The first time most investors in Hong Kong became aware of the subprime mortgage crisis was in February 2007, when HSBC Holdings shocked the market with its first-ever profit warning. That alert was prompted by a sharp rise in defaults at HSBC's US consumer finance unit, acquired in the bank's US$15 billion takeover of Household International in 2003. At the time, HSBC's bosses tried hard to sound reassuring. 'We are on top of the situation,' chief executive Michael Geoghegan promised analysts, 'and we will resolve it.' His reassurances were premature. As losses on the bank's US loan book mounted, HSBC's share price plunged. Yesterday, with the stock down 60 per cent from the date of that first warning (see the first chart), Mr Geoghegan and his colleagues attempted to draw a final line under the Household purchase. 'With the benefit of hindsight, this is an acquisition we wish we had not undertaken,' admitted chairman Stephen Green, as he announced the US consumer finance unit would close to new business, shut most of its branches and run off its remaining assets. Simultaneously, HSBC wrote off the entire US$10.6 billion in goodwill that remained on its balance sheet from the Household purchase - hammering 2008 earnings per share to below even Asian financial crisis levels (see the second chart) - and launched a US$17.7 billion five-for-12 rights issue to shore up the bank's sagging capital base. Both Mr Geoghegan and Mr Green are hoping yesterday's actions and the rights issue will persuade investors that the bank's ill-advised venture into the US consumer finance market is history. That might prove a tall order. Granted, in the short term, shareholders are likely to take up the bulk of HSBC's rights issue. The 50 per cent discount to Friday's closing price in Hong Kong should be sufficiently steep to tempt retail investors, while institutions will have little choice but to stump up the cash if they want to maintain their weighting in the stock. In any case, bolstering the bank's capital position is likely to be seen as a prudent move in uncertain times, which will put a welcome end to damaging rumours. And despite the dilutive effect on dividends and earnings per share, most long-term investors will prefer a rights issue to other methods of raising capital, such as selling off choice assets. Yet whether HSBC can convince investors that it has finally put all its troubles behind it is doubtful. Even after its latest write-down, the bank retains assets valued at US$100 billion in its North American 'run-off portfolio'. That exposure could still prove a drag on future performance, with Mr Green estimating that each additional percentage point rise in the US unemployment rate is likely to push up bad-loan provisions by between US$700 million and US$1.5 billion. In other words, if US unemployment returns to its 1982 high of 10.8 per cent from 7.2 per cent at the end of last year, HSBC could be forced to set aside a further US$5.4 billion in provisions against its Household legacy. Even that sum could be insufficient. Yesterday, disgruntled HSBC shareholder Knight Vinke Asset Management estimated the bank could still sustain losses of a further US$34 billion on its subprime portfolio. Meanwhile, with business conditions in HSBC's Asian markets still deteriorating, provisions against losses from the region are bound to rise, eating further into profits. As a result, even though most investors will back HSBC's rights issue, they are unlikely to be entirely convinced Mr Geoghegan and his team can handle the crisis successfully, two years after they first said they were on top of the situation.