Summary
HSBC’s decision to fire Bobby Mehta was a mistake; a classic wrong reaction. By recognizing the symbolism of the event, huge opportunity is signaled for investors.
Analysis
-Bobby Mehta is brilliant and a great executive. I have great confidence that no one can build a better loan origination and risk analytics capability than he can. When the dust settles, I think you’ll find that HSBC’s ’06 vintage will have better cumulative loss than most of the other players in the industry. I’m sure that the rating agencies already have insight into that.
-Of course, the sub-prime mortgage industry may have over-reached with its affordability products, and become too lax in its underwriting. But Bobby was excellent at striking the balance between growth and risk-based pricing. The risks he took were prudent and well priced. HSBC overall has far more than enough balance sheet capability to adsorb the volatility from this asset class. But management doesn’t have the appetite for embarrassment. Therefore the failure was a treasury one; the decision to hold the credit risk on balance sheet as opposed to sell it into the market. The failure was not an operating one: risks taken were well priced and prudent.
-However, HSBC corporate has an embarrassing spike in its loan loss to explain. Someone must take the fall for that. Bobby took the blame. HSBC has now parachuted in a traditional career banker to tighten up standards. Traditional bankers have thrown out the fact-based decision makers. But ultimately, yet again the data-driven approach will resurface and make a lot of money for new investors who can assess and manage risk rationally. The subprime mortgage class is not dead, although it seems it now. There is a huge opportunity arising for new money with a medium term perspective.
