1) Primary real estate exposure is Hong Kong residential mortgages
With the slowdown in China, demand for Hong Kong real estate should fall steeply.
2) Large US subprime exposure
Yes, it is still there. HSBC Finance, formerly the Household Finance Inc subprime lender, holds many loans with the expectation of holding until maturity. In fact it was one of the largest US subprime lenders until late 2007. Reading the annual report and related news articles, there are multiple mentions of securitized mortgages that were sold to HSBC affiliates or other subsidiaries. This allows HSBC to move the securities off balance sheet and avoid marking the securities to market. As a result, there is a significant chance that within months HSBC will need to raise capital in this increasingly unattractive capital raising environment.
3) Very large US consumer revolving credit exposure
The HSBC USA subsidiary is one of the largest credit card lenders in the US market.
[I will add facts to support this later.]
4) Global slowdown in key HSBC markets
US is already in a recession. UK is very close to admitting it is in a recession. China is slowing seriously and cannot see the bottom of the downturn. Thus HSBC will be pushed to recapitalize in at least two of the three major markets.
5) Madoff Discount
Thanks to Mr. Madoff's astute business model, you can erase $1B in market valuation in HSBC just due investments in Madoff managed funds alone. HSBC is now facing lawsuits due to alleged negligence advising it's clients.
6) Large Chinese manufacturing exposure
All consumer loans, industrial loans, and real estate loans made in China by multinational companies are at risk because of the huge slowdown export related manufacturing in the Greater China region. HSBC is heavily exposed to China in this manner.
7) $1T Credit Default Swap exposure
Credit default swaps, even if no default events occur, drain precious capital because of the counterparty collateral requirements. With a few potential major credit events on the horizon, CDS are a toxic security to hold.
8) Large Middle East Commercial Loan exposure
HSBC is pervasive in all areas of the former British Empire, the Middle East is no exception. But with the drop in the price of oil and the deflationary effects of the credit crisis, many of their commercial outlays in this region will be at risk or at least deserve to be marked down.
Transparency: The author is long HSBC JUN 09 $40 put options at $6.3 and
long HSBC JAN 10 puts at $3.1