Warren Buffett in his latest letter to shareholders says there are three kinds of acquisitions - The Great, The Good and The Gruesome. HSBC's landmark purchase of the US sub-prime lender Household International in 2003 now looks firmly parked in the third category.

With laudable candour, HSBC has laid out just how badly that business, which trades under the HFC banner, is performing. In every product line, from mortgages to credit cards and car loans, defaults are worsening fast. Loans in the final quarter were souring at the astonishing rate of $51 million (£25 million) a day.

But it is the pick-up in the speed of write-offs that is so unnerving. Things are not just getting steadily worse, they are getting exponentially worse.

It may be that the bottom will soon be reached, but that was not the message from HSBC yesterday. There's scope for pain in the trailer parks and poorer suburbs of America if unemployment starts to pick up.

With $150 billion still extended to the poor and credit-impaired of the US, it is much too early to draw a line under this saga. Fortunately for HSBC, with its businesses elsewhere largely powering ahead and its balance sheet rock solid, it can easily afford to finance the losses.

But it is now time to admit that a serious mistake was made. There may have been some spin-off advantages to the Household deal, like useful expertise garnered in credit cards, but the business overall was a bust.

Mr Buffett tells us he looks at four things before buying anything.

1. Is it a business we understand? 2. Does it have favourable long-term economics? 3. Is the management able and trustworthy? 4. Is it a sensible price tag?

With the benefit of hindsight, HSBC's answers to those questions as it was poised to write the £9 billion cheque five years ago, should should have been: 1. No. We do not understand the credit-scoring methodology used by Household and we are ignorant of the methods used by third-party brokers to gull the poor into contracts they can't possibly honour.

2. No. Sub-prime lending was and should have remained a niche business. Generations of bankers past understood this and would have nothing to do with it. It will shrink back to a niche business once again. There is a simple reason why the poor default. They have no money.

3. Trustworthy? Well, they had just been fined almost $500 million to settle allegations of predatory pricing. Able? No. HSBC subsequently paid tens of millions of dollars in severance pay to rid itself of them.

4. In the light of questions 1, 2 and 3 - emphatically no.

patrick.hosking@thetimes.co.uk

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