip on the US consumer finance business. Douglas Flint, HSBC’s finance director, will become chairman of HSBC Finance Corporation, its US consumer finance subsidiary.
Although some managers had been expected to take the blame following HSBC’s profit warning, Thursday’s shake-up is unusual for a bank that has traditionally maintained a tight-knit culture. People familiar with the matter said the departures were a sign of how seriously HSBC was taking the problems.
Mr Mehta and Ms Derickson, who joined HSBC as part of the takeover of Household in 2003, are likely to receive healthy pay-offs under their contracts, which run until March 2008. According to regulatory filings, Mr Mehta was paid $3.9m in salary and bonuses in 2005, and had restricted shares worth $15.7m at the end of the year. Ms Derickson received $2.8m and had shares worth $12m.
Mr Mehta took charge of the US businesses following the departure of William Aldinger, Household’s chairman and chief executive, in 2005. Later that year, consumer finance executives began rapidly to expand HSBC’s subprime mortgage book by snapping up adjustable-rate and second-lien mortgages, which offer an initial period of low interest rates or carry a second claim on a property that is already mortgaged.