It will, of course, come as a surprise to many Midland customers in the high street that the bank is punting on a large scale in the world's bond market casinos. But the excuse is that last year there was hardly a bank in the world that failed to get in on the act because it was so easy to make profits as interest rates fell.
This year has been much tougher for everyone, and profits have been far lower because of the upset in the bond market in February. But although everybody felt the pain, there was a lingering suspicion in the City of what Midland was up to, fuelled by memories of heavy losses on interest rate speculation by the previous management in the late 1980s.
Indeed, there were rumours in the spring that Midland had made losses on the same scale again. They were wrong, but it does now look as if the bank's dealing subsidiary, Midland Global Markets, stuck its neck out further than most.
This should not be a surprise. The bank's bond market economists were publicly among the most bullish on interest-rate falls and keenest on the theory that European interest rates could decouple from those in the US. In their favour, HSBC got the original rise in US rates right, but vastly underestimated the impact on European bond prices.
Sir William Purves insists that what happened must be seen in the context of an exceptionally profitable first half of 1993. Seldom will interest rates ever be such a one-way bet. Dealing floors smelt blood as central banks lost control of the markets. Why pick on HSBC just because its dealing profits suffered this half, like everyone else?
Well, up to a point. Lloyds made a small dealing loss, but its activities in this area are far smaller than HSBC's, and it made much less profit last year anyway. Dealing profits at Barclays, more comparable to HSBC, only fell from pounds 318m to pounds 193m.
HSBC's swing in dealing profits is in another league, nearer to the style of Salomon Brothers, the US investment bank that trades heavily on its own account, and is prepared to acccept billion-dollar quarterly swings in profits.
HSBC, Britain's biggest bank, can certainly afford to behave like a Salomon, because it has enormous capital, but the dealing bloomer must leave investors feeling uneasy.
Sir William has banned proprietary dealing until markets regain their calm. That sounds as if HSBC hasn't got Salomon's nerve, even if it has the same expertise.
But there were swings as well as roundabouts. The worse-than-expected fall in dealing profits was made up for by better-than-expected falls in bad debt provisions.
Meanwhile, the banking (rather than speculating) activities of Midland are improving. It will continue investing in new technology to bring it up to Far Eastern standards, while Sir William glares down at the unions from his battlements.
Staff in the branches must be wondering, as they contemplate their 2.25 per cent pay rise, whether the bond dealers will be handing back last year's bonuses.Reuse content