HSBC Is Too Big to Regulate
There's nothing necessarily illegal about setting up a company in Panama into which you channel your bonus payments. There's similarly nothing inherently dubious about living in Hong Kong, having Hong Kong citizenship, and opening a Swiss bank account to store some of your wealth. But when you're the chief executive of a British bank embroiled in a scandal about helping customers dodge taxes by hiding money in its Swiss private-wealth unit, it sure looks bad.
HSBC Chief Executive Officer Stuart Gulliver oversees Europe's biggest bank by market value, a global banking behemoth that's celebrating its 150th birthday this year. There's not much cause for celebration in the bank's results published today, however, or in the various wrongdoings regulators around the world have found it guilty of. And the timing of the latest revelations about Gulliver's personal banking arrangements come at a tricky time; the bank's chairman Douglas Flint has been summoned by members of Parliament to testify to the Treasury Select Committee on Wednesday about his time as finance director.
Yesterday, the Guardian newspaper reported Gulliver's Panama connection via a company called Worcester Equities, and that in 2007 he had $7.6 million in a Swiss account he set up in 1998. HSBC responded by saying the arrangements were for "reasons of confidentiality" and "provided no tax or other advantage." And while the bank said the Swiss account had been declared to the U.K. tax authorities for "a number of years," it declined to be more specific. So there's no way of knowing whether the account was declared when it was opened, a couple of years ago, or some time in between. It also seems odd to go to the trouble (and presumably expense) of setting up a company in Panama for anything other than tax reasons, but I guess we have to take HSBC's word for the probity of the set up.
The disclosures come just weeks after the International Consortium of Investigative Journalists published details of how HSBC's Swiss arm regularly did business with tax evaders, drug dealers and arms traders. Belgian prosecutors have threatened to issue international arrest warrants for the bank's officers if they don't cooperate with a probe into tax dodging.
HSBC's spin is that the Swiss affair is ancient history, and that it's cleaned up its act since then. Here's how it described those events in today's earnings presentation:
The recent disclosures around unacceptable historical practices and behaviour within the Swiss private bank remind us of how much there still is to do and how far society's expectations have changed in terms of banks' responsibilities.
Except, just last week HSBC's offices in Geneva were raided by Swiss prosecutor Yves Bertossa as part of an investigation into money laundering. No wonder investors have trashed the company's share price, with today's decline marking the biggest one-day slump since 2011:
Lord Ken Macdonald, a former U.K. director of public prosecutions (kind of a state prosecutor for the nation), told the Guardian newspaper that HSBC should face criminal charges in the U.K. on conspiracy to defraud, based on the evidence that's currently in the public domain:
It seems clear, from the evidence we have seen, that there exists credible evidence that HSBC Swiss and/or its employees have engaged over many years in systematic and profitable collusion in serious criminal activity against the exchequers of a number of countries. It seems equally clear that this criminal activity has taken place within the context of an institutional cynicism that is deeply shocking.
Today's earnings report showed full-year pretax profit fell 17 percent to $18.7 billion, below the $21.5 billion anticipated by analysts. Gulliver abandoned his profitability targets, citing the burden of greater regulation. Operating expenses were 6.1 percent higher last year than in 2013, with HSBC citing "increased regulatory and compliance costs."
It's hard, though, to feel any sympathy. Those expenses also came in the form of penalties. HSBC paid $550 million for "the settlement agreement with the Federal Housing Finance Authority." Another $1.2 billion went for "settlement and provisions in connection with foreign exchange investigations." Yet another $1.3 billion went to "U.K. customer redress programmes." If banks could somehow resist the urge to fleece their customers every which way, maybe the heavy hand of regulation wouldn't press quite so firmly on their shoulders and their profitability.
HSBC seems oddly lopsided for a bank that claims in its advertising to be "the world's local bank." An astonishing 78 percent of its profit came from Asia, with Europe contributing just 3.2 percent. And that's not an aberration; 2013's earnings were similarly skewed:
A bank that's mostly U.K. regulated, but makes the bulk of its money on the other side of the world, is a bank that's bound to be opaque to its home authorities, no matter how much scrutiny they try to apply.
Reading between the lines of today's report, it seem clear that what HSBC fears most is being broken up. "As our industry reshapes in response to public policy and regulatory directives, we now need to demonstrate, through clarity of our business model, the value to society of our scale and diversification," Chairman Flint said in the earnings statement. Gulliver told analysts on a conference call that breaking up the bank would destroy shareholder value.
Back in 2009, Lord Adair Turner, who was then the chief U.K. regulator as chairman of the Financial Services Authority, accused banks of growing "beyond a reasonable size" and becoming "socially useless." The cascade of recent revelations suggests HSBC still hasn't learned its lesson, and is more of a social menace than a social good. Gulliver's personal tax arrangements may not be illegal, but they are surely ill-advised and inappropriate. Unless Flint pulls off an Oscar-worthy performance at Wednesday's parliamentary hearing, HSBC will only have itself to blame if the authorities decide the bank is too big to regulate, and respond by seeking its dismemberment.
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