THE shareholder activist Knight Vinke has presented Stephen Green, chairman of HSBC, with four options to sever ties with HFC, its troubled American banking business.

The proposals have been made in a series of private meetings between Eric Knight, who heads the activist-investor group, and Green, ahead of HSBC’s full-year results, which are due to be published tomorrow.

These results will show record profits of $24 billion (£12 billion) for HSBC, but they will be scarred by the bank’s huge exposure to America’s sub-prime mortgage crisis.

Knight believes that each of his four solutions would “build a firewall” around HSBC’s future exposure. The bank has been one of the largest losers from America’s mortgage meltdown, having lent money to thousands of homeowners with poor credit histories.

The most dramatic of the four options involves HSBC walking away from HFC, leaving its bondholders with $150 billion of debt.

Knight Vinke says bondholders have no recourse to HSBC, although analysts say such a measure would badly damage the bank’s reputation in America.

Green has conceded that he wants to draw a line under HFC’s mortgage business, but he has not put a timescale on it.

Its American arm has cost it more than $11 billion this year from its exposure to stretched American consumers.

In the last two years the write-offs that have stemmed from HFC have topped the $14 billion price it paid for Household International five years ago. HFC formed the largest part of this acquisition. Knight called it a “catastrophic strategic error”.

Knight’s second solution involves HSBC asking HFC’s creditors to help restructure its $150 billion debt. This could involve asking them to undertake a debt-for-equity swap. HSBC could also swap its own $15 billion interbank loan with HFC into equity or write it off.

If this move is successful, HFC would still operate as a subsidiary, but HSBC would have no ongoing liability. It would allow HFC to carry on as a subsidiary company, but on a stand-alone basis with no further support from its parent.

Knight believes that if HSBC does walk away from its loan to HFC, it will quickly claw back the loss from a rapid rise in its share price. By shedding its American business, the majority of the group’s earnings would come from growth markets in Asia and Hong Kong, and this would give it a significantly higher market rating.

The third solution, according to Knight, is “for HSBC to recapi-talise HFC by injecting between $10 billion and $15 billion in cash or writing off its existing inter-company loan, and then selling the business”.

The fourth option involves recapitalising HFC and then demerging it into a stand-alone quoted company.

Green has been looking hard at the options for HFC. Last Friday he reconfirmed his strategy to move away from mature markets when he sold 400 bank branches in France to Banque Populaire for $3.2 billion.

Aside from the troubles in the bank’s American mortgage business, HSBC is expected to unveil a huge surge in impairments on its unsecured loan book. Across the group, total bad debt charges are expected to stretch to $16 billion – a 50% rise on last year.

HSBC’s profits have been boosted by the sale of its Canary Wharf headquarters building in London, and big gains on some of its Chinese holdings.

The bank’s stakes in Chinese insurance group Ping An, and the Bank of Communications have been marked up by more than $1 billion. It is also expected to announce board changes.

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