The $10 billion meltdown at HSBC (so far) and how the US housing crash may eventually destroy the world financial system

To think, we're just getting started. Oh, my, how interesting this ride will be.

The loans aren't going to be paid back. The bag holders are just now smelling the coffee. And a world financial system built on the back of a Great Bubble run amok will now collapse.

It hath been foretold.

HSBC fires US executives as it works to get Household in order

"Embarrassing", "catastrophic" and "disastrous" as not words one usually associates with HSBC. But they were being thrown around with wild abandon yesterday as the market woke up to the first profits warning in the 167-year history of Britain's biggest and most prestigious banking group.

The first came from the mouth of an HSBC spokesman; the latter two were used by analysts to describe a truly horrific trading statement in which the company was forced to admit it had got its figures on non-performing loans - bad debts - badly wrong.

While the market had expected provisions of about $8.8bn (£4.5bn) to cover these, the bank was forced to admit it will need to set aside nearer $10.6bn. The reason? The US sub-prime lender, Household.

Everyone knew there was a problem with the business, which offers mortgages and other loans to people whose poor credit histories mean they are shunned by mainstream lenders.

The company was forced to admit in December that it was grappling with difficulties at the operation, bought for $15bn in 2003. Some clients were defaulting on second mortgages within just six months of taking them out.

What it didn't take into account was a fundamental problem with the US housing market. There has been an unprecedented construction boom in the US over the past 15 years. So much so that the Goldman Sachs economist, Jan Hatzius, estimates there are about 1.5 million excess homes in the US.

Combined with that is the impact of 17 successive interest rate rises in two and a half years, taking them up from 1 per cent to 5.25 per cent. Aside from a few "bubble" areas (central Manhattan, for example) these two factors have caused house prices to fall.