Jeremy Warner's Outlook: Household was a foreseeable disaster which even being asleep at the wheel doesn't excuse

Royal Mail confronts the pensions issue; Centrica cuts prices with more to come
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The Independent Online

It's never happened before and it won't happen again. Actually, Michael Geoghegan, chief executive of HSBC, was referring to the collapse in lending standards at Household International, the US sub-prime lender bought for $15.5bn nearly four years ago, when he made this comment yesterday.

But he might just as well have been talking about the profits alert, which is the first such warning HSBC has ever issued and only seems to confirm the publicly expressed view of one City fund manager that management at Britain's biggest bank has been asleep at the wheel.

Household has turned out to have been a really very poor acquisition indeed for HSBC. Even at the time, nobody could quite work out why HSBC would want to buy such a business - a sub-prime lender in a mature market where bad-debt experience seemed certain to climb. But the US housing market was booming, and despite the warning signs HSBC was determined to join the party.

Americans were already by that stage up to their necks in debt. With its high exposure to low-quality, "trailer park" lending, much of it to poor immigrants, Household seemed highly exposed to any sustained rise in interest rates. The only justification seemed to be that it was cheap. The company was bought for little more than six times earnings. Yet things are rarely cheap without good reason and so it has proved with Household.

The really interesting thing about yesterday's profits warning is that it has little to do with lending that took place before HSBC acquired Household. Embarrassingly, most of the mischief seems to have occurred under HSBC's watch. The accelerated delinquency rates cited by HSBC refer in particular to loans acquired over the past two years.

What's been happening is that HSBC has been picking up parcels of sub-prime mortgage lending from smaller banks in the belief that its own lower funding costs would enable it to make a lot more money out of these loans than their previous owners. Instead, Household seems only to have been stuffed with a lorry load of toxic waste.

Mr Geoghegan says the buck stops with him, yet it is the line managers who are getting the chop for these errors of judgement. He promises to resolve matters swiftly. Shareholders, looking at the underperformance of the stock price since HSBC bought Household, might reflect that it is a bit late for that now.

HSBC's warning raises the obvious question of whether Royal Bank of Scotland is about to suffer the same fate with its own, acquired, US businesses - Citizens and Charter One. It may be too early to state categorically that it will not, but Citizens and Charter One, though heavily into mortgage lending in the US, do seem to be rather different animals.

As James Eden, the banking analyst at Dresdner Kleinwort, observes, Citizens and Charter One customers do not have wheels on their homes. Rather, they conform to the pattern of most properly assessed mortgage lending, which even in periods of high interest rates and rising unemployment, is relatively low risk. What's more, the lending is backed by robust levels of deposit taking, which is another missing ingredient at Household.

With yesterday's profits warning, Mr Geoghegan has presumably got all the bad news out in the open. He'd certainly be very ill-advised indeed if he's got further skeletons hidden in the closet. Any more nasties and it will be much more senior heads rolling next. Yet luckily for him, the Household acquisition cannot be laid at his door, or even properly at that of Stephen Green, the HSBC chairman. Mr Green was chief executive at the time, but Household was really Sir John Bond's show, and he's now gone.

As for Household itself, this is a business which continues to look completely out of place in the HSBC firmament - a high-risk business in a highly mature market. Yet it plainly makes no sense to sell now. At a time when the dollar is in any case exceptionally weak against the pound, HSBC would get only a pittance for these assets in current market conditions. A fire sale at the bottom of the market would certainly not be in shareholders' best interests.

Even so, to keep this business when the opportunities in Asia seem so bountiful looks a poor use of capital. We must assume that the HSBC hierarchy, doused by the recent tidal wave of criticism, is now fully awake again. It's not a pretty sight that greets them.

Royal Mail confronts the pensions issue

Post Office unions were for a change almost lost for words yesterday on hearing about their company's plans for closing the final-salary pension scheme to new members. Royal Mail also wants to consult on "how best to safeguard an affordable final-salary pension scheme for existing members". This is code for pay more, work longer and have your benefits cut. Small wonder representatives of this most militant of workforces were so incandescent with rage they could barely speak.

Workers in the private sector are well used to such announcements. The pensions regulator has required all companies with final-salary pension arrangements to put forward proposals to close deficits within 10 years. Most have answered these demands by among other things closing their schemes to new members, requiring existing ones to work longer, and by cutting benefits.

Yet Post Office workers surely believed they would escape such action, if only because their organisation is still part of the public sector, where one of the perks is that you can still expect to retire at 60 on full pension benefits. To treat state employees as if they are already part of the private sector with regards to pensions is almost unheard of. That unions believe it presages eventual privatisation, something which hitherto the Government has shrunk from, is understandable.

In any case, the difficulty that British Airways had in negotiating reform of pension arrangements with unions is going to look like a vicar's tea party against the epic struggle that this one will involve. Workers believed their pension rights were fully underwritten by the Government. Allan Leighton, the chairman, now seems to be telling them they are not.

As it is, Royal Mail somewhat exaggerates the size of the problem, presumably deliberately. The company yesterday announced the size of the pension fund deficit had increased by a further £1bn to £6.6bn. Yet this assessment depends crucially on abnormally high levels of longevity.

Had actuaries used the lower assumptions applied by the British Telecom scheme, to which the Royal Mail fund was once joined at the hip, the deficit would be much lower. Royal Mail is over-egging the size of the problem by applying the life expectancy of investment bankers to its assessment of future liabilities. A battle royal is promised.

Mr Leighton, still gongless after more than four years at the helm, must be wondering what on earth he signed himself up to. He'd hoped to produce a modern Post Office, yet at every turn he finds himself thwarted. By opening up the pensions issue on top of everything else, he risks fighting on too many fronts.

Centrica cuts prices with more to come

I doubt it made a great deal of difference to the Monetary Policy Committee's decision to leave rates on hold yesterday, but Centrica's announcement that it is bringing forward planned price cuts for gas and electricity is certainly a welcome relief from otherwise relentless upward pressures on inflation.

As it is, Sam Laidlaw, Centrica's still newish chief executive, has little option but to cut. Wholesale gas and electricity prices have been falling for more than six months now, and Centrica's prices have become quite severely uncompetitive. He had to do something to stem the consequent loss of market share. Unfortunately for him, his advantage won't last long. Rivals will soon be chasing him down, and, assuming wholesale prices stay low, he'll be cutting again before too long.