March 2 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank, is abandoning U.S. subprime lending six years after a $15.5 billion expansion that led to record loan losses.

Stephen Green, HSBC’s current chairman, said the London- based bank regrets the 2003 purchase of Prospect Heights, Illinois-based Household International, which added almost 50 million U.S. clients, many with spotty credit histories.

“It’s an acquisition we wish we hadn’t done with the benefit of hindsight, and there are lessons to be learned,” Green told reporters on a conference call today.

The consumer lending business of HSBC Finance Corp., the former Household, will stop making loans, HSBC said today. The unit will shed about 6,100 jobs and run down a real-estate and unsecured lending operation with $62 billion of assets. London- based HSBC also announced plans for a $17.7 billion rights offer following losses at the division.

The bank fell 19 percent to 399 pence in London trading, the lowest in more than a decade. It reported a 2008 pretax loss of $15.5 billion from North American operations, compared with a profit of $91 million in 2007.

The exit from U.S. subprime lending was overdue, HSBC shareholder Knight Vinke Asset Management said in a statement.

‘Catastrophic Investment’

“The board of HSBC has finally accepted that its catastrophic investment in Household International, not long ago described by the chief executive as a ‘dream portfolio,’ is worthless,” the U.S. fund manager said. “The investment has now been fully written off and the business is being shut down.”

Even so, further writedowns of HSBC’s $34 billion of U.S. subprime loan assets are “increasingly likely given that Household is effectively no longer a going concern and market conditions in the United States continue to deteriorate,” New York-based Knight Vinke said.

The takeover of Household was led by former Chairman John Bond, 67, and completed as Green, 60, became CEO. It marked a departure for the bank into lending to non-prime borrowers. As envisioned, the deal would enable Household to borrow more cheaply because of HSBC’s higher credit rating, leading to wider margins on loans to customers.

Some HSBC investors, including Richard Peirson at Framlington Investment Management in London, were concerned at the time that HSBC was increasing its risk. Bond argued in March 2003 that Household was “better able to predict their bad and doubtful debt experience than any institutions are in the corporate world.”

‘Absolute Disaster’

HSBC was forced to set aside about $53 billion in three years for bad loans, the majority relating to the U.S. division. Globally, the collapse of the subprime mortgage market has so far led to more than $1.15 trillion of credit losses and writedowns at financial institutions and government bailouts of companies ranging from Citigroup Inc. to Royal Bank of Scotland Group Plc of Edinburgh.

“The takeover was an absolute disaster,” said Colin Morton, who helps oversee $3 billion at Rensburg Fund Management in Leeds, England, including HSBC stock. “The idea was that they could access finance more cheaply than Household and they had one or two good years, but it was a pretty disastrous time to buy a subprime lender in the U.S.”

HSBC will maintain about $50 billion of assets in the U.S. with its credit card operation, Chief Financial Officer Douglas Flint told reporters today.

HSBC took a $16.3 billion provision for bad loans last year and a goodwill charge of $10.6 billion for its North American consumer finance unit, the London-based company said today.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

Last Updated: March 2, 2009 12:34 EST