“Do you know what the letters HSBC really stand for? Holy (insert appropriate expletive) the British are Coming.”

Anonymous friend.

“If Government was taking a one percent tax from the sale of the Bank of Bermuda, it would rake in $13 million. As things stand, public coffers stand to gain nothing.”

Larry Burchall

Column, Bermuda Sun

November 14, 2003

@EDITRULE:

HSBC is a very British bank. In fact, quintessentially so. Don't be fooled by the title. The Hong Kong Shanghai Bank corporation is no more Chinese or Asian than was the Bermudian Company of three hundred years ago, Bermudian.

The old adage that British commercial interest always followed the flag would aptly apply to HSBC as much as it applied to Jardine Matheson or for that matter Cecil Rhodes in Africa. HSBC's rise to global prominence corresponded with the rise of British Imperialism during the mid 19th century in Asia, and while the sun has long set on the political empire that was Albion, HSBC is a fitting example of the lasting legacy that was left in its wake.

Unbeknown to most, HSBC has been here for some time in the form of HSBC Insurance Solutions, located in the Continental Building in Hamilton.

But it is the arrival of the International Banking arm of this global behemoth that has caused a seismic shift in the somewhat complacent psychology of Bermudians by its audacious purchase, lock stock and barrel of the local banking icon, the Bank of Bermuda; a purchase that for many was had for a mere song at all of forty dollars per share, with the precious local property holdings of the Bank of Bermuda thrown in to boot.

At first blush, a marriage made in heaven, at least from the perspective of the Hong Kong & Shanghai Bank's directors and shareholders.

Although the deal has been announced there are still some regulatory issues to be addressed by the Bermuda Monetary Authority and final approval to the deal must still be given by the Bank of Bermuda's shareholders, to the offer on the table.

One does get the impression, however, that the above may indeed be characterised as a necessary formality and that the deal as outlined will take place.

Now, the sale to HSBC does not spell the end of the world. What it does signify at least in part and a major one at that is that Bermuda's emergence as a “City State” in this Global economy is now virtually assured.

The other part, that being Independence, must now be placed at the top of the agenda by our Government.

After all, you cannot be a “City State”, without possessing full sovereignty in all matters.

But the deal itself presages something significant and if we play our cards right, something which may usher in a profoundly new era.

There is an upside to this, no matter how bewilderingly ham-fistedly it has all played out.

It was Brian Duperreault, who, over two years ago called for Bermuda to advance to the next stage of economic development, by encouraging the further growth in the insurance sector post 9/11.

He used the term “Critical Mass” to illustrate the need to now solidify our global position as a blue chip off shore local.

The HSBC deal meets that objective in a big way by now positioning global banking strength alongside - and let's be honest - our vaunted position in the International insurance market.

It is another massive endorsement of Bermuda.

One that lessens our risk on a number of fronts and one - as alluded too - that makes a fully Independent Bermuda, an even more viable workable and desirable proposition.

It is also likely that this deal will not be the last.

There is also growing speculation that the Bank of Butterfield will be next, with most pundits giving them only another two or three years before they in turn attempt to cash in as well.

Perhaps more significantly, the Government has - as expressed most recently by Mr. Brimmer the Governments chief economic advisor - committed itself to opening up the financial service sector to foreign competition even further by allowing the domiciling of major international banks of the likes of Deutsche Bank, Credit Lyonnais and others if interested.

This commitment is also in line with promises extended by our Government to the OECD about four years ago.

At least in the financial services sector, the ring fence of protectionism that has existed in Bermuda for close to a century, is now nearly at an end.

Just as there are opportunities presented by the HSBC deal, there are also risks, especially on the local level.

HSBC markets itself as the “local bank”. One that while extraordinarily global, with a market capitalisation of $120 billion, is also one that tailors its operations on a local level to meet the particular needs of any jurisdiction that it finds itself in.

At least, that is what HSBC's marketing people tell us.

On the other hand, HSBC has also been the ultimate “corporate raider”, acquiring small to mid-sized banking entities and among other things their prized pension funds, at a rate not seen since Napoleon gobbled up most of Europe, two centuries ago.

Unlike Napoleon though, HSBC leads a corporate army that has yet to meet its Waterloo.

The Bermudian reaction to all of this has been nothing, if not instructive.

What appears to have escaped the notice of many is that what has culminated with the intended sale of the Bank of Bermuda, really had its origins with the initial bid by the Bank to seek relief from the 60/40 provisions under Bermuda law.

And secondly, the now successful efforts on the part of the OECD to force our Government to abandon its long standing protectionist policies. These efforts on the part of the OECD were particularly aimed at our financial services sector.

In a typical passive/aggressive posture which too, is very Bermudian, the time to have raised objections to all of this would have been five to six years ago, when the above was being contemplated and set in motion by our Government, particularly by the then Premier and her Finance Minister Mr. Cox and Banking leaders. Frankly, now, is much too late.

But it's not too late to draw lessons from what has taken place and to discuss the implications for Bermuda's future as a consequence of the pending sale which I intend to do in a follow up column.

One thing is certain, this deal does represent a tremendous opportunity for those Bermudians who held significant shareholdings in the Bank of Bermuda.

Effectively, those holding hundreds of thousands of shares were essentially holding nothing more than a lot of paper because their was no realistic way to liquidate those holdings.

In real terms, those sorts of holdings could not have been absorbed in the Bermuda market, factoring in the limitations imposed by a relatively small equities market locally.

A reality, that must have troubled a Henry Smith - soon to be former CEO of the bank - to no end.

Especially after reaching the storied heights of the bank after a 30-year career that literally started on the ground floor of that institution.

That, coupled with the continued unfounded psychological fear of many of Bermuda's old and not so old white families over the continued prospect of a black dominated Government that they essentially had no faith in and you have part of the recipe for what has taken place.

And what of Henry Smith? Well, with roughly $15 million worth of shares pending sale, millions more in options and a sweet severance package - after all he is a key employee - I don't think there will be too many moistened eyes when he finally walks away from the bank in about a year. If anyone has driven this process it has been him, the grand architect, from beginning to end.

And when all is said and done the real poison pill of this whole adventure may have been the much coveted, yet ill timed NASDAQ listing itself. Which reminds me of the old adage: Be careful what you ask for; you may just get it.

The big question is how did the previous PLP Government essentially play the role of such a willing dance partner without exacting the sort of price for this community, that would have made the sale a little easier to swallow.

Noted columnist Larry Burchall for example, writing in the Bermuda Sun only recently questioned this by pointing out that even a one percent tax on this sale would have netted our Government something in the region of $13 million and at 5 percent ... well you get the point. A tax (capital gains tax in the US), I might add, which would not have been considered uncommon in many of the jurisdictions that we constantly compare ourselves to.

In fact, if I were one of those major shareholders, I too would be laughing all the way to the bank on this one. No pun intended. I think!