US buy was blunder, says HSBC as it seeks £12.5bn

But larger writedowns than expected and a cautious view on the coming year, particularly in emerging markets, sent HSBC shares plunging 19%, or 92p to 3991/4p, with other banks also falling sharply.

Chief executive Michael Geoghegan, who promised two years ago that he would personally take control of the ailing US arm and particularly its sub-prime mortgage business, said: "With the benefit of hindsight it's an investment we wish we hadn't made."

He also declared that "not a cent" of today's £12.5 billion ($17.7 billion) rights issue would be spent on HSBC Finance, as the American arm is now known.Instead the axe has fallen on all new lending to US consumers through its HFC and Beneficial branches, and the remaining loan book will be put into run-off. Some 6100 jobs will be lost.

Activist shareholder Knight Vinke said its two-year campaign was vindicated but said safeguards are still needed to ensure the rights-issue cash is not used simply to pay off bondholders at the US subprime arm.

Chairman Stephen Green insisted that HSBC is launching the rights issue from a position of strength. "We are well capitalised, liquid and profitable," he said.

"This capital-raising will enhance our ability to deal with the impact of an uncertain economic environment and respond to unforeseen events.

"Importantly, it will also give us options regarding opportunities which we believe will present themselves to those with superior financial strength."

Shareholders are being asked to buy new shares at 254p on the basis of five for every 12 they already own. The new paper is being offered at a massive discount of 49% to Friday's closing price, but the entire issue has already been fully underwritten. This guarantees that the bank will get its new cash whatever happens to stock markets in the next month.

Pre-tax profits plunged 62% to just $9.3 billion, including the write-off of $10.6 billion of goodwill linked to HSBC Finance. Headline profits were down by 18% at $19.9 billion.

US writedowns on bad loans and other risks totalled $16.3 billion. But Geoghegan pointed out that apart from the US consumer business the bank had remained profitable in every country and every business area.

The final dividend is being slashed to 10 cents a share and investors are being told that — having seen a 29% cut in their income in 2008 to 64 cents a share — they should expect little more than half that amount for 2009.

The City advisers and sub-underwriters to the rights issue will collect just over £350 million in fees and commission. Lead underwriters are Goldman Sachs and JPMorgan Cazenove.

Geoghegan and his fellow directors have received no cash bonus for 2008. His pay package has been slashed from £3.5 million to £1.7 million.