HSBC (HBC) Get Money At Huge Cost

HSBC (HBC) proved two things as it raised just over $17 billion to offset substantial losses. The first is that a money center bank can still raise capital, even in a tight credit market. The second is that the bank will have to give up its first born to get the cash.

HSBC said it took a goodwill charge of $10.6 billion in North America. It will close most of its businesses in the region. Worldwide net profit for 2008 dropped 70% to $5.73 billion from $19.13 billion.

To raise money, according to MarketWatch, “HSBC said shareholders will have the right to buy five new shares at 254 pence each for every 12 shares they own. ” Unfortunately, before the announcement, shares traded at 491 pence.

The tremendous discount should be a caution to US banks that may need to raise private capital. The federal government has already told Citigroup (C) that it will need to bring in new investment as part of an arrangement that will leave taxpayers owning up to 36% of the bank. The same fate may lie ahead for Bank of America (BAC) because a number of analysts have questioned the values of many securities it holds on its balance sheet.

If Citigroup had to raise money at a discount similar to HSBC’s pricing, the stock in the US bank could drop from it current price of $1.50 to as low as $.80.

When it comes to raising money for troubled banks “cheap gets expensive” as the saying goes.

Douglas A. McIntyre