UPDATE 1-HSBC retreats from U.S., regrets Household deal

Mon Mar 2, 2009 12:49pm EST

* HSBC will slash 6,100 jobs

* To take $10.6 billion goodwill charge

* "a failure of the business model" - HSBC Finance CEO

* Shares down nearly 20 percent on NYSE (Adds HSBC executives, analyst comment; updates shares; adds NEW YORK dateline, byline)

By Steve Slater and Juan Lagorio

LONDON/NEW YORK, March 2 (Reuters) - HSBC (HSBA.L) is closing most of its U.S. consumer finance business as it seeks to put an end to its troubled purchase of Household some six years ago by writing off most of the value of the sub-prime business.

"With the benefit of hindsight, this is an acquisition we wish we had not undertaken," HSBC Chairman Stephen Green said in a statement on Monday.

Europe's biggest bank will take a $10.6 billion goodwill charge for its U.S. business and run off most of its loans. The move will leave HSBC's main focus in the world's biggest economy on corporate and commercial business, private and premier banking, and its credit card business.

"It's a failure of the business model. The combination of the high cost of wholesale funding, combined with the absence of home equity in the U.S. housing market, plus the high levels of delinquency that are foreseeable," said Niall Booker, chief executive of HSBC Finance Corp, in a conference call with reporters. "We believe it's not sustainable."

HSBC's U.S. bad debts jumped to $16.3 billion last year as the economy soured, adding to billions lost in recent years caused by Household, which was renamed HSBC Finance (HFC). The latest problems prompted the bank to launch a 12.5 billion pound rights issue on Monday. [nHKG49918]

Household was bought for $14.8 billion in 2003, in HSBC's biggest ever acquisition, led by former chairman John Bond.

He was criticised at the time for exposing the traditionally conservative lender to U.S. sub-prime borrowers.

As the U.S. economy deteriorated from 2006, HSBC began to pull back from U.S. sub-prime borrowers and stopped originating home loans and auto financing.

It is now going a step further, and will write no further U.S. consumer finance business through HFC and Beneficial brands, and close most of its 800 branches. About 6,100 staff will lose their jobs.

The bank will run off its outstanding $62 billion of real estate-secured and unsecured U.S. loan portfolio.

"It's not a happy sign for the availability of credit, but it's expected that people like HSBC will continue to pull in their horns in a time like this because of the ugly results in their businesses," said Mike Holland, the founder of money manager Holland & Co, in New York.

RECOGNIZING REALITY

Activist investor Knight Vinke Asset Management has urged HSBC to cut its losses on HFC throughout the last two years.

It said last year that if HSBC had accounted for HFC's assets as conservatively as other banks, its losses would have been over $50 billion, and HFC was unable to support its debt without help from its parent.

It wanted HSBC to walk away from the business and bondholders, but HSBC rejected that suggestion as "unthinkable and irresponsible."

"The deterioration in the U.S. economy in the last six months was not forecastable a year ago," said Brendan McDonagh, chief executive of HSBC North America.

HSBC said U.S. bad debts will "remain elevated" and operating losses in the business will continue this year and in 2010.

"We're recognizing reality," HSBC Finance Director Douglas Flint told reporters. "In 2003 when we acquired Household neither we nor anyone foresaw recession and depression in the United States six years forward."

HSBC shares ended down 18.8 percent to 399 pennies in London, while the stock HBC.N was down 19.8 percent to $27.92 in afternoon trading on the New York Stock Exchange. (Reporting by Steve Slater in London, and Juan Lagorio in New York; Editing by Hans Peters and Tim Dobbyn)

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