[& Republic NY, 1999 -- for opposition to HSBC - Household, 2002 and beyond, click here]
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Click here to Search ICP's Site For or with more information, contact us.
On November 14, 2002, HSBC announced a proposal to acquire the scandal-plagued subprime lender Household International, for $14 billion dollars. For the reasons set forth in our new HSBC Report (click here to view), as well as those set forth below, Inner City Press / Community on the Move and its Fair Finance Watch will be opposing HSBC's proposal. See also, "HSBC Sets $16 Billion Deal for Household International," Wall Street Journal, November 15, 2002; "HSBC to Buy a U.S. Lender for $14.2 Billion," by Andrew Ross Sorkin, New York Times, November 15, 2002, Pg. C1; "Lender With An Unenviable Reputation," by Joshua Chaffin and Gary Silverman, Financial Times, November 15, 2002; "HSBC to Acquire Household in $14.2-Billion Deal; Acquisition by the London-based Firm Would Expand its U.S. Presence But Expose It to Riskier Businesses," by E. Scott Reckard, Los Angeles Times, November 15, 2002, Pg. 4; "British HSBC Buying Household International for $14.2B," by Richard Newman, The Record (Bergen, NJ), November 15, 2002, Pg. B1; "HSBC Will Buy Household," by Jonathan Epstein, Wilmington, Del. News Journal, November 15, 2002, Pg. 7B; "HSBC Purchase of Household Opposed by Consumer Group," by George Stein, Bloomberg News, November 14, 2002; "HSBC to Buy Household International," by Bruce Stanley, Associated Press, November 14, 2002, etc.. For or with more information, contact us.
ICP's HSBC - Republic New York Corp. Report, 1999
At noon EST on December 31, 1999, HSBC "consummated" its acquisition of Republic New York Corporation, including its scandal-ridden securities unit (still the subject of litigation for its involvement in the scandal of Martin Armstrong / Princeton Economics and the Cresvale notes), and Republic National Bank of New York, which among other things purchases mortgage-backed securities based on high interest rate loans issued by subprime lenders like Delta Funding, even after Delta was deemed a predatory lender by New York State authorities. The transaction was delayed over seven months by these issues. Inner City Press is re-beginning its HSBC Watch (year 2000 HSBC coverage was part of ICPs Bank Beat page).
December 20, 1999
On Dec. 15, HSBC announced its U.S. management line-up. Surprisingly not on the starting (or even full-time) team are Republics Dov Schlein and Steve Saali. No need for tears -- both are on line for consultant jobs, at more than $1 million per annum.
The Buffalo News asked HSBC what the deal means for that city on the lake. HSBC flak Linda Stryker (who earlier this year explained the closing of HSBCs only consumer facility in the South Bronx as being justified by other HSBC branches nearby -- that is, 60 blocks away) told the Buffalo News (12/16/): I can tell you that Sandy Flockhart is going to be based in Buffalo and hes head of retail banking... Were not moving stuff out of Buffalo. Curiously, HSBC is bringing its head of US retail banking in from the companys bank in Saudi Arabia. Malcolm Burnett, stepping down as HSBC USA CEO on Dec. 31 (after making a variety of vague promises about community lending in New York City), claims hell spend his retirement in East Aurora in Western New York.
More seriously, the lawyer for Edmond Safras wife Lily, Marc Bonnant, has requested access to the Monaco police files, including the transcript of nurse Ted Mahers confession, asking, Was it credible and complete? What exactly pushed him to do what he did? How many fires did he set? Are there any inconsistencies in his confession? Good questions.
December 13, 1999
Armed with a Federal Reserve conditional approval of December 6, HSBC is rushing to consummate its star-crossed acquisition of Republic by December 31. Damn the torpedoes! That is to say, ignore the storm clouds of damages lawsuits around Republic New York Securities Corporation (and the Japanese authorities recently emboldened enforcement actions against Credit Suisse, for similar shenanigans); seize on the Monaco prosecutors surprisingly fast wrap up of the Safra murder investigation. The butler did it. Perhaps... Could it be that Ted Maher is a world-class fall guy? That too, perhaps... The U.S. press seems to have missed the Community Reinvestment Act portions of the Feds approval order, while the South China Morning Post put it this way:
The Fed decision, announced on Monday, is conditional on HSBC meeting requirements imposed by the Fed on lending to ethnic minorities and the underprivileged. Following criticism by ethnic minorities who said HSBC discriminated against low- and moderate-income groups, the bank told the Federal Reserve it planned to increase such lending, particularly in New York City... [T]here was concern over HSBC and Republics record under the Home Mortgage Disclosure Act, particularly in 1997 and last year, when the Fed reported certain disparities and weaknesses in the rate of loan applications, originations and denials by racial group and income level. It said HSBCs mortgage lending in low and moderate income areas and to African-American and Hispanic applicants was a low percentage of total lending, considering the demographics of the market in which the bank operates... As part of the deal, HSBC has now agreed with the New York State Banking Department to disperse more applications in areas where minorities make up 50 per cent of the population. The Fed said a condition of its approval was that it received a copy of the half-year report HSBC will file with the New York State Banking Department about its effort.
--Fed Gives HSBD Nod on Republic, by Sheel Kohli, South China Morning Post, December 8, 1999, Pg. 3
December 7, 1999 -- Mid-week flash (full weekly report of 12/6, below)
On December 6, the five Federal Reserve Board Governors voted unanimously to adopt a 37-page order approving HSBCs take over of Republic New York Corporation. The order contains not a word of the December 3 murder of Republic founder and 29% owner, Edmond Safra. As to the ongoing Princeton notes scandal, the Fed cursorily states, in a footnote, that it has considered... confidential and supervisory information regarding the charges of securities fraud filed against the owner and founder of Princeton Global Management Limited, a customer of Republic New York Securities Corporation... Neither RNYC or RNYSC has been charged with wrongdoing by any government authority in connection with this matter... the Board has taken account of plans by HSBC to address potential effects that might result from the Princeton matter. The Board is coordinating its review of this matter with the functional regulators of RNYSC and other appropriate law enforcement authorities. Order, n.20.
For the Fed, the self-proclaimed umbrella regulator, to take such a hands-off approach is more than a little surprising. Republic has been sued for over $100 million by Amada, one of the Japanese company which bought the Princeton notes. While the Fed refers to the functional regulators of RNYSC, the Fed just spent months pushing its position in Congress that it should be granted wider regulatory turf.
The Feds treatment of Community Reinvestment Act and fair lending matters is similar. Another major issue in the proceeding, the Fed confines to a footnote: One commenter maintained that the purchase by Republic Bank of mortgage-backed securities issued by Delta [Funding Corporation], which recently reached a settlement with New York State authorities regarding its lending practices, suggests that Republic Bank lacks fair lending compliance safeguards and might constitute a discriminatory lending practice. Republic Bank purchases MBSs issued by Delta on 10 occasions between July 1997 and June 1999. The Board has reviewed Republic Banks standards for investing in MBSs and has found nothing to suggest that its decision to invest in particular MBSs are based on any prohibited criteria. Moreover, RNYC has indicated that it was not involved in originating the underlying loans that were securitized. The Board has forwarded a copy of all comments on Delta to the Department of Justice, [HUD] and the [FTC], which have responsibility for reviewing compliance with the fair lending laws by nonbanking companies. Order, n.44.
The Fed uses an absurdly narrow interpretation of the fair lending laws -- whether Republic intentionally applied discriminatory criteria to buying MBSs. The Fed ignores a decision on just this issue by another Federal regulator, the OTS, on Lehman Brothers activities with Delta. And while the Fed tries to tip its hat to a recent GAO study that criticized the Feds refusal to coordinate with HUD and the FTC on fair lending, the referral is too limited: the allegations are about Republic Bank, not only Delta.
As to HSBC, the Fed admits (again, in a footnote) that HSBCs mortgage originations in LMI and minority census tracts and to African-American and Hispanic applications, as a percentage of its total mortgage lending, are lower relative to the aggregate and relative to the demographics of the markets in which HSBC operates. Order, n.35. The Fed bumbles on to say that this does not indicate discrimination, because raw lending numbers do not include credit histories. But both HSBCs actual loans made to, and the applications it receives from, protected classes are below industry aggregates -- credit histories and denial rates have nothing to do with it.
Moments before the Fed announced its approval, the Fed faxed ICP a one page memo to files, stating that [b]etween September 1, 1999, and November 1, 1999, I and other members of the Board staff spoke on various occasions by telephone with representatives of HSBC... HSBCs counsel inquired on occasion as to what, if any, written information the System might require with respect to allegations of fraud involving Princeton.... HSBC was required to provide information concerning the nature and extent of any potential liability... as well as a discussion of the steps to be taken by HSBC to avoid a recurrence of this situation.
The Feds own Ex Parte rules state that the System is not to communicate with either side to a disputed issue without the other side present. While the Fed tries to get around this by memorializing such ex parte contact, to withhold the memo until the date of the Boards vote is contrary to the Feds own rules.
In Monaco, public prosecutor Daniel Serdet on December 6 proclaimed that only the stabbed male nurse, Ted Maher, is guilty of Mr. Safras death, stating that Maher acted alone for personal reasons and there was no external intervention. It seems pretty fast to reach this last conclusion... But apparently the wheels of justice turn quickly for some, as with the Feds Dec. 6 approval....
December 6, 1999
On December 3 in Monaco, Republic New York Corporations founder and 29% owner, Edmond J. Safra, died in the bathroom of his penthouse apartment on Monte Carlos Avenue dOstende. According to police, two masked men broke into the building, and set a fire that ended in the suffocation of Mr. Safra and a nurse, Viviane Torente. Various murder scenarios and motives are being offered. With still few questions answered, both HSBC and Republic are stating that they wish to consummate their proposed merger as quickly as possible. Surprisingly, the U.S. Federal Reserve Board appears ready to vote on, and approve, the deal on Monday, December 6. It would seem wisest to wait to see if any of the many questions raised by the murder are answered...
The various accounts: Monacos Assistant Prosecutor Catherine Le Lay offered this description --
The apartment is immense, and within it there are two separate wing, one for Mr. Safra and one for his wife. Mr. Safra was in his wing, with consisted of three rooms -- his bedroom, a nursing laboratory and a bathroom. With him were two nurses. The police received a call from the receptionist of the building. She had been alerted by the male nurse who had staggered from the apartment with occupies the fifth and sixth floors, down to the ground floor. He had been injured with a knife with a six inch blade. The police arrived at the scene extremely quickly, and when they arrived they were unable immediately to access to the apartment, which is protected by steel reinforced doors. When they did gain entry with the firemen, the fire had already taken hold in the flat, which was extremely difficult to bring under control. When the police were finally able to penetrate the flat, they found Mr. Safra dead where he had taken refuge in the bathroom with his nurse, Viviane Torente, who also died. His wife was not even roused by the drama. It is difficult to convey just how big this flat is, but I have never seen anything like it. She was separated by a good distance from her husband and each door was reinforced. By the time the firemen had mastered the fire, smoke was only beginning to affect her wing of the flat, which would have rendered her more deeply unconscious. We still dont know how the attackers got into the flat, or how they escaped.
Monacos public prosecutor, Daniel Serdet, provided further details: Safra spoke to his wife at least twice from the bathroom, where his body was found at 7:15 a.m. by fire fighters. He made his last telephone call at 6:30 a.m.. Safra also resisted pleas from his wife to open the window to the bathroom, which might have prevented the two from suffocating. Mr. Serdet added, One element intriguing investigators is that the usual bodyguard was absent at the time of the events. The bodyguard, Samuel Cohen, is being questioned, according to Bloomberg.
The events gave rise to reactions worldwide. An arbitrageur in New York told Reuters (Dec. 3): Its definitely one of the weirdest deals ever. This is a really screwy one. A London analyst told Reuters (Dec. 3): The thing that is worrying now is to what extent Safras business was worth buying. Safra kept his cards to close to the chest that his business was always a mystery... He is the only guy who knows where all the bodies are and his is dead. According to Reuters, analysts said Safras death could come back to haunt HSBC and its shares, although it was unlikely to renegotiate the deal. You cant visit the same trough to often, said the analyst.
The Daily Telegraph (London) of December 4 reported that HSBC is said to be watching the situation closely in case the investigation into who killed Mr. Safra throws up any nasty surprises.
The Financial Times of December 4 recites that Safras banks are among the worlds largest bank note traders, a business that lends itself to money laundering. They are also big participants in the gold market -- another business where there is a premium on anonymity... Mr. Safra has frequently taken to the courts to protect his name.
The Moscow Times of December 4 (Banker Slain After Losing Millions in Russian Crisis) recaps: virtually exempt from further allegations of money-laundering by investigative journalists... Republic Bank quickly became known for sending armored cars to pick up large sums from its more secretive customers -- no questions asked, New York magazine wrote in January 1996.
The Daily Telegraph concluded that theories surrounding his death will now range from the Russian mafia to Japanese investors, through drug cartels and Middle Eastern trading companies.
With still few questions answered, both HSBC and Republic are stating that they wish to consummate their proposed merger as quickly as possible.
In New York, Republic spokeswoman Melissa Krantz said, Everything that was agreed upon is still valid; Safra had his house in order. He was not 100 percent well, so everything has been codified. Thats what lawyers are for.
General manager of Safra Republic Holdings, Lee Robertson, said, We will try to complete the merger as he would have wished. We are striving to complete the merger by the end of the year.
HSBC spokespeople read from the same script. Everyone at HSBC was appalled to learn the sad news of Edmond Safras death in Monaco, Michael Broadbent, HSBCs head of communications, said. The New York Times (Dec. 4) reported that Karen Ng, a spokeswoman for HSBC [in London], declined to comment on the implications of Mr. Safras death on the completion of the transaction. HSBC will uphold the banking tradition and integrity which were the hallmarks of Edmonds life, she said. This echoed a statement of HSBC chairman Sir John Bond: HSBC was appalled to near the sad news of the death of Edmond J. Safra in Monaco today. We extend our deepest sympathy to Mrs. Safra. HSBC will uphold the banking tradition and integrity which were the hallmarks of Edmonds life.
The New York Post (Dec. 4) reported that Mr. Safra was only in Monaco to hold meetings with HSBCs John Bond.
Named analysts were all over the map. Mark Thomas, an analyst with Credit Lyonnais in London, said coldly, In isolation, there should be delay at all. His death should be immaterial. New York Times, Dec. 4. Richard Coleman, of Merrill Lynch in London, said, Clearly, Safra was expected to take an active role, if not a symbolic role at the new bank. There has to be a risk that friends and associates whose money and trust had been connected to Safra may not be loyal to a new owner now that he died. It raises questions that I cant begin to quantify. NYT, Dec. 4.
The Financial Times LEX column (Dec. 4) opines: Edmond Safras violent death is a ghastly personal tragedy. It does, though, raise questions about how his banking empire was managed... The even bigger question is whether Mr. Safras death is an indication that his empire was fundamentally unhealthy... a string of bad news in recent years: first, big trading losses in Russia; then, Republics involvement in the Princeton notes scandal; and now Mr. Safras murder. Nobody has produced any evidence linking these three events... Nevertheless, until more in known about who killed Mr. Safra, and why, the questions will linger.
In Monte Carlo, prosecutor Daniel Serdet said, The investigation will probably be opened on criminal grounds, most likely Monday.
Also on Monday, Mr. Safra will be buried in Geneva.
Surprisingly, the U.S. Federal Reserve Board appears ready to vote on, and approve, the deal on Monday, December 6. It would seem wisest to wait to see if any of the many questions raised by the murder are answered...
At weeks end, ICP received from the Federal Reserve Board a letter responding to ICPs Freedom of Information Act request, stating, we are withholding in full approximately 88 pages of application-related material pursuant to exemption 4, and approximately 26 boxes of investigatory and examination information under exemptions 3, 7(A) and 8. Some of the information in the 26 boxes consists of grand jury material that the Federal Reserve is prohibited from releasing under Rule 6(e) of the Federal Rules of Criminal Procedure. Among the materials released: a November 4 letter from HSBCs counsel states that this letter provides information concerning [full paragraph redacted]. The letter also provides [another paragraph redacted]. Thereafter, two full pages are redacted. No opportunity to appeal these redactions, apparently: the Federal Reserve governors have placed HSBCs applications to acquire Republic on their agenda for consideration on Monday, December 6, while Mr. Safra is being buried in Geneva.
November 29, 1999
While HSBC watches the Fed, the Fed half-watches HSBC. In order: the FT Asia Intelligence Wire of November 22 ran a piece by HSBC Markets Senior Treasury Marketing Manager for South India, Rahul Badhwar: The Fed Did Move, The Market Did Snooze. This HSBC-er says that [o]ne event to look forward to is the December 21 meeting of the Fed Open Market Committee. However, the adoption of a neutral bias at last Tuesdays FOMC means it is unlikely anything dramatic will come out of the December 21 meeting except perhaps a whole lot of Christmas cheer.
HSBC itself, of course, is hoping for some pre-Christmas cheer from the Fed, in the form of approval for its application to acquire Republic New York Corporation. The Fed continues to refuse to provide the public with any of HSBCs submissions concerning the Cresvale notes scandal at Republic. Earlier documents that were withheld by the Fed have supposed been reviewed de novo by Fed Vice Chairman Roger Ferguson. His November 23 Freedom of Information Act appeal denial says: On review in connection with your appeal, I have confirmed that the information withheld from you under exemption 7(A) was compiled for law enforcement purposes, and that is disclosure could reasonably be expected to interfere with enforcement proceedings. Question: what enforcement proceedings is Mr. Ferguson referring to? The Fed has done nothing about the Cresvale notes scandal, to date. TO DATE...
HSBCs withholding of information is not limited to the application review process. The American Banker of November 23 quoted Lehman Brothers analyst Dine Glossman that [y]ou wouldnt see two U.S. banking companies this far along in a merger withholding details. They havent said anything about this merger except the price.
November 22, 1999
HSBC, with applications to acquire Republic New York Corporation pending at the Federal Reserve Board and the New York State Banking Department, has ceased sending copies of any of its submissions to the community groups opposing the merger, contrary to the Federal Reserves own rules. Meanwhile, Malcolm Burnett, who was HSBCs emissary to NYC community groups earlier this year, making vague promises like I intend to attempt to do that (improve HSBCs record under the Community Reinvestment Act), is now stepping down as the CEO of HSBC Bank USA, to be replaced by Youssef A. Nasr, previously of HSBC Canada. The vague promises now become even more attenuated (or plausibly deniable)... In Singapore, the National Union of Bank Employees has been picketing HSBC, due to layoffs.
November 15, 1999
Private banking: honorable or shady? On November 8, Edmond Safra, owner of 29% of the shares of Republic New York Corporation, announced he take $450 million less from HSBC, and will cover 60% of any Cresvale notes-related losses over $700 million up to $1 billion. Pundits called it elegant; one analogized it to the type of personal responsibility take by financier J.P. Morgan earlier this century. Others notes that if HSBC walked away from the deal, Republic would be seen as damaged goods. And aint it already? The Asahi newspaper of November 13 reports the 70 Japanese companies are preparing to file a lawsuit in federal court in Manhattan, against Republic New York Corporation, claiming losses of 120 billion yen (thats $9.5 billion). Note the $1 billion cap on Safras elegant offer. Let the fire works begin!
The pundits' references to private banking being based on character stood in contrast to testimony the U.S. Senate took on November 9, principally about Citibanks private banking unit, and its ties to various dictators and drug runners. Citigroups John Reed acknowledged that in the mid-1990s, the control environment in the private bank was not satisfactory. Investigation subcommittee chairwoman Susan Collins (R-ME) said, Too often, Citibanks private bank essentially paid lip service to its own procedures.
The problem with this Congress, however, is that it too often essentially pays lip service to its own purported concerns, thundering on about money laundering a week after voting for further deregulation of the banking industry. And how about the Federal Reserve, and the New York State Banking Department, both of which have to review, and rule on the record, on HSBCs applications? Safras November 8 announcement may resolve something for investors (make that, at this point in the transaction, speculators) -- but it doesnt change the facts, and the legal standards, the Fed and NYSBD are required to rule on. Nor has either agency yet released to the public HSBCs and Republics submissions / spin about the Cresvale notes scandal. These are fire works the regulators (and the banks) are trying to keep inside the box. Well see...
November 8, 1999
Two very conflicting views of how, when and if HSBC will acquire Republic are circulating. On November 4, both the Financial Times and the Wall Street Journal Europe reported that the deal will go forward at $72 a share, with Edmond Safra either (1) putting up to $1 billion of the $3.2 billion he is to receive into escrow (WSJ-Europe), or (2) buying private insurance against the possible $1 billion or more in claims against Republic from the Cresvale notes / Martin Armstrong scandal. In New York, Republic spokeswoman Melissa Krantz said Were trying to work toward having our shareholder meeting on November 30. Reuters (11/4) reported hearing from a shareholder close to Republic that the internal probe has concluded that the banks top management was unaware of the brokerage units dealing with Armstrong. Since Armstrong represented 90% of the brokerage units business, this unawareness would be difficult to explain...
The other view is crystallized in the American Banker newspaper of November 5. Intrepid reporter James Kraus quotes a source close to Republic as deeming the above-summarized press reports of Mr. Safras willingness to part with $1 billion laughable; Kraus records market scuttlebutt that arbitrageurs pushed the deal-about-to-close-at-$72 rumor so the stock would rise (as it did, to $68), and they could unwind their positions. Funds trading in Republic are reported to include Lehman Asset Management, SAC Capital Management, Perry Capital Corp., Mentor Investment Group, Chesapeake Partners and Harvest Management. AB reports that the deal would still have to be approved by the New York State Banking Department (next meeting: December 3) - but omits the Federal Reserve Board, which is still withholding from the public all of HSBCs and Republics submissions on this contested issue...
Under the first scenario, an announcement (and mailing to Republic shareholders) would take place this week. Well see...
At the deadline for this edition, the Thai newspapers Krungthep Thurakit and Business Day are reporting the HSBC will buy Bangkok Metropolitan Bank Plc for $1.03 billion. And the beat goes on...
November 1, 1999
After Republic for the third time adjourned its shareholders meeting on HSBCs takeover offer (still trying to put the right spin on its role in the Cresvale notes scandal), HSBC said it was extending the offer period to November 30 as well. In Hong Kong, HSBCs shares fell 1.4 percent. A local analyst told the Hong Kong Standard (10/27) that HSBC will move on with other takeover bids anyway even if the Republic deal fails.
The regulatory process remains opaque. The Federal Reserve is withholding 25 boxes of documents in the face of ICPs Freedom of Information Act request; ICP this week submitted its appeal, noting that, of the two FOIA exemptions the Fed cites, exemption 8 applies only to reports by federal regulators and supervisors (H.R. Rep. 1497, 89th Cong. 2d Sess. 11 (1966)); as to exemption 7(a), ICP questions whether the entire contents of these 25 boxes are documents that were prepared FOR law enforcement purposes (at the time of their preparation). ICP also questions whether, as to all pages, release would triggers the harms to which exemption 7 is directed. Nor has the Board made the requisite showing. See, e.g., Campbell v. HHS, 682 F.2d 256 (D.C. Cir. 1982); Center for Auto Safety v. DOJ, 576 F.Supp. 739 (D.D.C. 1983)...
October 25, 1999
On October 19, Republic announced the third adjournment of its shareholders meeting on HSBCs $72-a-share take over bid, this time to November 30. In London on October 20, HSBC Chairman Sir John Bond told reporters, We have received some information from Republic.. This is a very complicated matter and we are reviewing the information.
One must assume that the Federal Reserve and New York Banking Department will view it as a complicated matter as well, and will closely scrutinize, and release to the public, Republics and HSBCs spin on the situation. Inner City Press on September 6 submitted a Freedom of Information Act request for the banks submissions related to Japans Financial Supervisory Agencys (and other agencies) inquiry into the activities of Republic New York Securities Corporation.
According to the Feds October 15 letter to ICP, by letter dated October 5, 1999, the time period for our response to your FOIA request was extended... The staffs search of Board records has revealed many documents that are responsive to your request. Several of these documents will be provided to you in their entirety. We have determined, however, that the remaining documents contain... information compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement proceedings... In addition to the redactions indicated in the documents being provided to you, we are withholding in full approximately 234 pages of application-related materials pursuant to exemption 4, and approximately 25 boxes of investigatory and examination information under exemptions 7(A) and 8... The Boards Freedom of Information Office will provide you with a copy of the documents being made available to you pursuant to this authorization under separate cover... you may appeal this determination.
One problem -- ten days after the date of the Federal Reserves determination letter, the Fed has still not provided any of the documents to Inner City Press. (Meanwhile, the Fed has been deeply involved in the minutiae of the U.S. financial deregulation bill, clear here for a summary). Upon receipt, the documents (and appeal) will be reviewed in this space. Twenty-five boxes sure is a lot of information to withhold, on a matter of public interest that is not related to national security...
On the issue of Republic National Bank of New Yorks continued purchase of mortgage-backed securities supported by predatory mortgage loans, including by Delta Funding, sued for discrimination by the N.Y. Attorney General, its worth noting that on October 18, NYSBD Acting Superintendent Elizabeth McCaul, in a speech at the Interagency Bank Supervision Conference, said she wants to encourage bankers to conduct necessary due diligence reviews, with regard to subprime lenders MBS. Republic and HSBC, of course, have claimed to the NYSBD and to the Fed that Republic was not required to conduct any due diligence whatsoever. Well see how this one plays out, if and when the deal ever moves forward...
October 18, 1999
On Thursday, October 14, lawyers for Martin Armstrong argued in federal court that Republic New York Corporation, and not Armstrong, was responsible for funds being transferred from the accounts of Japanese investors to those of U.S. investors, to (at least temporarily) conceal what the SEC and CFTC allege to have been a Ponzi scheme. Court filings indicate that Republic credit-review officials raised concerns about the Armstrong accounts in the summer of 1998, and that the NY Merc brought Armstrongs commingled accounts to Republics attention at least ten months ago. All of this makes it more difficult for Republic to lay all of the blame on Bill Rogers. This inexorably-unfolding scandal has already resulted in Republic pushing back its shareholders meeting on HSBCs takeover bid to October 29.
Publicly, HSBC officials (at least HSBC Asia chairman David Eldon) reiterate their interest in acquiring Republic and its Safra affiliates. On October 12, HSBCs 62%-owned Hang Seng Bank paid a special interim dividend of 4.87 billion Hong Kong dollars to HSBC. Analysts interpreted the timing of this upload of funds as a further indication of HSBCs intent to proceed with Republic. Predictions circulated in London that HSBC will knock $2.50 off its $72-a-share Republic officer. The London Independent of October 14 reported heaving buying of Republic stock out of Europe over the past few days, some of it said to originate from reputed associates of Edmond Safra, the banks controlling shareholder. If The Independents report is true, one could understand these parties trying to keep Republics stock price up -- but the trading would arguably be based on inside knowledge...
HSBC tries to stay upbeat, implying that it will soon break its two-year Asian acquisition shutout. HSBC is pushing hard of one of the six Qualifying Full Banking licenses to be issued in Singapore, and, on October 14, HSBC announced it has been approved to underwrite local currency bonds in South Korea. HSBC is bidding on Bangkok Metropolitan Bank in Thailand -- but Bloomberg of October 14 reported that HSBC Asias head of credit recovery Lionel Peter McCarthy has been arrested for molesting three 12 and 13 year old Thai boys. McCarthy was in Thailand on holiday from Hong Kong; now he faces a Oct. 26 court date in Bangkok.
Will Republic mail out a proxy supplement in time for the scheduled October 29 shareholders meeting? Well see.
October 11, 1999
Republics attempts to distance itself from Martin Armstrong, or to concentrate blame on rogue employee Bill Rogers, became less effective last week. Filings by the Commodity Futures Trading Commission reveal that Prudential Securities in 1995 closed Armstrongs account, after its own routine review revealed a number of regulatory issues. That Republic allowed Armstrong to simply transfer his $185 million account to Republic New York Securities Corporation (RNYSC) shows a questionable compliance culture (to say the least) at Republic and RNYSC. That top officials at the Republic holding company either didnt know about Armstrong -- whose accounts came to constitute 90% of RNYSCs futures business -- or knew, but did nothing, does not support focusing the blame only on Bill Rogers, who left Prudential in 1995, and came to RNYSC with Armstrongs account.
Republics spokeswoman told the Hong Kong Standard that Republics own report on the scandal will be released on October 19. That would be necessary, to keep to the now-twice-delayed shareholders meeting date of October 29. But that would leave little time for shareholders (and the public, for purposes of commenting to the Fed and NYSBD) to review the self-generated report. The Federal Reserve is continuing to shuck and jive -- Inner City Press has received an October 5 Fed letter, stating that On September 7, 1999, the Board of Governors received your request pursuant to the Freedom of Information Act concerning HSBC to acquire Republic New York Corporation. We are extending the period of our response until October 20, 1999... in order to consult with another agency or with two or more components of the Board having a substantial interest in the determination of the request.
October 4, 1999
Republic has now pushed back its shareholders meeting for a second time, to October 29. Reports in the Financial Times that Republic has completed its internal investigation into its securities subsidiaries involvement with Martin Armstrong (who was indicted on September 30) and had forward the report to HSBC have been shown to be inaccurate. Republic issued a statement that it has not completed its investigation, and then announced the second postponement of its shareholders meeting.
The proposals in shambles, due to Republics involvement with Martin Armstrong, whos just been indicted for a $1 billion fraud on Japanese investors. Republics securities unit did 90% of its futures business with Armstrong, and reportedly issued letters to Armstrong to help him misrepresent the values of accounts. The whole thing calls into question not only Republics oversight of its securities unit, but also the Feds supervision of this large bank holding company and its Section 20 subsidiary. To date, however, the Fed has not released to the public ANY submission by HSBC or Republic on this issue. Below is ICPs October 4, 1999 filing with the Fed:
Dear Secretary Johnson, Chairman Greenspan and Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates (collectively, ICP), this is a supplemental comment, in extraordinary circumstances, in opposition to the applications and notices HSBC Holdings, plc, HSBC Finance, HSBC Holdings, BV, HSBC Americas, Inc. and their affiliates (collectively, HSBC) to acquire Republic New York Corporation and its subsidiaries (Republic), and all related applications.
Since the close of the initial comment period, Republic has announced that it is conducting its own inquiry into the involvement of its subsidiaries, Republic New York Securities Corporation (RNYSC), in a financial scandal involving Princeton Economics International, Cresvale International Ltd., Martin Armstrong and other related parties. A criminal complaint against Mr. Armstrong was filed on September 13, and, on September 30, an indictment by a federal grand jury was unsealed. See, e.g., Bloomberg Business News of September 30, 1999. It is reported that fully 90% of RNYSCs futures business with Mr. Armstrong, and the RNYSC provided letters certifying to false valuations of accounts that it held. This raises questions about RNYCs -- and the FRBs -- supervision and monitoring of RNYCs Section 20 subsidiary, questions that should be explored and addressed, including in whatever Order the FRB eventually issues on this proposal.
Republic pushed back its shareholders meeting from September 9 to October 12, and has now pushed it back again, to October 29. (ICP should also be provided with whatever proxy statement supplement Republic and/or HSBC file with the FRB)... This is a serious managerial and financial resources issues on this application, that ICP, a timely protestant, has formally put into the record. ICP notes that it has yet to be provided with a copy of ANY Republic or HSBC submission to the Board on this issue, in response to ICPs September 7 Freedom of Information Act request, or under the Boards Ex Parte Rules. This information should be provided to ICP as soon as possible after HSBC or Republic submit it into the record, and ICP will comment thereon at that time.
The General Accounting Office (GAO) on September 24, 1999, released its study, GAO/GGD-99-180, which inter alia reports a lack of transparency in the merger application process and recommend[s] the FRB address this lack of transparency. GAO Report at 2 and elsewhere. The FRB has indicated that it generally agree[s] with the recommendation. FRB Chairmans letter of September 14, 1999, Appendix VI to the GAO Report. In this proceeding, not only has ICP, a timely protestant, not been provided with any submission by HSBC or Republic on the above-discussed issue -- also, on CRA issues, HSBC has submitted purportedly rebutting information that is still being withheld from ICP, and HSBCs purported commitment to increase its New York CRA activities has not been put into the record, at least not with a copy provided to ICP. These issues, too, should be resolved and made (more) transparent, prior to any FRB vote other than denial of the Applications.
On the current record, this application could not legitimately be approved..
Very Truly Yours,
cc: Mr. Philip Toohey, Esq.
General Counsel, HSBC USA
Messrs. Brown and Pilecki
September 27, 1999
On Friday, September 24, the London Independent published an unsourced report that Republic own internal probe of its liabilities for Republic New York Securities Corporation has found that the only employee with knowledge of Mr. Armstrongs trading relationship with Republic was William Rogers. On that basis, Republics shares rose five percent on Friday. Analysts and arbitrageurs expect Republic to issue a statement early in the week of September 27, either confirming that the shareholders vote will be held on October 12, at the same purchase price, or announcing a new (lower) purchase price. But wait --
The question is, how much credibility should a probe a company itself pays for be given, in this situation? By analogy, what if Bank of New York this week announces that its New York law firm has found that it has no liability in the developing Russian money laundering scandal -- would that mean that all investigators and Congressional committees would throw up their hands, and announce that BNY is clean? Hardly. How is this Republic situation different?
Even on what has been publicly reported to date, one can reasonably question why parent RNYCs management did not inquire into RNYSC, whose futures division did 90% of its business with a single company / individual, Armstrong-Princeton-Cresvale. The Indepedents article states that [t]he report also points out that Republic Securities is an arms length company... The advice is that any legal liability for damages would be limited to the $76 million of equity still held by the securities arm. This raises questions about the Independents article, and/or the report is purports to summarize. It would be absurd to characterize a U.S. bank holding companys Section 20 sub as an arms length company, or to advise that liability for the Section 20 subs actions will necessarily be limited to the subs remaining equity. The Federal Reserve, in allowing bank holding companies to set up so-called Section 20 subsidiaries like RNYSC, clearly expected and expects the holding companies management to supervise these subsidiaries. If Republic itself is now trying to disavow its Section 20 sub, or characterize it as an arms length company, the Feds Section 20 precedents, and the credibility of the Feds supervision, is called into question.
Strangely, the Fed has yet to release to the public any Republic or HSBC submission on this issue, which the Fed would have to rule on along with the merger. Not only will Republic have to get its shareholders new and up-to-date information ten days before a valid shareholders meeting -- the Fed, based on this late-breaking issue, should allow the public to review and comment on HSBCs and/or Republics arguments on how this incident reflects on the managerial and financial factors which the Fed must consider, and that the public has a right to comment on. This is particularly true if, as The Independent has reported, Republic is now trying to disavow its Section 20 sub, or characterize it as an arms length company.
Section 20 subsidiaries as the Savings & Loans of the year 2000?
September 20, 1999: Republic = SeoulBank?
Entering the week of Sept. 20, there are serious indications that the HSBC - Republic merger may not take place, or may only take place at a much-reduced price. On September 13, Martin Armstrong, chief of the Princeton / Cresvale group of companies that together represented 90% of the business of Republic New York Securities Corp.s futures business, was arrested and charged with a massive, over $1 billion fraud. Papers filed along with the indictment included some of the over 200 letters that Republics William Rogers provided to Armstrong, misrepresenting net asset values of investor sub-accounts. The letters are dated as recently as August 16, 1999. The complaint states that Republics confirmation letters falsely overstate the value of assets... from a few thousand dollars to as much as approximately $46 million. At press time for this edition, 27 Japanese companies have been public their losses to Armstrong; yogurt-maker Yakult is already threatening litigation.
Republic has commissioned a study of the matter by KPMG and the Sullivan & Cromwell law firm. The study is expected to be delivered to Republic this week. British institutional investors are urging HSBC to at a minimum re-negotiate the deal, for a lower price, or to simply walk away, as HSBC recently did from its six-month negotiated deal to acquire South Koreas SeoulBank. On the British media beat, the Sunday Telegraph of Sept. 19, at 3, opines: [w]hen HSBC last bought big in the US it chose a bank called Marine Midland. It turned out to be the worst deal it has ever done. This time HSBC should count itself lucky to have received such a timely warning about Republic and walk away. HSBCs main problem seems to be that it has already issued new shares to pay for the cash purchase of Republic. If the deal is called off, HSBCs financials will suffer...
Only a Pollyanna could conclude at this point that Republic does not face serious liabilities. Bloomberg of September 14 quotes various experts as to these liabilities. RNYSCs letters are the critical act that kept this kind of fraud alive... Republic could easily be indicted for knowingly aiding and abetting a fraud, said oft-quoted Columbia law professor John Coffee.
The individual who wrote the 200 letters from Armstrong, William Rogers, was not a low- or mid-level rogue employee. He was the head of RNYSCs futures division. Republic has also suspended RNYSCs president, James Sweeney.
Some of the questions raised include: how could Republic New York Corp. have allowed its Section 20 subs futures division to do 90% of its business with a single individual / company? And what does the whole episode say about the Federal Reserve Boards supervision of the Section 20 subsidiaries that the Fed began allowing in the late 80s?
The Fed (and HSBC) have declined to date to provide copies of any of HSBCs and/or Republics submissions on this issue, into the record on the pending application before the Fed. The New York State Banking Department, in a September 13 letter to Inner City Press, claims that HSBC had made no submissions to the NYSBD on this issue as of that date.
It would be contrary to public policy for HSBC and Republic to simply allow these regulators a glance at their own commissioned report on the matter, and then expect a quick approval vote by the Fed and the New York Banking Board. The Financial Times of September 18 reports that British institutional investors have given HSBC one month to deal with this matter. Whatever KPMG and S&C say, its hard to see how Republics liabilities could be quantified, and disclosed to shareholders, prior to October 12, the tentative re-scheduled shareholders meeting. And so -- Republic = SeoulBank? Developing...
Finally, for this Report, an account of statements by the Federal Reserve Boards chairman, including surprise at the securitization of high-interest rate home equity loans, of the kind purchased by Republic National Bank, is contained in this weeks ICP Federal Reserve Reporter - click here to view.
September 13, 1999
HSBCs attempted acquisition of Republic is still hung up, including by Japans FSAs inquiry into Republic New York Securities Corporation and its clients, Princeton Economics International, Princeton Global Management and their affiliate, Cresvale International. The FSA has now ordered Cresvale to stop selling Princetons securities in Japan, because the funds assets allegedly werent kept in client accounts as required, an FSA official said Sept. 9. Princeton issued a statement: We do not deny that some rescue deals with Japanese corporates involving notes that are expressed in book value rather than market value have been issued in Japan -- almost a definition of kobashi. Princeton went on to went on to blame Republic for the issue the FSA seems most concerned with. Princeton, referring to Republics suspension last week of RNYSCs chief executive James Sweeney, said: The dismissal and suspension of staff who we know to have been involved in the supervision of the individual accounts opens in respect of each investors assets does indeed suggest that some serious shortcomings have been identified.
Republic on September 3 postponed its Sept. 9 shareholders meeting until October 12. That date would imply a new prospectus / proxy statement being released around September 12. As of Friday, September 10, Republics web site did not announce or link to any such new prospectus. Strangely, it appears that Republic did not similarly adjourn the shareholders meeting of Republic Fund Advisors, for which a proxy statement was filed August 11.
Meanwhile, British labor unions have expressed concern about HSBCs shifting of transaction processing jobs to an HSBC center in the Chinese province of Guangzhou. The union, Unifi, accuses HSBC of exploiting cheap labor in Asia. HSBC responds that this is part of its strategy to reduce costs by exploiting its global scale of operations. The Guardian (London), September 9, 1999. The Beijing-controlled Hong Kong monetary authority regulatory body in the largest shareholder in HSBC, with an 8.1% stake. As an aside, its strange to see the majority on Congress expressing concern about a Chinese company processing cargo containers at the Panama Canal, but unconcerned about this proposed acquisition...
On the Community Reinvestment Act front, Senator Gramm (R-TX) has reportedly requested from HSBC copies of "all current and past agreements, agreement letters, [and] contracts or memorandums of understanding." HSBC has previously, at least indirectly, assisted Sen. Gramm's attacks on the CRA. It will be ironic if HSBC now provides Gramm with a copy of its vague letter of intention to double its CRA activities in NYC over five years -- since HSBC has apparently not provided this letter to with the Fed or the NYSBD. Agencies which could and should enforce such a pledge don't get a copy of it from HSBC -- but demogogues attacking the CRA will get a copy.
September 7, 1999
HSBCs acquisitive plans are now in disarray. Its proposed acquisition of Republic New York Corporation, the largest proposed acquisition in HSBCs history, is being, at a minimum, delayed. On September 3, Republic announced that it is postponing its shareholders meeting on HSBCs offer, from September 9 to October 12. Among other things, Republic will be re-writing its proxy statement. How a company can give full disclosure about a serious probe the full scope of which is not yet known -- is a question Republics re-drafting must answer. Republics internal probe (already resulting in the suspension of the CEO of Republics securities unit, James Sweeney, and the head of its future trading unit, William Rogers) is being run by the law firm of Sullivan & Cromwell. Reports circulating suggested client funds of up to $1 billion might also have to be compensated for -- producing a very material impact on HSBCs takeover. South China Morning Post, September 3, 1999. HSBC, apparently assuming automatic approval of its application to acquire Republic, sold $3 billion in new shares, and issued $3 billion in subordinated debt. Perhaps that gun-jumping makes understandable the comment of HSBCs Sir John Bond in May: It took us a long time to find a bank that was more conservative than we are. Republics involvement in restructuring equity holdings for Japanese companies (otherwise known as tobashi deals, in which Japanese institutions try to hide losses through complex derivatives transactions) -- hardly seems conservative. But compared to raising $6 billion with nowhere to spend it -- maybe playing tobashi IS conservative... Also, The run-up in the US bank's share price ahead of the deal also raised concerns and prompted a leading Hong Kong bank last week to mention the possibility that inquiries might be under way into this market activity. South China Morning Post, Sept. 5.
Also last week, HSBCs eight-month attempt to acquire Seoul Bank in South Korea fell apart. During HSBCs ill-fated attempt, Commerzbank bought 30% of Korea Exchange Bank, Goldman Sachs bought 17% of Kookmin Bank, and ING bought 10% of Housing & Commercial Bank, Koreas leading mortgage lender. HSBC says it wants 100% or nothing. Nothing it is, then.
HSBCs other attempted expansion in the United States, via its bid on the 300 branches that Fleet Financial is having to divest, also went nowhere. On September 3, Massachusetts Attorney General Tom Reilly confirmed press reports that the winner of the Fleet divestiture sweepstakes is Sovereign Bank of Pennsylvania.
Where does HSBC go from here? In its pending applications to the Federal Reserve and New York State Banking Department to acquire Republic, HSBC is still withholding its presentation of its lending in communities of color in the four most recent months, after it was subject to an NYSBD requirement to double its lending in these communities. HSBC continues to defend Republics purchase of securities backed by high interest rate home equity loans issued by Delta Funding, even as the securities are put on watch for downgrade by Moodys Investor Service, due to pending discrimination litigation against Delta Funding. This litigation could and should be extended to the major purchases of Deltas mortgage backed securities, which include Republic National Bank. Finally, HSBC has apparently not made any submission to the Fed or NYSBD about the scandals swirling around Republic: the Japanese FSA probe, and alleged Russian money laundering. House Banking Committee Chairman Jim Leach (R-Iowa) had told Reuters that while the probe is currently focusing on two New York banks, Bank of New York and Republic National Bank, there is a distinct possibility other U.S. and international banks might have been drawn in. Reuters, August 30, 1999...
September 2, 1999
HSBCs applications to acquire Republic New York Corporation has been thrown into turmoil by two scandals developing around Republic. Most recently, after the close of stock trading on September 1, Republic announced that it had fired the head of its securities unit, and that the Japanese Financial Supervisory Agency is investigating that Republic units mis-valuation of investments for a client. HSBC put out at statement saying this may delay the merger, and has said it is reserving "all of its rights under the merger agreement," includnig, implicitly, the right to back out of the deal in light of recent revelations. While HSBC claims privately to have known about Republic's role in the money laundering scandal made public in August, it seems unlikely HSBC knew about Republic's Section 20 subsidiary's problems in Japan.
Further inquiry has resulted in reports that the client is New Jersey-based Princeton Economics International and its affiliate, Cresvale International, which has drawn $1 billion in investments in Japan. Cresvale is more connected to Republic than the characterization of it as an affiliate of a client would make it appear. Cresvales head of U.S. operations, James Curley, was the CEO of Republic New York Securities from 1994 to 1996.
Princeton Economics web site (which as of September 2 had yet to be updated to address the scandal) contains articles by its chairman, Martin Anderson, ridiculing Cintonomics as Just Another Arkansas Financing Scheme. What quirky clients Republic has... Lehman Brothers' (and others') analysts proclaim that the deal will proceed.
Inner City Press calls to sources close to the situation reveal a pervasive skitishness about the proposed deal now. What liabilities are out there? Could there be a lawsuit, by investors or regulators?, said one source who had spoken with Republic president Steve Saali. Other sources (politely called shareholders; in reality, arbitrageurs) earlier in the week told ICP that HSBC had told them that HSBC had been told by Federal Reserve staffers that HSBCs application would be voted on and approved by the Fed on a particular day. Such communications (since rendered moot, see above) would have been improper; ICP has raised all of the above matters to the Federal Reserve and NYSBD in comment letters in recent days, as well as noting that HSBC continues to seek to withhold its reports showing whether or not it has complied with the NYSBD's Community Reinvestment Act requirement that HSBC double its lending in communities of color by the end of the year 2000. HSBC has yet to make any presentation to the Fed about its ill-defined August 30 reiteration of this commitment (and attempt to extend the time period from doubling lending to five years from two); HSBC and Republic have yet to make any written presentation to the Fed about either of the two scandals now swirling around Republic.
August 30, 1999
HSBC claims to be on track for closing its acquisition of Republic by October 1 -- in fact, the bank hopes to complete most of its integration plan before closing the deal. Buffalo News, August 24. But HSBC is still trying to withhold from the public its presentation of its first half 1999 lending record, which the New York State Banking Department requested in order to assess HSBCs compliance with conditions the NYSBD previously imposed on the bank, to double its marketing in minority census tracts, to bring itself closer to its peers performance. And a new issue has emerged:
Lost or unclear in the hoopla about Bank of New Yorks involvement in Russian money laundering is Republic National Banks role. USA Today has reported that the alleged $15 billion of money laundering took place through accounts at Bank of New York AND Republic National Bank. The House Banking Committee has called for hearings into the matter, and regulatory authorities on both sides of the Atlantic are demanding documents, to get to the bottom of the scandal. It is questionable whether the U.S. Federal Reserve can or should go forward on HSBCs application to acquire Republic until Republics role in the unfolding scandal is made clear.
The spin for now is to present Republic as the whistle-blower: Republic filed a suspicious transaction report with the Federal Bureau of Investigation in August 1998. But the FBI was already aware of suspicious activity by the Benex shell corporation. A Republic spokeswoman states that Republic kept the account through which money was laundered open at the request of authorities. None of this, however, has been verified, and HSBC has not addressed it in any of its public submissions to the Fed. So is HSBCs application on track? ICP has commented to the Fed that it should wait until the facts are clear -- or should deny HSBCs application, on Community Reinvestment Act and fair lending grounds. Meanwhile, HSBC has been displaced by Sovereign Bank in public prognostication about who will win the Fleet divestiture sweepstakes. But Sovereign could hardly be considered a legitimate competitor to the proposed Fleet Boston. Sovereign is a savings bank -- institutions that do far less small- and middle-market lending than commercial banks do. Sovereign has only $24 billion in assets -- more than six times smaller than the proposed, post-divestiture Fleet Boston. Informed analysts opine that Fleet is actually in negotiations with another (real) bank, and is using Sovereign to drive up the price at which is will sell the branches. And could that bank be HSBC?
August 23, 1999
HSBC continues to bob and weave, seeking to evade rather than address the publics comments that have actually been filed with the Federal Reserve and New York Banking Department opposing HSBCs applications to acquire Republic. Seeing its applications bogged down, HSBC has written a letter stating that over the next five years, we expect to double... our CRA activity... within metro New York. But this expression of expectation is illusory. In January 1999, the NYBD already imposed a requirement that HSBC double its lending in majority minority census tracts by the end of the year 2000 -- that is, in two years. In the months since, HSBC has done little to improve its record. HSBC apparently hopes that this reiteration (and extending of time) of its pledge will break the logjam on its Republic application, and even provide ground cover if HSBC is selected to buy the branches that Fleet must divest in New England. (The American Banker on August 23 reported without qualification that HSBC is "promis[ing] to double its CRA activity in New York... over the next five years." Missing from the spin is the fact that HSBC is already subject to a NYSBD requirement to double its lending in majority minority census tracts in the next TWO years, by the end of the year 2000). No matter what spin is put on this illusory pledge (the current spin is to pretend that HSBC is entering the New York City market for the first time, with a clean slate -- when it has owned 50 branches in the city for years), HSBCs last minute letter would not justify approval of its Republic application, nor future applications.
NYBD has asked HSBC for a presentation of its lending in communities of color in April, May and June of this year (in order to see if HSBC has in fact taken any actions on the increased lending the NYBD previously required of HSBC, due to it weak record). Despite the fact that HSBC has made other, public claims about its 1999 lending (and is now trying to replace the NYSBDs requirement to double its lending in two years with a weaker expression of intent to do so over five years), HSBC is apparently trying to withhold the actual numbers. ICP has requested this HSBC filing, under the freedom of information law.
Meanwhile, on another fair lending issue swirling around HSBC and Republic (and entirely unaddressed by HSBCs August 20 letter), in an August 9 submission to the Fed, HSBC wrote that [t]he Fourth ICP Comment attempts to make such of the fact that one of Republic Banks purchases of Delta Funding MBS occurred in June of this year... HSBC Holdings notes that the Attorney Generals announcement concerned a resolution of all claims brought against Delta Funding and that following that settlement, Delta Funding was allowed to continue to conduct its business in New York without interruption.
But on August 20, the New York State Attorney General filed a sweeping Federal civil rights lawsuit against Delta Funding Corporation, which asks the U.S. District Court for the Eastern District of New York to place Delta into state receivership, contending that the company is unlikely to obey court orders that it alter its lending practices. New York Times, August 21, 1999, Pg. B1. Meanwhile, due to the "spin" Delta put on its announced settlement with the NYSBD, Reuters on August 18 reported that this was a "global" settlement that involved the NYS AG -- clearly incorrect. The error is attributable to Delta, whose spokesman Marty Cohen told Bloomberg on August 17, "It made sense to settle this globally... [There are] no ouststanding investigations against the company." The American Banker, in its August 23 article, quotes Delta's CEO Hugh Miller that "this global settlement will resolve any outstanding investigations into Delta's lending practices....". Since Delta is publicly-traded, one wonders if this inaccurate portrayal of the NYSBD settlement as "global" doesn't take it outside of the safe harbor for forward-looking statements... The NYS Attorney Generals lawsuit makes ever-clearer the scope of fair lending problems at Delta Funding, of which Republic was or should have been aware prior to purchasing securities backed by loans issued by Delta, in an activity covered by the Fair Housing Act. (The NYSBD has also asked HSBC about Republics purchases of Deltas MBS, in a letter dated August 9 letter, the response to which HSBC has still not provided to ICP).
HSBCs responses to regulators make clear that it would continue to purchase securities backed by predatory mortgage loans -- HSBC claims it has no responsibility whatsoever to do even the most basic due diligence on the MBS Republic and/or HSBC purchase. HSBCs submission dated August 11, 1999 claims that if a purchaser of MBS does not deal directly with issuers and does not impose any terms or conditions on its purchase of asset- or mortgage-backed securities, it has no Fair Housing Act duties. That facile position is directly at odds with the Fair Housing Act, which imposes duties (and liabilities) on purchasers of MBS. In the same August 11 submission, HSBC sets forth Republics criteria for purchasing MBS -- and the description does not even mention a consideration of Fair Housing Act and other regulatory compliance. Nor does HSBC provides any document(s) memorializing those criteria, which the Fed had requested.
The Fed also asked for a list of all mortgage backed securities that Republic has bought. HSBC responded with a list, making it Attachment 59 to the application. The list includes such subprime lenders as United Companies, Aames Capital Corp., Advanta Mortgage Loan Trust, Provident Bank, PacificAmerica Money Center, and Wilshire Funding Corp. (note that Wilshire has subsequently gone into bankruptcy [arguably calling into question even Republics safety and soundness standards for purchasing securities backed by high interest rate mortgage loans], and that the OTS is closely scrutinizing Wilshires proposed restructuring).
It appears from the Feds questions to HSBC that the Fed is leading HSBC to claim that it does not or cannot impose terms on the MBS it purchases, in a statement similar to that made by Bankers Trust/Deutsche Bank earlier this year. This distinction is meaningless in light of the applicable Fair Housing Act regulation -- it appears that the Fed is trying to construct fair lending defenses or immunities in contradiction to the terms of the applicable regulations....
ICPs August 9 submission noted that HSBC had not complied with the Feds Ex Parte rules, and requested an extension of the comment period until ICP received the improperly withheld HSBC submission and could comment thereon. Up until August 17, the Fed faxed ICP many of the HSBC submissions that had been improperly withheld from ICP. These consist of a series of (virtually identical) purported responses to other adverse comments. HSBCs August 3 letter to the New York Fed again presents the commitment that the NYBD REQUIRED of HSBC earlier this year (doubling of lending over two years), without HSBC mentioning that it was required by its regulator. As noted above, HSBC is now making much of its expression of intent to double its lending over five years...
In an August 3 letter to Ms. Melissa Clark of the FRB, HSBC claims that it has demonstrated that the proposed merger... will not have a negative impact on the convenience and needs of customers in New York City. ICP disputes this. HSBC would close twenty branches, and has withheld all identifying information about these closures. In a Bridge News article dated August 17, HSBC spokeswoman Linda Stryker is quoted (regarding HSBCs closure of its only South Bronx consumer facility): We opened the loan processing office and subsequently we got three other full service branches very close by. Emphasis added. The closest branch HSBC acquired was on Fordham Road, more than fifty blocks away. Given HSBCs repeated claim that 50 blocks away is close by, at least in low income neighborhoods, there is reason to believe that HSBCs branch closings, even if characterized by HSBC as mere consolidations, would adversely affect the convenience and needs of the community, particularly residents of low income neighborhoods like the South Bronx.
HSBCs weak lending record, however, goes well beyond the South Bronx. In fact, if published reports are true, HSBC is attempt to export its practices to New England, by buying some or all of the branches Fleet would be required to divest. It is difficult to see, notwithstanding its attempt to make much of its August 20 expression of intend to double its lending over five years (when it is already required to do so over two years), how HSBCs bob and weave, withhold and dissemble strategy will serve it as it attempts to expand in the United States...
August 16, 1999
The Federal Reserve and New York Banking Department continue to ask questions about HSBCs applications to acquire Republic. The NYBD has asked for HSBCs lending volumes in April, May, June and July, 1999, in order to see if HSBC has done anything to comply with the commitment HSBC was required to make earlier this year, to bring its lending to minorities close to that of its peers.
Both the Fed and the NYBD have begun asking questions about Republics purchase of securities backed by high interest rate mortgages issued by Delta Funding -- Republic kept buying these securities, even after Delta Funding was charged with discrimination and predatory lending by the New York Attorney General. HSBCs most recent response on this issue is evasive: HSBC emphasizes that Republic was not in a position to get Delta to change its practices, rather than explaining why it continued to buy these securities backed by predatory loans after it knew or should have known of Deltas violative practices.
HSBC states that Republic is not in a position to negotiate any terms or conditions in such transactions other than price... It is the convention in such transactions that the terms and conditions governing the transaction are established by the underwriters, brokers, or institutional holders of the securities.... But Republic is an institutional holder of these securities, and under the law, has as much responsibility (and liability) under the fair lending laws as an underwriter does. ICP is preparing its response, and will file it once it receives a copy of HSBCs response to the NYBDs most recent questions.
Meanwhile, outside of the formal process, HSBC on August 11 held a meeting in New York City, purportedly to address concerns that some have raised about its Republic application. Malcolm Burnett, HSBC Bank USAs chief executive, spoke for HSBC; Republics Dov Schlein (due to get a massive golden parachute, according to Republics recently filed proxy statement) began the meeting by explaining the acquisition entirely in terms of Edmund Safras failing health. Safra sought out a global bank to continue his legacy, Schlein said, and found HSBC to be the best bet. Unsaid was that Safra demanded it be a cash acquisition, which no one but HSBC would do.
As an aside, Londons Independent newspaper now reports that Citigroup is about to acquire a European bank, most probably HSBC... Developing...
According to ICPs sources, HSBCs Burnett acknowledged that there are a lot of things HSBC is not doing well. Burnett made non-committal commitments, each carefully phrased as We will wish to do that. That is, not we will do that, not even we wish to do that, but we in the future will wish to do that. From ICPs perspective, Burnetts statements resolve none of the adverse issues now in the record before the Fed and NYBD.
HSBC has been discouraging other community group from commenting to the regulators, saying for weeks that the comment period is closed. But the Fed has issued two letters to ICP extending the comment period, as has the NYBD. ICP will be submitting further comments to the regulators, once HSBC answers the most recent round of questions, and finally begins to comply with the Feds ex parte rules, which HSBC has been ignoring.
HSBC -- in the USA, at least -- is a something of a rogue bank, flying under the radar on community reinvestment, performing at less than half the volume of its peers, in terms of lending to people of color, and now, suddenly, coming forward for major acquisitions in the USA. At the August 11 meeting, Burnett tried to portray the Republic proposal as just an acquisition of eighty branches. Meanwhile, HSBC is bidding on the branches Fleet would have to divest in New England, and Citigroup is on the prowl, trying to acquire HSBC (see London Independent of August 14, 1999).
This will be updated, once HSBC responds to the regulators outstanding questions, and finally begins complying with the Federal Reserves ex parte rules.
August 9, 1999
On August 4, the Federal Reserve granted ICPs request to extend its comment period on HSBC - Republic, because HSBC had not provided ICP with a copy of its July 14 submission about branch closings, etc.. In fact, this HSBC submission is less than useful, as HSBC portrays its and Republics overlapping branches by latitude and longitude, rather than by census tract or street address. But, as set forth below, ICP has continued its analysis of HSBCs disparate lending in 1998, and has put it into the record before the Federal Reserve and NYS Banking Department. HSBC has still not provided ICP with a copy of its response to the NYSBDs detailed July 15 questions about its lending and office closing. Meanwhile, HSBC is desparately (and belatedly) looking for friends among NYC community groups.
August 9, 1999
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Secretary Johnson, Chairman Greenspan and Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates (collectively, ICP), this is a timely supplemental comment in opposition to the applications and notices HSBC Holdings, plc, HSBC Finance, HSBC Holdings, BV, HSBC Americas, Inc. and their affiliates (collectively, HSBC) to acquire Republic New York Corporation and its subsidiaries (Republic), and all related applications. The Federal Reserve Board (FRB) has given ICP until at least August 9 to submit supplemental comments.
ICP has submitted four prior comments, dated June 24 and July 12 and 21, and August 2, 1999. On August 3, HSBCs counsel submitted a response to ICPs July 21 comment (the 3rd Resp.).
In the second section of this submission, ICP replies to HSBCs 3rd Resp.. ICP begins, however, by further reviewing HSBCs disparate lending record in New York, based on the recently-released 1998 Home Mortgage Disclosure Act (HMDA) data.
In the New York City Metropolitan Statistical Area (MSA) in 1998, HSBC (reporting as Marine Midland Bank) denied 66.7% of home improvement loan applications from African Americans, denied 65.7% of home improvement loan applications from Latinos, and denied only 26.9% of home improvement loan applications from whites. The industry aggregate denied only 25.3% of such applications from African Americans, only 19.5% from Latinos, and 24.9% from whites. This is clearly a red flag. While HSBCs denial rate for whites is similar to the aggregates, HSBCs denial rate for African Americans is 2.64 times high than the aggregates, and for Latinos is 3.37 times higher than the aggregates. [snip - contact ICP for more recent data]
Now, ICPs reply to HSBCs 3rd Resp.. HSBC largely confines its 3rd Resp. by reiterating its cumulated mortgage and small business loan volume in the South Bronx since 1996, putting the figure at $50 million and claiming that the figure shows the closing its South Bronx loan production office (LPO) in 1999 did not result in a reduction in credit available from HSBC Bank.... First, HSBC lumps mortgages with small business, because its mortgage lending record is so weak. HSBCs 1st Resp., at 11, stated that [f]rom January 1, 1996 to June 30, 1999, HSBC Bank made 22 mortgage loans totaling $2,249,000... in that area. While HSBC now emphasizes a $50 million mortgage plus small business number, less than two-and-a-half million of the $50 million was mortgage lending, a major need in the South Bronx. Second, cumulating its lending from January 1, 1996 to June 30, 1999 hardly shows that the closure of its lone South Bronx consumer facility in 1999 does not (as is clear here, on the ground) result in less credit availability from HSBC Bank in this, the largest contiguous LMI / majority minority community in New York State. Note the questions that the NYSBD on July 15 asked HSBC about the LPO closing:
--"The number and dollar volume of applications received and loans originated over each of the last five years.
--A description of the banks marketing/advertising / outreach undertaken during of the last five years to generate business for the office.
--A description of the analysis undertaken by the bank in order to arrive at the decision to close the office.
--A description of the plans by the bank to serve the South Bronx community in the absence of the LPO.
See NYSBD Letter to HSBC, dated July 15, which ICP has already submitted into the record, asking for a response at your earliest opportunity. Also note that, as of August 8, three-and-a-half weeks after this letter, ICP has yet to receive a copy of HSBCs response, if it has submitted one to date. ICP will be submitting a further comment once HSBC answers these questions. On the current record, these Application could not legitimately be approved.
Very Truly Yours,
cc: Mr. Richard E. T. Bennett, Esq.
Group Legal Advisor
HSBC Holdings, plc
August 2, 1999
HSBC, eager to buy banks in the United States -- first Republic National Bank of New York, then, apparently, branches that Fleet Financial is proposing to divest -- continues to resist the U.S. Community Reinvestment Act. Most recently, HSBC has claimed to the Federal Reserve Board that purchasers of pools of high interest rate mortgage loans have no duties under the Fair Housing Act. See below. The New York State Banking Department on July 15 asked HSBC why it closed its only South Bronx consumer facility -- an action that HSBC took, without notice, weeks before it applied to acquire Republic National Bank of New York. As of July 28, HSBC has not responded to the NYSBD. Both the Federal Reserve and the NYSBD extended their comment period, until at least August 2. ICP has put in additional comments, including analyzing HSBCs just-released 1998 lending record. A summary is below. Also, the Greater Rochester CRA Coalition has now commented against HSBCs application to acquire Republic. HSBC, one of the few banks subject to an NYSBD require to increase its lending to people of color in New York State, now want to take it show on the road, and is bidding for the Fleet divestiture branches. It is difficult to see how such a proposal could be favorably viewed. Performance requirements, and acquisition technique, may be different in Mexico and South Korea, where HSBC is also seeking to buy banks. Perhaps HSBC is suffering from culture shock? The HSBC Watch continues -- for or with more information, contact us.
Here is a summary of the comments ICP submitted on August 2:
August 2, 1999
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Dear Secretary Johnson, Ms. Clark, Chairman Greenspan and Governors:
On behalf of Inner City Press/Community on the Move and its members and affiliates (collectively, ICP), this is a timely supplemental comment in opposition to the applications and notices HSBC Holdings, plc, HSBC Finance, HSBC Holdings, BV, HSBC Americas, Inc. and their affiliates (collectively, HSBC) to acquire Republic New York Corporation and its subsidiaries (Republic), and all related applications. The Federal Reserve Board (FRB) has given ICP until at least August 2 to submit supplemental comments.
HSBCs resistance to the fair lending laws is long-standing, and ongoing. On July 29, 1999, the FFIEC finally made 1998 HMDA data available on its web site. ICP is analyzing HSBCs 1998 lending record. While ICPs analysis continues (and ICP will be submitting further comments), note that in 1998, for conventional home purchase loans in the NYC MSA, HSBCs (Marine Midland Mortgage Corp. -- HSBCs main lender in 1998) denial rate disparity between African Americans and whites was higher than the industry aggregates, even though HSBC made a notably lower percentage of its loans to African Americans than the aggregate did.
For conventional home purchase loans in the NYC in 1998, the aggregate made 5416 loans to African Americans, 4018 loans to Latinos, and 35,134 loans to whites. For these race-specified loans, 12.2% of the aggregates loans were to African Americans, and 9.0% of the aggregates loans were to Latinos. [snip - contact ICP for more recent data]
...HSBCs lending record is particularly weak in the South Bronx. Beyond the information that ICP has already presented, HSBCs 1st Resp., at 11, stated that [f]rom January 1, 1996 to June 30, 1999, HSBC Bank made 22 mortgage loans totaling $2,249,000... in that area. That works out, over those 3 1/2 years, to an average of a mere 6.29 mortgages a year, for less than $650,000 per year, to this area of 450,000 people. Nor does HSBCs Resp. explain its spokeswomans claim that HSBC closed its lone South Bronx consumer facility because it now had other branches nearby. HSBCs nearest consumer branch is fifty blocks away. If fifty blocks is HSBCs definition of nearby, its statements about the branch closings in which this proposal would result must be even more closely scrutinized. ICP does not know when HSBC submitted its list of contemplated branch closings (1st Resp. at 12) -- but this list should be provided to ICP and the public, and the comment period should be extended on that ground as well as the one below.
...ICP has submitted three prior comments, dated June 24 and July 12 and 21, 1999. On July 27, HSBCs counsel submitted a response to ICPs July 12 comment (the 2nd Resp.). As of this writing, ICP has still not received a copy of HSBCs July 14 response to the Boards questions, which HSBCs July 15 submission (the 1st Resp.), at 18, stated contains information responsive to ICPs concerns. This should be provided to ICP, under the clear terms of the FRBs Ex Parte Rules (and in light of ICPs July 21 request), and, as further explained below, the comment period must be extended.
In the interim, ICP hereinbelow replies to HSBCs 2nd Resp., which inter alia evades the question of what Fair Housing Act compliance programs Republic National Bank of New York (RNBNY) has in place, given its continued purchase of securities backed by predatory, high interest rate dwelling-backed securities, even of Delta Fundings securities in late June 1999 (2nd Resp. at 3) -- AFTER the NYS Attorney General had charged Delta with illegal predatory lending.
On July 12, ICP documented to the FRB that RNBNY was purchasing mortgage-backed securities (MBS) issued by Delta, directed the FRB (and HSBC) to 24 CFR 100.125, and to the FRBs sister agency Office of Thrift Supervisions (OTSs) decision to require a company involved in Delta Fundings MBS to adopt practices and policies to identify and avoid predatory pricing practices.
HSBCs July 27 2nd Resp. tries to argue that RNBNY (and HSBC, if it is allowed to purchase RNBNY) have no Fair Housing Act responsibility whatsoever as purchasers of MBS. HSBC also tries to argue that the FRB should not consider or follow determinations of the OTS as to the Fair Housing Act, which both the FRB and OTS are required to enforce as to their respective insured institutions and holding companies. Both arguments are without merit, and reflect a troubling compliance culture at HSBC, further militating for denial of this Application.
First, a summary of facts. While RNBNY has reason to know of compliance problems with the Delta loans / MBS it was purchasing in 1997 and 1998 (two purchases in 1997, seven in 1998, see 2nd Resp. at 3), the issue is further narrowed by focusing on RNBNYs purchase of Delta loans / MBS in late June 1999. 2nd Resp. at 3. By that time, not only had the New York Times run a detailed account of problems, including predatory pricing and apparent discrimination, at Delta -- the NYS Attorney General had openly accused Delta of race discrimination, in violation of the federal Equal Credit Opportunity Act. See, e.g., Bureau of National Affairs, June 24, 1999...
It is striking that the 2nd Resp. does not even attempt to explain RNBNYs most recent purchase of Delta loans / MBS, in late June 1999, AFTER the above-reference fair lending enforcement action. HSBCs 2nd Resp. implies that RNBNY could have no liability under the Fair Housing Act, even if it bought securities backed by loans which had been charged / found to be discriminatory, as long as Republics explicit purchasing policy does not refer to race. That is a laughable interpretation of the fair lending laws, and, inter alia, of the disparate impact standard of proof that applies to the FHA. HSBC claims that the only way there would be an issue would be if RNBNY referred to race, color, religion, sex, handicap, familial status or national origin in determining what to purchase loans or securities. 2nd Resp. at 3, emphasis added. But FHA liability, and the need for FHA compliance programs and safeguards, is not limited to explicit, intentional discrimination (such as explicitly referr[ing] to race), as the Department of Justices (DOJs) fair lending cases, the FRBs and other agencies referrals, and decades of case law makes clear. HSBCs misunderstanding of the fair lending laws is another adverse factor on this application, militating for denial of the proposal.
Next, HSBC tries to argue that while an underwriting of MBS may have a duty / liability under the FHA, a purchaser of loans/MBS has no such duty. This ignores the plain language of the regulation, which, if anything, makes the duty on purchasers more clear than that on poolers...
This regulation is explicitly directed at purchasers of loans or securities backed by dwelling-based loans. It can and should be read as applying to underwriters (in that, in the course of underwriting, they may purchase and/or pool loans) -- but it even more directly applies to purchasers like RNBNY. And, as noted, liabilities and duties under the FHA and its regulations are not limited to explicit, intentional discrimination, as the DOJs lending cases, the FRBs and other agencies referrals, and decades of case law makes clear.
HSBCs mechanical defense ignores the clear language of the regulation, and ignores even the FRBs own fair lending referrals to the DOJ. Finally, HSBC tries to argue that the FRB should ignore the OTS recent action on Lehman Brothers application for a thrift charter, purportedly because that decision was under the HOLA, while the FRB implements the BHC Act. But the language of the FHA and its regulations, which both the FRB and OTS are required to enforce, as to the insured institutions and holding companies under their jurisdiction is identical. In fact, the FRB routinely relies on decisions and proceedings of other federal bank regulatory agencies, including the OTS. For example, see the FRBs decision on Royal Bank of Canadas acquisition of Security First Network Bank. For further example, see the pending application of CIBC to become a BHC, by acquiring a proposed bank in Florida -- CIBC asks the FRB to rely on a recent OCC decision. If it suited HSBC, it would be asking the FRB to rely on other regulators decisions. Since it does not, in this case, HSBC argues that other regulators decisions - even under the same exact laws the FRB must enforce -- are without precedential bearing on the Boards consideration of applications.... 2nd Resp. at 1. HSBCs defense is laughable, reflects a lack of understanding or respect for the fair lending laws, and further militates for denial of this application.
...The FRB should further note that the NYSBD has extended its comment period, and, see NYSBD Letter to HSBC, dated July 15, attached hereto, asking for a response at your earliest opportunity. Also note that, as of July 28, two weeks after this letter, HSBC had still not responded. ICP will be submitting a further comment once HSBC answers these questions; the FRB should extend its comment period (and also provide ICP with HSBCs responses to the FRBs questions, under the clear terms of the FRBs Ex Parte Rules).
On the current record, these Application could not legitimately be approved.
If you have any questions, please telephone the undersigned at (718) 716-3540.
Very Truly Yours,
July 26, 1999
The Federal Reserve Board has extended its comment period on HSBCs application to acquire Republic, until August 2. Fed staff state that the reason for the extension was HSBCs delay in making information available, by trying to hold confidential its Community Reinvestment Act plan and its comparison of its and Republics fees. Sources tell ICP that the Federal Reserve Bank of New York is taking a much more proactive stance on HSBCs application than on others, including calling groups and asking them it they are going to comment, and if they are going to request a public meeting.
July 19, 1999
On June 24, ICP submitted a 29-page challenge to HSBCs applications to acquire Republic, to the Federal Reserve and the New York State Banking Department. On July 15, HSBC finally submitted a response, and, on the same day, ICP finally obtained from the NYSBD a response to its request under the Freedom of Information Law.
It turns out that regulators have also noticed HSBCs weak and disparate lending record. Earlier this year the NYSBD, in a rare enforcement move, required HSBC to commit to improve its mortgage lending to African Americans and Latinos. This regulatory enforcement action, which gives support to opposition to HSBCs Republic (and possibly Fleet, see below) acquisition proposals, was not publicly reported, and there is no evidence that Fleet has yet taken any of the steps it committed to. If HSBC is one of the few New York banks on which the NYSBD has had to impose fair lending requirements, it is highly questionable whether HSBC should be allowed to acquire another major New York bank, much less whether HSBC should be allowed to acquire any of the branches that Fleet would have to sell off as part of its proposal to acquire BankBoston. It has been publicly reported that HSBC is among the six finalists that Fleet has selected for these divested branches. Clearly, HSBCs chieftains now want to expand quickly in the United States. But they should have ensured a better CRA record here -- their lack of attention, documented in ICPs June 24 challenge (see below), and reflected by the NYSBDs rare enforcement requirement, should preclude HSBCs U.S. expansion at this time.
Provided to ICP on July 15 by the NYSBD were letters between this regulator and HSBC (then called Marine Midland), including the following:
January 25, 1999
Deputy Superintendent of the Consumer Services Division
New York State Banking Department
Two Rector Street, 18th Floor
New York, NY 10006
Dear Mr. Holley:
Per your requirement for approval of the First Commercial Bank of Philadelphia acquisition, Marine Midland agrees to, on a preliminary basis, develop a plan to strive to meet an aggregate level of 10% of our total Mortgage, Refinance Mortgage and Home Improvement Applications to Black and Hispanic individuals residing in census tracts with greater than 50% minorities. Said plan will consider Safety and Soundness and be available by February 10 at which time we will meet with you at your offices to discuss it.
We look forward to meeting with you and discussing our plan.
Charles O. Nagele
[Office of General Counsel]
- - -
March 22, 1999
Mr. Edward F. Holley
Consumer Services Division
State of New York Banking Department
Two Rector Street
New York, NY 10006
Dear Mr. Holley:
We are writing in response to the February 3rd meeting between the New York State Banking Department and Marine Midland Bank. Marine Midland remains committed to providing financial services that meet the needs of all the communities we serve and to do that in a safe and sound manner. It is our intention to increase our penetration in Majority/Minority Census Tracts to a level that is consistent with our peers and attainable in a profitable manner.
In conformance with our business strategy, Marine Midland will not discount the interest rate on lending products to capture a greater share of the market, nor will the credit underwriting policy on lending products be altered to reach a greater percentage of the market. In addition, Marine Midland does not intend to pay third party originators large finders fees in order to capture a greater share of the market.
After reviewing the demographic data for the State of New York, we have noted that there are currently 1,537,000 occupied housing units in Majority/Minority Census Tracts, of which 1,192,000 are rental units.
It can be easily noted that the greatest opportunity to increase Marine Midlands lending penetration into Majority/Minority Census Tracts is in New York City / Long Island, Rochester, and Buffalo. In order to increase the number of applications and closed loans from Majority/Minority Census Tracts, Marine Midland has identified a series of initiatives that, we believe, will over the next two years, result in an increased level of lending in conformance with our business strategy. Outlined below are the strategies which we believe will increase our market penetration in Majority/Minority neighborhoods for Home Purchase/Refinance and Home Improvement lending:
... A listing of non Marine Midland customers located within Majority / Minority Census Tracts will be purchased. This customer list will be solicited to refinance with Marine Midland using the Telesales Unit during the third quarter of 1999. A prerequisite for participation in this program will be an acceptable credit history...
A review of Marine Midlands existing mortgage portfolio located in Majority / Minority areas is being undertaken to identify borrowers who have an opportunity to benefit from a refinance. A direct solicitation of the identified customers will be made...
We expect that Marine Midland will be able to attain a 10% penetration rate in Majority / Minority Census Tracts by the end of the year 2000. We will use our best efforts to have this penetration appropriately apportioned throughout New York State....
Home Improvement Initiatives... Use our local branch sales force in low and moderate income areas to promote programs and products targeted to low to moderate income families and Majority / Minority Census Tracts by creating and distributing promotional flyers...
The Action Plan anticipates that the number of applications from low to moderate income borrowers in Majority / Minority Census Tracts will increase. This increase will, based upon anticipated application volume, raise our penetration rates in Majority / Minority Census Tracts from 6.1% at the end of 1996 to 10% at the end of the year 2000...
Edward C. Schultz
VP, CRA Management
It should be noted that the goal of 10% is not an aggressive goal -- rather, it is no more than a level consistent with its peers. See HSBCs Response at 8. For home purchase and refinance loans to predominantly minority census tracts, HSBC is current at only 5% -- less than half its peers standard. Id.
The legitimacy of HSBC improving its record by purchasing lists of non-HSBC customers and soliciting them for refinance loans, and pitching refinance loans to its own (relatively few) minority borrowers is questionable. Also, if the Home Improvement Loan strategy depending on the use of HSBCs branch staff, it is notable that HSBC has no consumer branches in the South Bronx and Harlem, the largest contiguous Majority / Minority area in New York State.
In fact, HSBCs response to ICPs comments states that HSBC has under consideration the establishment of a full service branch in a neighborhood in Harlem....
HSBC has not yet responded to the issues ICP has raised about Republic's purchase of securities backed by mortgages made by the questionable, high interest rate lender Delta Funding (see below).
On July 2, the NYSBD wrote to HSBC and asked, among other things, Has either of the existing banks conducted community outreach with respect to the proposed merger transaction?... How will with new HSBC Bank USA integrate the CRA program of the two banks? HSBCs July 15 response to ICPs protest states, among other things, that HSBC Bank traditionally has not emphasized CRA investments to the same degree as Republic Bank... Proportionally, though, CRA investments may not be as substantial a component in HSBC Banks CRA program following the merger as they have been at Republic Bank. Resp. at 5. While the focus of ICPs challenge to HSBC is on its retail lending, particularly to Latinos and African Americans (in which HSBC is at less than HALF its peers standard, see above), HSBCs admissions as to CRA investments are giving rise to concern about NYC community development groups. Both the NYSBD and the Fed, however, intend to close their comment periods in a weeks time, on July 26. Republic, reportedly, is setting up meetings with NYC community development groups. A little late -- unless the goal is simply to mollify groups until after the end of the comment period. Meanwhile, the NYSBD is trying to charge $380 for copies of HSBCs application, in a practice that would clearly preclude most residents of and community groups in low income areas from reviewing the application.
And the beat goes on, and will go on.
July 12, 1999
ICP has submitted a second comment opposing HSBCs application to acquire Republic, to the Federal Reserve Board and to the New York State Banking Department. Because HSBC has still not rebutted ICP previous comments about HSBCs weak lending and service record in low-income neighborhoods, ICPs second filing focuses on Republic -- which has been a major purchaser of mortgage backed securities issued by the questionable subprime lender Delta Funding, which has settled discrimination charges with the NYS Attorney General. A summary of ICPs comment, faxed on July 11 to the Fed and NYSBD, is below.
In other HSBC news, the bank is about to capitalize on its sweetheart deal in Mexico, and buy Banca Serfin, of which it already owns 19.9%. While HSBC has made much of the European Unions July 2 decision not to oppose its acquisition of Republic, it was no surprise: there is very little overlap in Europe (the only thing the EU can consider); ICP did not even submit any comments to the EU. HSBC cannot acquire Republic New York Corporation without the prior approval of the Federal Reserve and of the NYSBD -- which approvals, for the reasons set forth below, should not be granted.
FIRST SUPPLEMENTAL COMMENT BY INNER CITY PRESS / COMMUNITY ON THE MOVE AND THE INNER CITY PUBLIC INTEREST LAW CENTER IN OPPOSITION TO THE APPLICATIONS AND NOTICES OF HSBC HOLDINGS AND ITS AFFILIATES TO ACQUIRE REPUBLIC NEW YORK CORPORATION AND ITS SUBSIDIARIES
JULY 12, 1999
I. PRELIMINARY STATEMENT
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively hereinbelow, ICP), this is ICPs first supplemental comment opposing and requesting hearings on the applications and notices of HSBC Holdings, plc, HSBC Finance, HSBC Holdings, BV, HSBC Americas, Inc. and their affiliates (collectively, HSBC) to acquire Republic New York Corporation and its subsidiaries (Republic), and all related applications.
As set forth below, eighteen days after the June 24, 1999 submission of ICPs petition to deny this application, ICP has still not received a copy of any response by the Applicants. ICP is requesting an extension of the comment period on this and other ground (see infra Section III).
ICP is submitting this first supplemental comment in order to place into the record on this application the fact that Republic National Bank of New York is a purchaser of securities backed by residential real estate loans made by the questionable subprime lender Delta Funding. As set forth in Section II, ICP is entering into the record the findings of the New York State Attorney General as to Delta, and to the OTS ruling and attachments thereto dated June 30, 1999, regarding 24 C.F.R. §100.125, Lehman Brothers involvement with Delta Funding, and concerning predatory pricing practices. On the current record, this HSBC - Republic application must be denied.
II. BEYOND HSBC WEAK LENDING AND BRANCHING RECORD, REPUBLIC NATIONAL BANK OF NEW YORK CLEARLY HAS NO STANDARDS OR FAIR LENDING COMPLIANCE SAFEGUARDS -- REPUBLIC IS A PURCHASER OF SECURITIES BACKED BY RESIDENTIAL REAL ESTATE LOANS MADE BY DELTA FUNDING
While both Republic and HSBC are engaged in the origination of home mortgage loans, ICP hereby enters into the record that Republic National Bank of New York is also a purchaser of mortgage-backed securities, including securities backed by subprime mortgages made by Delta Funding (see infra for a discussion of Deltas problematic practices. Since it is now possible to take judicial notice of these problems, this Comment begins by documenting (some of) Republics links with Delta).
Delta Fundings SEC Form 10-K for its Delta Funding Corp Home Equity Loan Series 1998-3, filed with the SEC on March 19, 1999, states, at Item 12, that Republic National Bank of New York is a beneficial owner of more than 5% of that pool of subprime home equity loans: Class A-1A, $20,000,000 (original principal balance), 67.0% (percentage of class).
For further example, Delta Fundings SEC Form 10-K for its Delta Funding Corp Home Equity Loan Series 1998-4, filed with the SEC on March 30, 1999, states, at Item 12, that Republic National Bank of New York is a beneficial owner of more than 5% of that pool of subprime home equity loans: Class A-1F, $15,455,000 (original principal balance), 14.0% (percentage of class).
ICP contends that this reflects a lack of fair lending compliance safeguards at Republic National Bank of New York. Controversy has swirled around Delta Funding for more than a year. ICP has formally raised issues about Deltas lending and foreclosures since at least November 1998. In January 1999, the New York Times ran a detailed expose of Deltas practices. In late June, 1999, Delta Funding settled discrimination and other charges with the New York State Attorney General. See infra.
This squarely raises the issue: what Fair Housing Act compliance standards and safeguards does Republic National Bank of New York have in place when considering purchasing, and purchasing, residence-backed securities, an activity clearly covered by the Fair Housing Act regulations?
In June 1999, ICP raised similar issues to the Office of Thrift Supervision, with regard to Lehman Brothers, which has done underwriting of Delta loans. On June 30, 1999, the OTS issued an order which incorporated by reference, and attached, a commitment letter from Lehman Brothers to the OTS [available in ICP's Delaware Watch]
ICP hereby raises this precedent into the record on this HSBC-Republic application. These are commitments that the OTS required / encouraged, and the OTS incorporated Lehmans commitment letter into its Order, and placed Lehmans commitment letter on the OTS Internet web site, immediately following its Order. It is irrefutable that the Fair Housing Act applies as least as directly, if not more so, to a purchaser of MSB like Republic National Bank of New York, as it to an underwriter like Lehman Brothers.
* * *
ICP raised this issue earlier this year, in connection with Bankers Trusts (now Deutsche Banks) role as trustee / custodian for Deltas loans and trusts. There, the Applicants argued that they had no duties under the Fair Housing Act, as trustee, but would have such duties as underwriters of such securities. Note that 24 C.F.R. §100.125 even more clearly applies to purchasers of securities backed by residential real estate.
ICP enters the following into the record: BNA BANKING DAILY, June 24, 1999 [snip]
As noted above, ICP has formally raised issues about Deltas lending and foreclosures since at least November 1998. See, e.g., the New York State Banking Departments December 4, 1998, response to ICPs 1998 complaint letter to the NYSBD about Delta. ICP contends inter alia that Delta presumptively violates the Home Mortgage Disclosure Act (HMDA; 12 U.S.C. §2801, et seq.). Deltas HMDA violations (reporting a patently incredible percentage of its applications as withdrawn, and as race not reported) are exemplified in the HMDA data it reported for the New York City Metropolitan Statistical Area (MSA) in 1997, as found on the FFIECs web site:
Conventional Home Purchase (Table 4-2)
Apps Origs Dens W/drawn
Black 43 10 0 33
Hispanic 20 6 0 14
White 55 13 3 48
Race Not 615 116 45
A number of presumptive HMDA violation must be noted in this data. First, 84% of these applications (and 80% of these originations) were listed as race not reported, violating HMDAs main purpose: that the public (and regulators) can assess the fairness of lending, including compliance with the fair housing laws. Second, all minority applications that were not originated were listed as being withdrawn, rather than denied -- creating an inference of illegal prescreening. Finally, for those loans for which race was reported, Delta is clearly targeting minorities for its higher-than-normal interest rate loans (Delta has much higher market shares of applications for and loans to minorities than to whites). Delta presumptively violates HMDA (and the fair lending laws).
See also, Delta Funding Corp. Home Equity Loan Series 1998-4 (Prospectus filed with the SEC on December 18, 1998) -- one of the Delta issuances of which Republic National Bank of New York purchased a substantial portion (see supra). This Prospectus makes clear that these are subprime loans: [t]he borrowers have less than perfect credit... The rate of prepayment may be affected by the credit standing of the borrowers. If a borrowers credit standing improves, that borrower may be able to refinance his existing loans on more favorable terms. If a borrowers credit standing declines, he borrower may not be able to refinance. As further explained infra, Republic National Bank of New York, as a purchaser of these securities, is counting on, and profits from, the borrowers not being able to improve their credit standing (which would allow the borrowers to refinance at lower interest rates, but would adversely impact the investment return on the pool of subprime loans). Republic National Bank of New York has taken an explicit interest directly at odds with the interests of (predominantly low- and moderate-income) borrowers, contrary to the CRA.
ICP has geocoded properties in New York City on which Delta Funding has lent, and then securitized the loans, a substantial portion of which Republic National Bank of New York purchased. These properties are disproportionately -- VIRTUALLY ENTIRELY -- in minority communities. The concentration of these properties, for higher than normal interest rate loans, in minority census tracts, is troubling.
Delta Funding in Brooklyn, New York [snip]
Examining individual Delta loans and related documentation is also troubling. ICP has reviewed a Delta loan in New York to Oscar and Dorothy Jernegons. The closing statement shows, out of the $101,250 loan, Mr. Jernegons was charged $7,151 in origination fees by Delta, $8,100 in fees to Dunewood Funding, and $6,000 to a Mr. Stanley R. Stern (to whom Mr. Jernegons has stated he was not previously indebted). Mr. Jernegons claims that a Mr. Archer wrote down a rental income figure which had no basis in fact in order to show financial capacity, for qualifications purposes. Mr. Jernegons states that he never saw these loan documents despite numerous requests. This is a most troubling loan, and exemplifies the type of practices that Republic National Bank of New York, which purchases substantial portions of Deltas MBS issuances, in an activity subject to the Fair Housing Act, was or should have been aware of.
Delta get most of its loans from mortgage brokers. Consider the records of the mortgage brokers with which Delta does business and gets the loans with which it subsequently does business with Lehman. On our current knowledge, these brokers have included:
Northeast Mortgage Investment Corp., on information and belief run by a Michael Beyer, relation to David and Barry Beyer, whose Sterling Resources was lambasted in the NYC Department of Consumer Affairs study, Predatory Home Improvement Lending.
Coastal Capital: an extension of Dartmouth Funding, a/k/a Dartmouth Plan, which has been inquired into by the NY and CT Attorney Generals offices, and which was also critiqued in the Predatory Home Improvement Lending study, supra.
ECI a/k/a Equitable Mortgage/Dunewood Funding (see supra and attached re loan to Mr. Jernegons involving Delta and Dunewood): on information and belief, Dunewood and its principal, Robert Shapiro, have been charged by the state comptrollers office with fraud and issuing unregistered securities.
Delta also long-used a questionable title and abstract company, All Island Abstract, 81 Scudder Avenue, Northport, New York, which also did extensive business with the now defunct Cityscape.
Also, just prior to going public, Delta sold a number of non-performing loans to NY Mortgage Servicing, whose officers appear to have been Sidney A. Miller, Hugh Miller and Irwin Fein (the officers of Delta Funding). This appears to be a material related party relationship, never disclosed in Deltas SEC filings, and appears to have been to artificially deflate Deltas delinquency numbers.
More recently, there have been a number of transactions of loans between Delta and American Strategic Income Portfolio, Inc., of Minneapolis, MN, which has shared a CEO/President with Piper Jaffray.
A question: as the RESPA / TILA / HOEPA suits against Delta (those reported in the New York Times in January, 1999, and others yet unreported), and conceivably apply to between $1.5 billion to $3 billion of outstanding loans, this could come to have a serious financial effect on Republic National Bank of New York, and on the combination proposed in the instant Application.
A second question: what Fair Housing Act compliance standards and safeguards does Republic have in place when considering purchasing, and purchasing, residence-backed securities, an activity clearly covered by the Fair Housing Act regulations? It would appear that Republic National Bank of New York does not even examine the HMDA data of Delta, or of the loan pools Republic purchases (see supra).
The information set forth above -- Republic National Bank of New Yorks purchase and ownership of a substantial quantity of Delta Fundings loans -- makes out a serious adverse factor on this application, and raises questions that must be answered (unless the Application is to be dismissed).
III. The Comment Period Must Be Extended, and An Evidentiary Hearing Should Be Held
ICP submitted a petition to deny this application on June 24, 1999, which focused on HSBCs weak lending records, HSBCs high fees, and, inter alia, that HSBC has no service facilities in the South Bronx or Upper Manhattan, and recently closed its only consumer-accessible facility, on 148th Street and Willis Avenue in the Bronx.
As of July 12, 1999, 18 days after ICP filed its protest, via telecopier, ICP has not received a copy of any HSBC response to the issues raised.
ICPs petition to deny was reported, inter alia, in The Independent (London), of June 27, 1999. This article contained the following quote: We are aware a statement has been published on the Internet, an HSBC spokesman said. We expect U.S. regulators will invite our comments. We shall respond....
The Buffalo News of June 29 contained the following quote: We expect the regulators will invite our comments and we will respond in full... HSBC spokeswoman Kathleen Young said.
The South China Morning Post of June 29 quoted HSBC CEO Aman Mehta: In response to challenge from a U.S. pressure group against HSBCs proposed U.S. $10.3 billion takeover of Republic New York Corp., Mr. Mehta said the bank would state its case soon.
Two weeks after this comment by HSBCs CEO, ICP has not received a copy of any HSBC response to the issues ICP raised on June 24, 1999. ICP submitted its petition to deny at the earliest possible time, inter alia so that it would have an opportunity to review and reply to HSBCs response(s). In light of the above, and of the Republic / Fair Housing Act / managerial issues raised above and in the attached, ICP is formally requesting an extension of the comment period, and an evidentiary hearing on these issues.
On the current record, this application could not legitimately be approved.
Matthew Lee, Esq.
July 4, 1999
On June 24, Inner City Press/Community on the Move filed a 29-page challenge to HSBCs applications to acquire Republic, with the Federal Reserve and the New York State Banking Department. The South China Morning Post of June 29 reported: In response to a challenge from [ICP] against HSBCs proposed U.S. $10.3 billion takeover for Republic New York Corporation, [HSBC CEO] Mr. Mehta said the bank would state its case soon. As of July 2, more than a week after the filing of the protest, HSBC had submitted no response.
On July 1, ICP filed with the New York Stock Exchange an opposition to HSBCs request for a listing on the Exchange by July 16. While the crux of ICPs concerns about the take-over of Republic concerns HSBCs history of branch closings and not serving low-income communities of color, ICP also notes that HSBC has said it would not be subject to the jurisdiction of U.S. courts, including on investor- and consumer-protection lawsuits. Why should it be listed on the NYSE, then? Heres the letter:
July 1, 1999
New York Stock Exchange
Attn: Mr. Richard Grasso and staff
11 Wall Street
New York, NY 10005
RE: ADVERSE ISSUES ON, AND COMMENT AGAINST, THE PROPOSED LISTING OF HSBC (HONG KONG SHANGHAI BANKING CORP.) ON THE NYSE, REPORTEDLY SCHEDULED FOR 7/16/99
Dear Mr. Grasso and others at the NYSE:
On behalf of our non-profit consumer advocacy organization, Inner City Press/Community on the Move and its members (collectively hereinbelow, ICP), this letter concerns, and opposes, the proposed listing of HSBC (Hong Kong Shanghai Banking Corporation) on the New York Stock Exchange (the NYSE), reportedly to take place (absent further, and required, scrutiny) on July 16, 1999.
While our organization, whose members include not only consumers of banking services, but also investors in the capital markets, including via the NYSE, has many concerns about HSBC, we direct you particularly to the following, reported in the South China Morning Post (Hong Kong) of June 28, 1999:
HSBC has informed the financial regulator, the Securities and Exchange Commission (SEC), that US litigants could find it almost impossible to enforce US court orders against it.
In a statement made to the SEC before HSBC's share trading debut on the New York Stock Exchange next month, the group said that due to the holding company's location, it may not be possible to serve orders on HSBC officials.
"Most of the assets of HSBC Holdings' directors and executive officers and a substantial portion of HSBC Holdings' assets are located outside the US," it said.
"As a result, it may not be possible to serve process on such persons or HSBC Holdings in the United States or to enforce judgments obtained in US courts against them or HSBC Holdings based on civil liability provisions of the securities laws of the United States."
HSBC also said there was "doubt" the English law courts - under whose jurisdiction much of its assets fall - would also enforce any actions against the group, particularly if they attempted to uphold civil liabilities made under US securities laws, or the judgments of US courts made on the basis of those civil liabilities provisions.
It added that punitive damages made in the US may also be unenforceable in Britain.
How these facts, acknowledged and proclaimed by HSBC, are consistent with HSBC listing its shares on, and luring U.S. investors through, the NYSE is a mystery to us. Your web site, under the heading Listing Requirements, states inter alia that:
[t]o be listed on the New York Stock Exchange, a company is expected to meet certain qualifications and to be willing to keep the investing public informed on the progress of its affairs... [O]ther factors are taken into consideration when evaluating the companys eligibility for listing. The NYSE encourages the company to discuss its qualifications with a NYSE representative prior to submitting eligibility material for review... The Exchange has broad discretion regarding the listing of a company... [T]he Exchange may deny listing or apply additional or more stringent criteria based on any event, condition or circumstance that makes the listing of the company inadvisable or unwarranted...
We contend, via this comment that we ask to be made part of the record on HSBCs application for listing, that HSBCs statements that it will not be subject to the jurisdiction of judgment of U.S. courts, to be a condition or circumstance that makes the listing of the company inadvisable or unwarranted....
Note that HSBC has a history, right back to its first entry into the U.S., of seeking to evade regulatory requirements that it disclose information about its business. When HSBC first bought Marine Midland Bank (MMB) in 1980, and found questions being asked by the New York State Banking Department (the NYSBD) about HSBCs condition and holdings, HSBC it arranged for Marine to convert from a state-chartered to a national bank, to expedite the acquisition without having to make the basic disclosures requested by the NYSBD. Even then, the OCCs approval order stated that areas of MMBs [CRA] performance are judged to be capable of significant improvements. American Banker, January 29, 1980, Pg. 1. Thereafter, HSBC converted Marine back to a state-chartered bank.
Beyond HSBCs open statement that it will not accept the jurisdiction or judgments of U.S. courts, and that it may be impossible to enforce judgments obtained in US courts against... HSBC Holdings based on civil liability provisions of the securities laws of the United States (see supra), consider the following:
There are also adverse managerial and financial factors that the NYSE should inquire into and consider, before acting on HSBCs request for a listing on the NYSE. See, e.g., HSBC Finds the Going Tough as Asian Crisis Takes Its Toll, Birmingham Post, February 23, 1999, Pg. 19: The group said it was setting aside an extra pounds 60 million to cover its liabilities under the pension mis-selling scandal... The retail banking arm faces possible strike action later this year, following an outspoken attack by finance union BIFU on what it said was a pay freeze for senior clerical workers.
See also, South China Morning Post of August 4, 1998, at 3: The bank also announced a GBP60 million provision to cover against future compensation payments it might be forced to pay under an investigation into the mis-selling of pensions being undertaken by British regulators. The investigation was widened in March.
That is to say, the investigation was widened AFTER the following (which is also an adverse issue): Midland Bank, part of HSBC, was fined $150,000 for its part in the pensions mis-selling scandal. Watchdog IMRO said the bank failed to give customers all necessary information to enable them to decide whether to leave their company scheme and take out a personal pension. Midland was also ordered to pay IMROs costs of $70,708. Daily Mail (London), September 30, 1997, Pg. 55.
See also, HSBC and Barings Face Action in Japan, The Times, May 27, 1998: The Japanese Ministry of Finance is set to take punitive measures against the Tokyo subsidiaries of HSBC and ING Barings over alleged breaches of local securities trading laws... In the case of HSBC, the SESC said the firm had failed to relay client orders to the market and issued false securities trading reports. The firm is alleged to have violated laws on bucketing....
See also, Chicago Daily Law Bulletin of May 28, 1998, at 1: proposed settlement to the class-action case that alleged New York-based Marine Midland Mortgage Corp. had cheated its mortgage customers through excessive escrow charges. Gail L. Robinson, et al. v. Marine Midland Mortgage Corp., No. 95 C 5635.
We urge you to closely consider the information provided to you in this comment, particularly HSBCs recent statements that it will not be subject to the jurisdiction of judgment of U.S. courts, and that it may be impossible to enforce judgments obtained in US courts against... HSBC Holdings based on civil liability provisions of the securities laws of the United States (see supra), as a condition or circumstance that makes the listing of the company inadvisable or unwarranted.... We urge that you not begin listing HSBC on the NYSE, certainly not on or about July 16, 1999, and that you keep us informed of your inquiries and actions in this regard. We can be reached at (718) 716-3540. Thank you for your attention.
Very Truly Yours,
June 28, 1999
On June 24, Inner City Press / Community on the Move and the Inner City Public Interest Law Center filed a 29-page challenge to HSBC's applications to acquire Republic National Bank, with the Federal Reserve Board and the New York State Banking Department, both of whom would have to approve the merger.
HSBC has since stated, "We expect U.S. regulators will invite our comments. We shall respond...". HSBC Accused of Prejudice, The Independent (London), June 27, 1999, click here to view. How HSBC will respond to the fact that while it is applying to acquire Republic, and to list its shares on the New York Stock Exchange, it has no consumer branches in the South Bronx or Harlem, where one million New Yorkers of color live, remains unclear. Particularly given HSBC's recently closing of its only consumer facility in the South Bronx. Click here for a history, the conclusion of today's Bronx Report.
The Fed will give HSBC eight days to submit its response. ICP will then have an opportunity to reply. ICP is continuing to analyze HSBC's 1998 mortgage lending data, which the bank just provided, and HSBC's seven-volume application to the Fed.
ICP is preparing an analysis of HSBC's Machiavellian approach to government regulation and democracy worldwide (for more, see Inner City Press's Global Inner Cities site) -- note that HSBC is currentnly negotiating with South Korea's government to buy 71% of Seoul Bank. HSBC already got a sweet deal on Mexico's failing Banco Serafin -- HSBC got a guarantee to get $150 million of its investment back in three years, while Mexico investors get nothing back at all... HSBC calls for the intervention of the Hong Kong Monetary Authority to raise mortgage interest rates (Business Times of Singapore, June 24), while in the United States, HSBC avoids making mortgages to minorities and in lower-income neighborhoods, and has closed its only consumer facility in the South Bronx... Meanwhile, HSBC has told the U.S. Securities and Exchange Commission, in connection with its application to list its shares on the NYSE on July 16, that "it may not be possible to service process... on HSBC Holdings in the United States or to enforce judgments obtained in U.S. courts against them or HSBC Holdings...". South China Morning Post, June 28, 1999. On these terms, why should HSBC be listed on the NYSE? ICP is inquiring into this; updates forthcoming.
Below is a summary of ICP's first comment to the Federal Reserve and NYSBD; this page will be updated as circumstances warrant.
Some background (June 24): HSBC is the "Hong Kong Shanghai Banking Corporation," which has owned Marine Midland Bank in New York State since 1980. Marine was recently re-named "HSBC Bank USA," but its lending and branching performance in low-income neighborhoods, and its treatment of consumers, hasn't gotten any better (see below).
On May 10, 1999, HSBC announced it would try to acquire Republic New York Corporation, the parent of Republic National Bank, for $10.6 billion. Public reports indicate that HSBC would close at least 20 bank branches if it is allowed to acquire Republic; also, HSBC has higher fees for consumers than Republic does.
HSBC's application to the Federal Reserve Board alludes to 30 "pairs" of branches that HSBC is considering "consolidating," but tries to put off until later any disclosure of how many, and which, branches HSBC would close. But the public has a right to comment on the likely effects of such a merger proposal, and the Fed must review such effects while considering the application. HSBC's application also tries to keep its Community Reinvestment Act (CRA) plan confidential, as well as an analysis comparing its and Republic's fees. ICP is requesting both of these under the Freedom of Information Act.
HSBC's disparate record of mortgage and small business lending is detailed below. Updates on this proceeding will be provided weekly in this space. (See also, ICPs For the Media page). For or with more information, contact us. Here's the summary:
PETITION TO DENY AND HEARING REQUEST BY INNER CITY PRESS / COMMUNITY ON THE MOVE AND THE INNER CITY PUBLIC INTEREST LAW CENTER IN OPPOSITION TO THE APPLICATIONS AND NOTICES OF HSBC HOLDINGS AND ITS AFFILIATES TO ACQUIRE REPUBLIC NEW YORK CORPORATION AND ITS SUBSIDIARIES
JUNE 24, 1999
I. PRELIMINARY STATEMENT
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively hereinbelow, ICP), this is a timely comment opposing and requesting hearings on the applications and notices of HSBC Holdings, plc, HSBC Finance, HSBC Holdings, BV, HSBC Americas, Inc. and their affiliates (collectively, HSBC) to acquire Republic New York Corporation and its subsidiaries (Republic), and all related applications.
HSBC and its subsidiaries in the United States have troubling fair lending and Community Reinvestment Act (CRA) records, militating for denial of this expansion application. This Comment notes the Federal Reserve Boards (FRBs) previous identification of disparities in HSBCs lending record, and shows that the disparities have grown worse. Section II(A), infra.
This proposed acquisition would ill-serve the convenience and needs of affected communities, including in light of the branch closings and fee raising that would result. §§(B) and (D), infra. ICP has requested that HSBC disclose how many and which branches it would close; HSBC has refused to answer. However, see, e.g., N.Y. Daily News, May 11, 1999, at 31: [B]etween 15 and 20 branches... will be shuttered. See also, Crains New York Business of May 17, 1999, at 3: when HSBC closes 20 branches, as expected.... The Application alludes to fewer than thirty pair of HSBC Bank and Republic Bank branches apparently being considered for closure. App. at 108, emphasis added. So that the public can meaningfully participate in this process, and so that the FRB can, as it is required to, assess the likely effects of the merger, HSBC must disclose its plans, during the comment period.
HSBC closed a number of branches and lending facilities after its acquisition of First Federal, including closures that left it without any lending facilities in low income communities like the South Bronx. Currently, and even if this acquisition were approved, HSBC has no lending facilities, for example, in Upper Manhattan or the South Bronx -- an area with nearly 1 million residents. See Section II(C), infra, and Section III, for further adverse issues the FRB must consider.
II. HSBC MAINTAINS A TROUBLING FAIR LENDING AND SERVICE RECORD; THIS MERGER WOULD RESULT IN FURTHER BRANCH CLOSINGS AND FEE RAISING; THE APPLICATION SHOULD BE DENIED ON THESE BASES
A. HSBCS TROUBLING FAIR LENDING RECORD
The Federal Reserve Board, in its previous analyses of HSBCs and its affiliates lending, has noted disparities by race and income. See, e.g., 81 Federal Reserve Bulletin 56 (January 1995), n.7 and accompanying text (the data also reflect some disparities in the rate of loan originations, denials, and applications by racial group or income level); 81 Fed. Res. Bull. 310 (March 1995), n.9 (These data reflect some disparities in the rate of loan originations, denials, and applications by racial group or income level); 81 Fed. Res. Bull. 1044 (November 1995), n. 18 (The denial rates for Hispanics also increased slightly from 7 percent in 1993 to 10.2 percent in 1994. These data reflect disparities in denial and origination rates by racial group); and 83 Fed. Res. Bull. 326 (April 1997), n.29 (the data show disparities in application and origination rates to loan applicants who are minorities or residents of LMI census tracts compared to applicants who are not minorities or residents of LMI census tracts. The Board is concerned when the record of an institution indicates such disparities, and it believes that all banks are obligated to ensure that their lending practices are based on criteria that assure not only safe and sound lending, but also assure equal access to credit by creditworthy applicants regardless of race).
These disparities have not improved -- if anything, they have grown worse. The most recent publicly-available Home Mortgage Disclosure Act (HMDA) data, for 1997, reveals the following:
In the New York City Metropolitan Statistical Area (MSA), for conventional home purchase loans, HSBCs bank and mortgage company combined to deny 11.9% of applications from whites, while denying 22% of applications from Latinos. HSBC in this MSA denies Latinos 1.85 times more frequently as whites, which compares unfavorably to the industry aggregates ratio of 1.68 in this MSA.
Strikingly, HSBC based on its marketing and the disparate way in which it has branched and expanded (excluding, for example, the entirety of the South Bronx and Harlem), has lower percentages of its loans to people of color than do other institutions in this MSA. HSBCs bank and mortgage company combined made 825 conventional home purchase loans to whites in this MSA in 1997, versus only 91 loans to African Americans, and 87 loans to Latinos. Combining these three categories of loans, 17.8% of Marines loans went to African Americans and Latinos, comparing unfavorably to the industry aggregate (following this same methodology) of 20.2% of loans being to African Americans and Latinos.
ICP has just received HSBCs 1998 HMDA Loan Application Register (LAR). While ICP will be submitting further comments on this data, as review progresses, attached hereto is HSBC Bank USAs 1998 LAR for Bronx County, New York. In 1998, HSBC Bank USA received 190 applications from The Bronx. Based on its marketing, however, only 44 (or 23%) of these applications came from the South Bronx, defined as Community Planning Districts 1-6. Less than a quarter of applications -- from the lower-income, more predominantly minority half of the county. HSBC Bank USAs denial rate in the South Bronx was (a high) 28.6%. As the attached LAR makes clear, the denials were disproportionately to consumers and homeowners, actual residents of the South Bronx. The approvals are disproportionately multifamily loans, which do not distinguish between simple refinances and loans that actually help to improve a rental property for tenants. HSBC Bank USA is not serving the credit needs of South Bronx residents.
HSBCs record throughout its U.S. markets is disparate. The analysis below is of this HSBC mortgage company, for conventional home purchase loans in the most recent year for which data is publicly-available, 1997 (As noted above, ICP has just received HSBCs 1998 HMDA LAR, and will be submitting further comments once it reviews this information).
On Long Island (MSA 5380), where HSBC has 36 branches, HSBCs mortgage company in 1997 made 915 conventional home purchase loans to whites, versus only 18 loans to African Americans, and 22 loans to Latinos. Combining these three categories of loans, 1.9% of Marines loans went to African Americans, while the industry aggregate (using this same methodology) was 5.1% of loans going to African Americans. Only 2.3% of HSBCs loans went to Latinos, while the industry aggregate (using this same methodology) was 3.5% of loans going to Latinos. As in New York City, HSBC disproportionately excludes African Americans and Latinos from its marketing and lending on Long Island. [snip - contact ICP for more recent data]
...Even the FRBNYs CRA Performance Evaluation of HSBC states that Marine placed fifth among seven peers in the percentage of home purchase lending to LMI borrowers [and] sixth for refinance loans.... FRBNY Exam at BB28. It also states that the geographic distribution was poor in Kings, Bronx, Queens and Westchester County... The banks demand adjusted penetration of LMI census tracts was less than that of the aggregate in the PMSA. HSBC comes in fifth and sixth, out of seven -- low and moderate income consumers would be ill-served by allowing HSBC to acquire and extinguish other institutions. This application should be denied.
As to small business lending, the New York State Banking Departments (the NYSBDs) CRA Exam of HSBC states that [t]he bank lags the aggregate in small business... lending in such measures as the proportion of loans of various sizes and those made to small businesses (defined as entities with revenues of $1 million or less). Id. at 5-8.
Does HSBC intend to improve its CRA record? (1) It hasnt, in the past; (2) theres no way to know -- HSBC has asked for confidential treatment for its CRA plan (Confidential Attachment 14), while, ironically, including in the public portion of its submission Republic CRA documents labeled Confidential (see attached). Similarly, HSBC has withheld a comparison of its and Republics fees (Confidential Attachment 9). ICP and the public should be provided with all documents for which HSBC has erroneously (and arbitrarily) requested confidential treatment, and the comment period should be extended.
* * * *
HSBC made much, when it acquire First Federal in 1997, of expanding its mortgage lending nationwide. But HSBC has imposed the same presumptively discriminatory practices on this nationwide lending. In 1997, for conventional home purchase loans:
In the Detroit, MI, MSA, HSBCs mortgage company denied the applications of African Americans 2.32 times more frequently than the applications of whites. [snip - contact ICP for more recent data]
B. This Proposed Merger Would Result In Branch Closings and a Loss of Service to Communities
Under Section 3 of the Bank Holding Company Act (the BHC Act), the FRB must consider the effect this proposed acquisition would have on the convenience and needs of the communities to be served. How many branches would HSBC close if this application were approved? ICP has asked HSBC, in writing; HSBC has responded, by letter dated June 21, that [a]s yet, no decisions have been made as to which branches will be closed or consolidated following the merger. The Application, at . However, see, e.g., N.Y. Daily News, May 11, 1999, at 31: [B]etween 15 and 20 branches... will be shuttered. See also, Crains New York Business of May 17, 1999, at 3: if [HSBC] closes 20 branches, as expected.... See also, HSBC Deal Will Add Jobs In Buffalo, Buffalo News, May 11, 1999, at 1A: HSBC expects to save $300 million annually by merging operations. (Further discussed infra, Section III).
In Brooklyn, HSBC has six branches, and Republic has 25 branches. In the Bronx, HSBC has 10 branches (already, none in the South Bronx), and Republic has only two. In Manhattan, HSBC has 29 branches, and Republic has 27 branches. In Queens, HSBC has 12 branches, and Republic has 11 branches. In Suffolk County, HSBC has 24 branches, and Republic has two branches. In Nassau County, HSBC has 12 branches, and Republic has 12 branches. In Westchester, HSBC has 23 branches, and Republic has 8 branches. How many of these would close? The presumptive loss of banking services implicates an adverse convenience and needs factor. HSBC should be directed to disclose its branch closing (and service reduction and fee raising) plans, before the comment period on this application could legitimately close.
C. HSBCs History, Including Recent History, of Closing Offices and Reducing Services, and its Failure to Serve LMI and Minority Communities
Significantly, HSBC has recently closed its only consumer facility in the South Bronx. See, e.g., N.Y. Daily News of June 14, 1999, Pg. 24:
Three and a half years ago, with much fanfare, HSBC opened a loan office in the South Bronx in response to protests from community activists concerned over subsidiary Marine Midlands lending record in the area. Now that the 1995 agreement to make at least $15 million worth of loan to the areas residents has expired, HSBC is calling it quits.
In a recent filing with state bank regulators, HSBC said it would close the office at 509 Willis Ave. The decision comes as HSBC is shelling out $10.3 billion in cash for Edmond Safras Republic New York Bank, strongly increasing its presence in the city.
Demand for the lending center had dwindled since the bank opened three full-service branches in nearby Bronx locations, said HSBC spokeswoman Linda Stryker. As she explained, We had not booked a loan there in months.
But Bronx-based banking activist[s] Inner City Press / Community on the Move, wh[ich] helped pressure HSBC to open the Willis Ave. office, decried the banks decision to close it in light of how hard it is from Bronx residents to get access to funding.
They literally unfurled a white canvas over the signs, [ICP's executive director] said. It seems a crazy thing to do.
HSBCs spokeswoman justifies the closing as having been triggered by the bank open[ing] three full-service branches in nearby Bronx locations. Where are those branches? The nearest of the three is at One Fordham Road -- more than forty (long) blocks away. In between 148th Street and Willis Avenue, and Fordham Road and Jerome Avenue, over 300,000 people live. This is not nearby in any credible sense of the word. Either HSBC, from its Buffalo (or overseas) headquarters, is entirely out of touch with the reality of the Bronx and other urban areas -- or HSBC is intentionally misleading the public.
HSBC Excludes the South Bronx, the Most Predominantly Minority Community in NYC, From Its Services, Including Credit Services, Adverse Under CRA and Violating the Fair Lending Laws
Here are the addresses of HSBCs branches in the Bronx:
1580 Westchester Avenue; 1756 Crosby Avenue; 2014 Bartow Avenue; 3478 Boston Road; 3825 East Tremont Avenue; 1360 East Bay Avenue; 4395 White Plains Road; One East Fordham Road; 1499 West Avenue; and 569 West 235th Street.
HSBC does not have a single consumer branch in the South Bronx, where 450,000 people, 98% Latinos or African American, live. Annexed hereto are: a map of the Bronx (and Manhattan, see infra), and data from the dicennial census, showing, by district, income and national origin. HSBCs branching and expansion patterns, and its provision of services, in the Bronx (and Upper Manhattan, see infra) are presumptively violative of the fair lending laws, adverse issues under the CRA, and militate for the denial of this application.
In 1998, HSBC Bank USA received 190 applications from The Bronx. Based on its marketing, however, only 44 (or 23%) of these applications came from the South Bronx, defined as Community Planning Districts 1-6. Less than a quarter of applications -- from the lower-income, more predominantly minority half of the county. HSBC Bank USAs denial rate in the South Bronx was (a high) 28.6%. As the attached LAR makes clear, the denials were disproportionately to consumers and homeowners, actual residents of the South Bronx. The approvals are disproportionately multifamily loans, which do not distinguish between simple refinances and loans that actually help to improve a rental property for tenants. HSBC Bank USA is not serving the credit needs of South Bronx residents.
HSBCs branching pattern in Manhattan is also instructive. HSBC has fully 29 branches in Manhattan -- none of them in Harlem or Washington Heights, the lower-income, more predominantly minority portion of Manhattan, where nearly half a million people live. HSBCs branching (and service) pattern in New York City resembles a donut with a hole in the middle: the hole being the low income communities of color of the South Bronx, Harlem and Washington Heights.
HSBC has had an opportunity to improve upon this record, and has not. In fact, the one concrete step HSBC made -- the opening of a loan production office in 1995 in the South Bronx -- it has rescinded. This expansion application should be denied.
Given that HSBCs above-quoted statement to the public (that the bank has opened three full-service branches in nearby Bronx locations, N.Y. Daily News, June 14, 1999, see supra) is clearly inaccurate and misleading, lets go further and consider, in the light most favorable to HSBC, its other apparent defense, that demand for the lending center... dwindled.
In September 1995, when Marine opened the South Bronx loan production office, the regional president of Marine Midland Bank said its new office demonstrated its commitment to a slow but steady expansion throughout the New York City markets. The Bronx office will include four full-time employees -- two small business loan specialists, a home mortgage expert, and a consumer products person who will handle credit cards and home equity loans. American Banker, September 21, 1995, Pg. 8.
In an April 1997 New York Times article about branches opened in the South Bronx after local advocacy efforts, an official of another bank which opened a South Bronx branches stated that its done exceptionally well. Its absolutely a profitable branch. I treat it no differently than any branch in midtown Manhattan. In fact, I think the growth potential may be greater up there. HSBCs president for metropolitan New York said that the South Bronx was unique because of a 2-year-old, multibillion dollar effort by the city and Federal Government to build more than 30,000 housing units in a neighborhood that epitomized urban decay. The investment, he said, attracted middle-income residents and fueled a broad economic upswing that has helped the new branches. New York Times, April 16, 1997, Pg. B1, Banks Discover the South Bronx; Forced to Open, Branches Profit and Refute Stereotypes.
Particularly significant, in August 1997, Marines regional vice president [said], We have three people working in our loan production office in the Bronx. They all speak Spanish. They all belong to community groups. By day, these employees work for the bank, and by night they are making outside contacts, [he] said. American Banker, August 20, 1997, Pg. 1, The South Bronx Cheering as Banks Comes Back.
So what happened, between August 1997 and early 1999? Already in August 1997, Marine had made its two acquisitions, and already had 10 branches in the Bronx and 7.8% of the countys banking market. Id. As noted, none of the Bronx facilities was in the South Bronx, except the loan production office, which HSBC was still touting in August 1997. Has the Bronx economy declined since 1997? No. Other banks which opened South Bronx facilities say they are profitable, and, even, that they present greater opportunities than elsewhere. See supra.
HSBC in 1999 claims that demand at the LPO dwindled, then quickly makes reference to three other Bronx facilities, calling them nearly when none is within less than forty blocks. If HSBCs business at the LPO dwindled, it either demonstrates HSBCs lack of commitment to serving LMI areas, or indicates that HSBC intentionally decided to undermine its one South Bronx facility, by referring prospects to branches more than forty blocks away. What happened to the community outreach, including at night, that HSBC publicly touted as recently as August 1997? It was discontinued, to save money, by closing HSBCs lone consumer facility in the South Bronx (and Upper Manhattan, where HSBC had and has no facilities at all). This expansion application should be denied.
D. HSBC Would Also Raise the Fees Currently Charged by Republic -- Taken Together With the Foreseeable Branch Closings, This Merger Would Only Adversely Affect the Convenience and Needs of Communities
The FRB must consider the effect this proposed acquisition would have on the convenience and needs of the communities to be served. The acquisition would have an adverse effect, including in light of HSBCs anti-consumer practice of charging among the highest fees in New York City and New York State, much higher than Republic (which HSBC would be eliminating). HSBCs expected overhaul of Republics New York City consumer-banking business is likely to include... higher fees. New York Times, May 11, 1999, Pg. C6.
Earlier this year, the NYC Department of Consumer Affairs conducted a survey of bank fees. North Forks $1.25 and Marine Midlands $1.30 were among the highest fees a bank charged its own customers for using another banks ATM... Three banks were found to charge customers no ATM fees at all: Independence Savings, Republic and Sterling National. N.Y. Daily News, January 8, 1999, Pg. 3, emphasis added.
See also, Buffalo News, April 5, 1999, at 5A: HSBC Bank USA, formerly known as Marine Midland Bank, went from not surcharging to a $1.50 surcharge...;
-- One of the last operational changes Peter B. Davidson effected at Marine Midland Bank before donning a consultants cap at Atlanta-based Speer & Associates was to set late fees across the board at $20. Most, but not all, cardholders faced a $15 penalty until the change was made earlier this year. Credit Card Management, September 1997, Issuers Take a Seat at the Fee Feast.
--Sixty six percent of banks require a minimum balance in checking accounts to avoid fees. The average minimum balance required was $352.27. Fleet Bank and Marine Midland Bank required the highest balance at $1,000.... The Times-Union (Albany, NY), September 13, 1997, at B7.
HSBC has withheld a comparison of its and Republics fees (Confidential Attachment 9). ICP and the public should be provided with all documents for which HSBC has erroneously (and arbitrarily) requested confidential treatment, and the comment period should be extended.
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HSBCs anti-consumer practices have not been limited to ATM surcharges, credit card fees, and high minimum deposit requirements. See also, Chicago Daily Law Bulletin of May 28, 1998, at 1: proposed settlement to the class-action case that alleged New York-based Marine Midland Mortgage Corp. had cheated its mortgage customers through excessive escrow charges. Gail L. Robinson, et al. v. Marine Midland Mortgage Corp., No. 95 C 5635.
III. Other Adverse Issues Which the FRB Should Consider
Republic has requested and received tax breaks in exchange for creating and/or retaining jobs in New York City. However, see, e.g., HSBC Deal Will Add Jobs In Buffalo, Buffalo News, May 11, 1999, at 1A: Several of Republics administrative and customer service functions, including management information systems, credit card operations and residential lending, will likely be shifted from New York City to Buffalo, Cleave said... Republic has about 5,800 employees, including staff at 83 branches. The New York City bank is in the process of an internal restructuring that will eliminate 560 jobs, and the merger will mean additional job cuts, officials said... HSBC expects to save $300 million annually by merging operations.
See also, N.Y. Daily News, May 11, 1999, at 31: [B]etween 15 and 20 branches... will be shuttered... HSBCs Cleave confirmed that an unidentified number of branch employees and administrative staffers will lose their jobs.
There are also adverse managerial and financial factors that the FRB must inquire into and consider, under the BHC Act. See, e.g., HSBC Finds the Going Tough as Asian Crisis Takes Its Toll, Birmingham Post, February 23, 1999, Pg. 19: The group said it was setting aside an extra pounds 60 million to cover its liabilities under the pension mis-selling scandal... The retail banking arm faces possible strike action later this year, following an outspoken attack by finance union BIFU on what it said was a pay freeze for senior clerical workers.
See also, HSBC and Barings Face Action in Japan, The Times, May 27, 1998: The Japanese Ministry of Finance is set to take punitive measures against the Tokyo subsidiaries of HSBC and ING Barings over alleged breaches of local securities trading laws... In the case of HSBC, the SESC said the firm had failed to relay client orders to the market and issued false securities trading reports. The firm is alleged to have violated laws on bucketing....
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For the reasons set forth above, on the current record, the FRB [and NYSBD] must deny this proposal.
Matthew Lee, Esq.
Inner City Press/Community on the Move
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