CONFORMED

UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
	EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission file number 1-7436
HSBC USA Inc.
(Exact name of registrant as specified in its charter)

Maryland	13-2764867
(State of Incorporation)	(I.R.S. Employer Identification No.)
452 Fifth Avenue, New York, New York	10018
(Address of principal executive offices)	(Zip Code)
(716) 841-2424
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o			Accelerated filer o
Non-accelerated filer x	(Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o     No x

At July 31, 2008, there were 708 shares of the registrant’s Common Stock outstanding, all of which are owned by HSBC North America Inc.

HSBC USA Inc.
Form 10-Q

TABLE OF CONTENTS

Part I	FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements
	Consolidated Statement of (Loss) Income	3
	Consolidated Balance Sheet	4
	Consolidated Statement of Changes in Shareholders’ Equity	5
	Consolidated Statement of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Forward-Looking Statements	37
	Executive Overview	37
	Basis of Reporting	41
	Balance Sheet Review	43
	Results of Operations	46
	Segment Results - IFRSs Management Basis	58
	Credit Quality	67
	Fair Value	75
	Off-Balance Sheet Arrangements	81
	Risk Management	86
	Average Balances and Interest Rates	92
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	94
Item 4.	Controls and Procedures	94
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	95
Item 1A.	Risk Factors	96
Item 6.	Exhibits	96
Signature		97

2

HSBC USA Inc.

CONSOLIDATED STATEMENT OF (LOSS) INCOME (UNAUDITED)

	Three months ended June 30,					Six months ended June 30,
		2008			2007		2008			2007
(in millions)
Interest income:
Loans	$	1,359		$	1,477	$	2,847		$	2,919
Securities		327			274		630			562
Trading assets		138			168		296			309
Short-term investments		92			258		223			477
Other		62			44		144			76
Total interest income		1,978			2,221		4,140			4,343
Interest expense:
Deposits		581			959		1,381			1,848
Short-term borrowings		68			105		167			176
Long-term debt		239			350		541			723
Total interest expense		888			1,414		2,089			2,747
Net interest income		1,090			807		2,051			1,596
Provision for credit losses		606			264		1,104			469
Net interest income after provision for credit losses		484			543		947			1,127
Other revenues:
Credit card fees		211			198		442			376
Other fees and commissions		151			136		288			299
Trust income		36			24		69			47
Trading (loss) revenue		(116	)		312		(825	)		449
Securities (loss) gain, net		(34	)		16		50			37
HSBC affiliate income		33			41		87			87
Residential mortgage banking revenue		14			42		51			63
(Loss) gain on instruments at fair value and related derivatives		(48	)		1		9			—
Other (loss) income		(93	)		7		(98	)		53
Total other revenues		154			777		73			1,411
Operating expenses:
Salaries and employee benefits		332			341		641			678
Support services from HSBC affiliates		292			290		582			569
Occupancy expense, net		65			59		130			118
Other expenses		241			188		401			356
Total operating expenses		930			878		1,754			1,721
(Loss) income before income tax expense		(292	)		442		(734	)		817
Income tax (benefit) expense		(118	)		152		(282	)		253
Net (loss) income	$	(174	)	$	290	$	(452	)	$	564

The accompanying notes are an integral part of the consolidated financial statements.

3

HSBC USA Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	June 30, 2008			December 31, 2007
(in millions)
Assets
Cash and due from banks	$	3,775		$	3,567
Interest bearing deposits with banks		4,424			4,741
Federal funds sold and securities purchased under agreements to resell		12,336			13,677
Trading assets		33,940			37,036
Securities available for sale		22,068			19,962
Securities held to maturity (fair value of $2,913 million and $2,945 million at June 30, 2008 and December 31, 2007, respectively)		2,847			2,891
Loans (includes $1,901 million recorded under fair value option at June 30, 2008)		90,586			95,826
Less - allowance for credit losses		1,796			1,414
Loans, net		88,790			94,412
Properties and equipment, net		576			568
Intangible assets		589			534
Goodwill		2,701			2,701
Other assets		9,750			8,284
Total assets	$	181,796		$	188,373
Liabilities
Deposits in domestic offices:
Noninterest bearing	$	12,925		$	13,831
Interest bearing (includes $2,053 million recorded under fair value option at June 30, 2008)		70,120			68,237
Deposits in foreign offices:
Noninterest bearing		964			1,030
Interest bearing		29,901			33,072
Total deposits		113,910			116,170
Trading liabilities		14,063			16,253
Short-term borrowings		8,997			11,832
Interest, taxes and other liabilities		6,380			4,613
Long-term debt (includes $3,582 million recorded under fair value option at June 30, 2008)		26,416			28,268
Total liabilities		169,766			177,136
Shareholders’ equity
Preferred stock		1,565			1,565
Common shareholder’s equity:
Common stock ($5 par; 150,000,000 shares authorized; 708 and 706 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively)		—			—
Additional paid-in capital		9,594			8,123
Retained earnings		1,520			1,901
Accumulated other comprehensive loss		(649	)		(352	)
Total common shareholder’s equity		10,465			9,672
Total shareholders’ equity		12,030			11,237
Total liabilities and shareholders’ equity	$	181,796		$	188,373

The accompanying notes are an integral part of the consolidated financial statements.

4

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

	Six months ended June 30
	2008			2007
(in millions)
Preferred stock
Balance, January 1 and June 30,	$	1,565		$	1,690
Common stock
Balance, January 1 and June 30,		—			—
Additional paid-in capital
Balance, January 1,		8,123			8,124
Capital contribution from parent		1,460			—
Employee benefit plans and other		11			(1	)
Balance, June 30,		9,594			8,123
Retained earnings
Balance, January 1,		1,901			2,661
Adjustment to initially apply fair value measurement and fair value option accounting, under FASB Statement Nos. 157 and 159, net of tax		113			—
Net (loss) income		(452	)		564
Cash dividends declared on preferred stock		(42	)		(50	)
Cash dividends declared on common stock		—			(470	)
Balance, June 30,		1,520			2,705
Accumulated other comprehensive loss
Balance, January 1,		(352	)		(214	)
Net change in unrealized (losses) gains, net of tax on:
Securities available for sale, net of tax		(298	)		(154	)
Derivatives classified as cash flow hedges		(10	)		(12	)
Unrecognized actuarial gains, transition obligation and prior service costs relating to pension and postretirement benefits, net of tax		7			9
Foreign currency translation adjustments, net of tax		4			2
Other comprehensive loss, net of tax		(297	)		(155	)
Balance, June 30,		(649	)		(369	)
Total shareholders’ equity, June 30,	$	12,030		$	12,149
Comprehensive (loss) income
Net (loss) income	$	(452	)	$	564
Other comprehensive loss		(297	)		(155	)
Comprehensive (loss) income	$	(749	)	$	409

The accompanying notes are an integral part of the consolidated financial statements.

5

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

	Six months ended June 30,
	2008			2007
(in millions)
Cash flows from operating activities
Net (loss) income	$	(452	)	$	564
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and deferred taxes		(132	)		85
Provision for credit losses		1,104			469
Net change in other assets and liabilities		(90	)		(839	)
Net change in loans held for sale		835			246
Net change in loans attributable to tax refund anticipation loans program:
Originations of loans		(12,628	)		(17,428	)
Sales of loans to HSBC Finance Corporation, including premium		12,628			17,640
Net change in trading assets and liabilities		1,743			(232	)
Mark-to-market on financial instruments designated at fair value and related derivatives		(288	)		—
Net change in fair value of derivatives and hedged items		647			879
Net cash provided by operating activities		3,367			1,384
Cash flows from investing activities
Net change in interest bearing deposits with banks		317			(2,994	)
Net change in federal funds sold and securities purchased under resale agreements		1,341			(3,123	)
Net change in securities available for sale:
Purchases of securities available for sale		(6,469	)		(5,556	)
Proceeds from sales of securities available for sale		586			3,705
Proceeds from maturities of securities available for sale		3,311			1,729
Net change in securities held to maturity:
Purchases of securities held to maturity		(273	)		(130	)
Proceeds from maturities of securities held to maturity		317			171
Net change in loans:
Originations, net of collections		11,302			13,351
Loans purchased from HSBC Finance Corporation		(11,884	)		(11,368	)
Loans sold to third parties		3,976			—
Net cash used for acquisitions of properties and equipment		(43	)		(42	)
Other, net		3			(21	)
Net cash provided by (used in) investing activities		2,484			(4,278	)
Cash flows from financing activities
Net change in deposits		(2,224	)		4,707
Net change in short-term borrowings		(2,835	)		357
Net change in long-term debt:
Issuance of long-term debt		2,579			2,931
Repayment of long-term debt		(4,592	)		(4,347	)
Capital contribution from parent		1,460			—
Other increases (decreases) in capital surplus		11			(1	)
Dividends paid		(42	)		(520	)
Net cash (used in) provided by financing activities		(5,643	)		3,127
Net change in cash and due from banks		208			233
Cash and due from banks at beginning of period		3,567			3,359
Cash and due from banks at end of period	$	3,775		$	3,592

The accompanying notes are an integral part of the consolidated financial statements.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Basis of Presentation

HSBC USA Inc. is an indirect wholly owned subsidiary of HSBC North America Holdings Inc. (HNAH), which is an indirect wholly owned subsidiary of HSBC Holdings plc (HSBC). The accompanying unaudited interim consolidated financial statements of HSBC USA Inc. and its subsidiaries (collectively, HUSI), including its principal subsidiary, HSBC Bank USA, National Association (HBUS), have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. These unaudited interim consolidated financial statements should be read in conjunction with HUSI’s Annual Report on Form 10-K for the year ended December 31, 2007 (the 2007 Form 10-K). Certain reclassifications have been made to prior period amounts to conform to the current period presentation. The accounting and reporting policies of HUSI are consistent, in all material respects, with those used to prepare the 2007
Form 10-K, except for the impact of new accounting pronouncements summarized in Note 18, “New Accounting Pronouncements” of the consolidated financial statements.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Interim results should not be considered indicative of results in future periods.

Note 2. Trading Assets and Liabilities

Trading assets and liabilities are summarized in the following table.

	June 30, 2008		December 31, 2007
(in millions)
Trading assets:
U.S. Treasury	$	235	$	460
U.S. Government agency		2,293		3,009
Asset backed securities		2,497		2,942
Corporate and foreign bonds		2,385		2,483
Other securities		4,823		4,643
Precious metals		7,579		8,788
Fair value of derivatives		14,128		14,711
Total	$	33,940	$	37,036
Trading liabilities:
Securities sold, not yet purchased	$	931	$	1,444
Payables for precious metals		2,255		1,523
Fair value of derivatives		10,877		13,286
Total	$	14,063	$	16,253

At June 30, 2008 and December 31, 2007, the fair value of derivatives included in trading assets have been reduced by $2.5 billion and $3.6 billion, respectively, of amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties, consistent with the reporting requirements of FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No. 39
(FSP- FIN 39-1).

At June 30, 2008 and December 31, 2007, the fair value of derivatives included in trading liabilities have been reduced by $8.7 billion and $5.6 billion, respectively, of amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties, consistent with the reporting requirements of FSP FIN 39-1.

7

Note 3. Securities

At June 30, 2008 and December 31, 2007, HUSI held no securities of any single issuer (excluding the U.S. Treasury, U.S. Government agencies and U.S. Government sponsored enterprises) with a book value that exceeded 10% of shareholders’ equity. The amortized cost and fair value of the securities available for sale and securities held to maturity portfolios are summarized in the following tables.

June 30, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(in millions)
Securities available for sale:
U.S. Treasury	$	505	$	—	$	(16	)	$	489
U.S. Government sponsored enterprises (1)		13,260		62		(348	)		12,974
U.S. Government agency issued or guaranteed		4,013		10		(73	)		3,950
Obligations of U.S. states and political subdivisions		697		1		(16	)		682
Asset backed securities		1,189		—		(198	)		991
Other domestic debt securities		2,696		—		(191	)		2,505
Foreign debt securities		246		1		(8	)		239
Equity securities (2)		239		—		(1	)		238
Total	$	22,845	$	74	$	(851	)	$	22,068
Securities held to maturity:
U.S. Government sponsored enterprises (3)	$	1,875	$	65	$	(18	)	$	1,922
U.S. Government agency issued or guaranteed		509		26		—			535
Obligations of U.S. states and political subdivisions		233		9		—			242
Other domestic debt securities		181		—		(16	)		165
Foreign debt securities		49		—		—			49
Total	$	2,847	$	100	$	(34	)	$	2,913

December 31, 2007	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(in millions)
Securities available for sale:
U.S. Treasury	$	1	$	—	$	—		$	1
U.S. Government sponsored enterprises (1)		10,931		60		(251	)		10,740
U.S. Government agency issued or guaranteed		3,193		13		(34	)		3,172
Obligations of U.S. states and political subdivisions		668		3		(3	)		668
Asset backed securities		1,563		2		(72	)		1,493
Other domestic debt securities		2,649		15		(25	)		2,639
Foreign debt securities		1,036		1		(3	)		1,034
Equity securities (2)		235		—		(20	)		215
Total	$	20,276	$	94	$	(408	)	$	19,962
Securities held to maturity:
U.S. Government sponsored enterprises (3)	$	1,862	$	42	$	(22	)	$	1,882
U.S. Government agency issued or guaranteed		528		24		(1	)		551
Obligations of U.S. states and political subdivisions		255		14		—			269
Other domestic debt securities		176		1		(4	)		173
Foreign debt securities		70		—		—			70
Total	$	2,891	$	81	$	(27	)	$	2,945

(1)	Includes mortgage backed securities of $2.3 billion and $2.1 billion issued or guaranteed by the Federal National Mortgage Association (FNMA) and $2.1 billion and $2.0 billion issued or guaranteed by Federal Home Loan Mortgage Corporation (FHLMC) at June 30, 2008 and December 31, 2007, respectively.
(2)	Includes securities issued by FNMA of $189 million and $210 million at June 30, 2008 and December 31, 2007, respectively.
(3)	Includes mortgage backed securities of $.6 billion issued or guaranteed by FNMA at both June 30, 2008 and December 31, 2007 and $1.2 billion and $1.1 billion issued and guaranteed by FHLMC at June 30, 2008 and December 31, 2007, respectively.

8

Gross unrealized losses and related fair values, classified as to the length of time the losses have existed, are summarized in the following tables.

	One Year or Less							Greater Than One Year
June 30, 2008	Number of Securities		Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities		Gross Unrealized Losses			Aggregate Fair Value of Investment
($ in millions)
Securities available for sale:
U.S. Treasury		1	$	(16	)	$	489		—	$	—		$	—
U.S. Government sponsored enterprises (1)		1,600		(118	)		5,661		146		(230	)		3,386
U.S. Government agency issued or guaranteed		752		(38	)		2,378		186		(35	)		700
Obligations of U.S. states and political subdivisions		47		(5	)		304		52		(11	)		344
Asset backed securities		36		(119	)		383		17		(79	)		534
Other domestic debt securities		64		(116	)		1,600		52		(75	)		840
Foreign debt securities		5		(3	)		85		6		(5	)		119
Equity securities		1		(1	)		49		—		—			—
Total		2,506	$	(416	)	$	10,949		459	$	(435	)	$	5,923
Securities held to maturity:
U.S. Government sponsored enterprises (1)		15	$	(4	)	$	159		13	$	(14	)	$	257
U.S. Government agency issued or guaranteed		1		—			15		—		—			—
Obligations of U.S. states and political subdivisions		16		—			17		3		—			2
Other domestic debt securities		2		(4	)		55		10		(12	)		102
Total		34	$	(8	)	$	246		26	$	(26	)	$	361

	One Year or Less							Greater Than One Year
December 31, 2007	Number of Securities		Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities		Gross Unrealized Losses			Aggregate Fair Value of Investment
($ in millions)
Securities available for sale:
U.S. Treasury		—	$	—		$	—		—	$	—		$	—
U.S. Government sponsored enterprises (1)		48		(57	)		1,581		564		(194	)		5,628
U.S. Government agency issued or guaranteed		9		—			13		440		(34	)		1,607
Obligations of U.S. states and political subdivisions		43		(2	)		256		13		(1	)		106
Asset backed securities		33		(70	)		969		15		(2	)		127
Other domestic debt securities		31		(13	)		642		50		(12	)		735
Foreign debt securities		5		(1	)		71		6		(2	)		158
Equity securities		—		—			—		1		(20	)		190
Total		169	$	(143	)	$	3,532		1,089	$	(265	)	$	8,551
Securities held to maturity:
U.S. Government sponsored enterprises (1)		11	$	(3	)	$	87		20	$	(19	)	$	377
U.S. Government agency issued or guaranteed		1		—			15		82		(1	)		42
Obligations of U.S. states and political subdivisions		7		—			4		—		—			—
Other domestic debt securities		3		(1	)		41		7		(3	)		66
Total		22	$	(4	)	$	147		109	$	(23	)	$	485

(1) Included primarily mortgaged backed securities issued or guaranteed by FNMA and FHLMC.

9

Gross unrealized losses within the available for sale securities portfolio increased during the six months ended June 30, 2008 due to the impact of continued widening of credit spreads on private label collateralized mortgage obligations (CMOs) which are included in other domestic debt securities, mortgage backed securities issued or guaranteed by FNMA and FHLMC which are included in U.S. Government sponsored enterprises and asset backed securities (ABS). These are primarily fixed rate securities and a majority of these securities are
highly-rated (i.e., AAA or AA). HUSI has the ability and intent to hold these securities until maturity or a market price recovery. As a result, other than the securities described below, they are not considered to be other than temporarily impaired.

During the second quarter of 2008, two domestic debt securities were determined to be other-than-temporarily impaired pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. As a result, HUSI recorded an other-than-temporary impairment charge of $24 million on these investments, which is recorded as a component of securities gains (losses) in the accompanying consolidated statement of (loss) income.

Note 4. Loans

A distribution of the loan portfolio, including loans held for sale, is summarized in the following table.

	June 30, 2008						December 31, 2007
	Loans Held for Sale		All Other Loans		Total Loans		Loans Held for Sale		All Other Loans		Total Loans
(in millions)
Commercial loans:
Construction and other real estate	$	40	$	8,703	$	8,743	$	26	$	8,428	$	8,454
Other commercial		1,901		29,508		31,409		1,939		28,407		30,346
		1,941		38,211		40,152		1,965		36,835		38,800
Consumer loans:
Sub-prime residential mortgages		1,527		—		1,527		1,869		—		1,869
Other residential mortgages		727		27,875		28,602		1,018		32,493		33,511
Credit card receivables		215		18,036		18,251		—		19,415		19,415
Other consumer		55		1,999		2,054		418		1,813		2,231
		2,524		47,910		50,434		3,305		53,721		57,026
Total loans	$	4,465	$	86,121	$	90,586	$	5,270	$	90,556	$	95,826

Loans pledged as collateral are summarized in Note 14, “Financial Guarantee Arrangements and Pledged Assets” of the consolidated financial statements.

In May 2008, HUSI sold approximately $4 billion of prime Adjustable Rate Mortgages (ARM). The transaction resulted in a $13.5 million gain on sale, which is reflected as a component of residential mortgage banking revenue in the accompanying consolidated statement of (loss) income. HUSI retained the servicing rights in relation to the mortgages upon sale.

Loans Held for Sale

HUSI originates commercial loans in connection with its participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as other commercial loans held for sale at June 30, 2008. Commercial loans held for sale under this program were $1.9 billion at June 30, 2008, all of which are recorded at fair value. Refer to Note 15, “Fair Value Measurements” of the consolidated financial statements for additional information.

Residential mortgage loans held for sale include sub-prime residential mortgage loans acquired from unaffiliated third parties and from HSBC Finance Corporation, with the intent of securitizing or selling the loans to third parties. Also included in residential mortgage loans held for sale are first mortgage loans originated and held for sale primarily to various governmental agencies.

Credit card receivables held for sale represent a private label credit card portfolio attributable to one merchant relationship.

10

Other consumer loans held for sale consist primarily of student loans.

The valuation allowance related to loans held for sale is presented in the following table.

	Three months ended June 30						Six months ended June 30
	2008			2007			2008			2007
(in millions)
Balance at beginning of period	$	(726	)	$	(26	)	$	(475	)	$	(29	)
Increase in allowance for net reductions in market value		(92	)		(72	)		(358	)		(81	)
Releases of valuation allowance for loans sold		21			40			36			52
Balance at end of period	$	(797	)	$	(58	)	$	(797	)	$	(58	)

Commercial leverage acquisition finance loans held for sale are recorded at fair value as a result of electing fair value option. Refer to Note 16, “Fair Value Option” of the consolidated financial statements for further details. During the six month period ended June 30, 2008, the market value of these loans decreased. This was primarily a result of adverse conditions in the corporate credit markets. However, in the second quarter of 2008, the market value of these loans experienced a moderate recovery from the first quarter declines.

Residential mortgage and other consumer loans held for sale are recorded at the lower of cost or market value. The cost of loans held for sale exceeded market value at June 30, 2008, resulting in an increase to the related valuation allowance. This was primarily a result of adverse conditions in the U.S. residential mortgage markets.

Loans held for sale are subject to credit risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions as well as in the interest rate and credit environment. Interest rate risk for the residential mortgage loans held for sale is partially mitigated through an economic hedging program to offset changes in the fair value of the loans held for sale. Trading related revenues associated with this economic hedging program, which include net interest income and trading revenues, were $70 million and $30 million for the three and six month periods ended June 30, 2008, respectively. Trading related revenues related to this economic hedging program, which include net interest income and trading revenues, were $69 million and $67 million for the three and six month periods ended June 30, 2007, respectively.

Note 5. Allowance for Credit Losses and Credit Quality Statistics

Changes in the allowance for credit losses are summarized in the following table.

	Three months ended June 30					Six months ended June 30
	2008			2007		2008			2007
(in millions)
Balance at beginning of period	$	1,583		$	862	$	1,414		$	897
Acquired / (transferred) reserve		(21	)		—		(21	)		—
Provision charged to income		606			264		1,104			469
Less: Charge offs		443			293		845			598
Add: Recoveries		71			69		144			134
Balance at end of period	$	1,796		$	902	$	1,796		$	902

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          Credit Quality Statistics

Nonaccruing loans are summarized in the following table.

	June 30, 2008		December 31, 2007
(in millions)
Nonaccruing loans
Commercial:
Construction and other real estate	$	51	$	34
Other commercial		171		89
Total commercial		222		123
Consumer:
Residential mortgages		859		640
Credit card receivables		1		1
Total consumer loans		860		641
Total nonaccruing loans	$	1,082	$	764

Interest income on nonaccruing loans is summarized in the following table.

Six months ended June 30	2008		2007
(in millions)
Interest income on nonaccruing loans:
Amount which would have been recorded had the associated loans been current in accordance with their original terms	$	39	$	16
Amount actually recorded		1		4

Additional credit quality statistics are summarized in the following table.

	June 30, 2008		December 31, 2007
(in millions)
Accruing loans contractually past due 90 days or more as to principal or interest:
Total commercial	$	40	$	8
Consumer:
Residential mortgages		—		—
Credit card receivables		460		432
Other consumer loans		14		16
Total consumer loans		474		448
Total accruing loans contractually past due 90 days or more	$	514	$	456
Impaired commercial loans:
Balance at end of period	$	222	$	123
Amount with impairment reserve		142		41
Impairment reserve		44		15
Other real estate and owned assets:
Balance at end of period	$	73	$	71

Further analysis of credit quality and credit loss reserves are presented in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)” of this Form 10-Q under the caption “Credit Quality.”

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Note 6. Intangible Assets

The composition of intangible assets is summarized in the following table.

	June 30, 2008		December 31, 2007
(in millions)
Mortgage servicing rights	$	552	$	494
Other		37		40
Intangible assets	$	589	$	534

Mortgage Servicing Rights (MSRs)

A servicing asset is a contract under which estimated future revenues from contractually specified cash flows, such as servicing fees and other ancillary revenues, are expected to exceed the obligation to service the financial assets. HUSI recognizes the right to service mortgage loans as a separate and distinct asset at the time they are acquired or when originated loans are sold. Servicing fees collected by HUSI are included in residential mortgage banking revenue and were $62 million and $56 million for the first six months of 2008 and 2007, respectively.

MSRs are subject to credit, prepayment and interest rate risk, in that their value will fluctuate as a result of changes in these economic variables. Interest rate risk is mitigated through an economic hedging program that uses securities and derivatives to offset changes in the fair value of MSRs. Since the hedging program involves trading activity, risk is quantified and managed using a number of risk assessment techniques, which are addressed in more detail in HUSI’s 2007 Form 10-K.

Residential MSRs are initially measured at fair value at the time that the related loans are sold and are remeasured at fair value at each reporting date (the fair value measurement method). Changes in fair value of the asset are reflected in residential mortgage banking revenue in the period in which the changes occur. Fair value is determined based upon the application of valuation models and other inputs. The valuation models incorporate assumptions market participants would use in estimating future cash flows. The reasonableness of these valuation models is periodically validated by reference to external independent broker valuations and industry surveys.

Fair value of residential MSRs is calculated using the following critical assumptions.

	June 30, 2008		December 31, 2007
Annualized constant prepayment rate (CPR)	21.00	%	21.40	%
Constant discount rate	8.40	%	10.44	%
Weighted average life	4.9 years		4.9 years

Residential MSRs activity is summarized in the following table.

	Three months ended June 30						Six months ended June 30
	2008			2007			2008			2007
(in millions)
Fair value of MSRs:
Beginning balance	$	468		$	483		$	489		$	470
Additions related to loan sales		52			30			82			60
Changes in fair value due to:
Change in valuation inputs or assumptions used in the valuation models		46			57			25			64
Realization of cash flows		(20	)		(22	)		(50	)		(46	)
Ending balance	$	546		$	548		$	546		$	548

Commercial MSRs, which are accounted for using the lower of cost or market method, totaled $6 million and $4 million for the first six months of 2008 and 2007, respectively.

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Note 7. Goodwill

Goodwill is tested for impairment at least annually at the reporting unit level in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. Goodwill may be tested more frequently if certain conditions are met. During the third quarter of 2007, HUSI completed its annual impairment test of goodwill. At the testing date, HUSI determined that the fair value of each of its reporting units exceeded its carrying value. As a result, no impairment loss was required to be recognized.

As a result of difficult business conditions and market volatility which began in the second half of 2007 and continued into the first half of 2008, HUSI performed an interim goodwill impairment test for the Global Banking and Markets business segment as of June 30, 2008. The results of this test showed the fair value of the business unit exceeded the carrying value including the goodwill that was assigned to it and, therefore, no impairment was recorded.

Note 8. Income Taxes

The following table presents HUSI’s effective tax rates.

	Three months ended June 30						Six months ended June 30
	2008			2007			2008			2007
Statutory federal income tax rate		(35.0	)%		35.0	%		(35.0	)%		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit		1.5			1.6			1.4			1.7
Tax exempt income		(1.3	)		(1.0	)		(1.0	)		(1.0	)
Validation of deferred tax balances		—			—			(.4	)		(3.5	)
Tax credits		(4.5	)		(2.3	)		(3.6	)		(2.5	)
Effects of foreign operations		.9			.3			1.7			.2
Uncertain tax provision		—			.4			(.5	)		1.3
Other		(2.0	)		.4			(1.0	)		(.2	)
Effective tax rate		(40.4	)%		34.4	%		(38.4	)%		31.0	%

The effective tax rate for the three months and six months ended June 30, 2008 increased compared to the same prior year period as a result of tax benefit adjustments such as tax credits, tax exempt income and deferred tax adjustments applied to pretax loss in 2008 as compared to similar tax benefits applied to pretax income in 2007.

HUSI is currently under audit by the Internal Revenue Service as well as various state and local tax jurisdictions. Although one or more of these audits may be concluded within the next 12 months, it is not possible to reasonably estimate the impact of the results from the audits on HUSI’s uncertain tax positions at this time.

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Note 9. Long-Term Debt

Long-term debt is summarized in the following table.

	June 30, 2008		December 31, 2007
(in millions)
Senior debt	$	16,178	$	18,233
Subordinated debt		6,193		5,693
Structured notes		2,986		3,284
All other		1,059		1,058
Total long-term debt	$	26,416	$	28,268

The decline in Senior debt from December 31, 2007 is principally the result of the maturity of $1,500 million of Floating Rate FHLB advances, the early maturity of $1,360 million of structured financing transactions and the repayment of $700 million in private label credit card secured financings. This decline was partially offset by the issuance of $1,500 million of Floating Rate Extendable Notes on April 21, 2008 with an initial maturity date of May 15, 2009 and a final maturity date of April 15, 2013. Interest on these notes is paid quarterly based on three-month LIBOR plus the applicable spread for each interest period.

Included in Senior debt are $1,500 million of Floating Rate Extendible Notes, which require the noteholders to decide each month whether or not to extend the maturity date of their notes by one month beyond the initial maturity date of December 15, 2006. In no event will the maturity of the notes be extended beyond December 15, 2011, the final maturity date. If on any election date a noteholder decides not to extend the maturity of all or any portion of the principal amount of their notes, the notes will mature twelve months from the election date. Refer to page 129 of HUSI’s 2007 Form 10-K for additional information regarding these notes.

In August 2007, noteholders of $750 million of the above Floating Rate Extendible Notes exercised their option not to extend the maturity date of their notes. These notes will mature on August 15, 2008. In September 2007, noteholders of $690 million of this debt exercised their option not to extend the maturity date of their notes. These notes will mature on September 15, 2008. On the October 2007 election date, noteholders of the remaining $60 million of this debt elected not to extend the maturity date of their notes. These notes will mature on October 15, 2008.

On June 18, 2008 HBUS issued $700 million of 7.00% Subordinated Bank Notes due January 15, 2039. These notes were issued under the $40 billion Global Bank Note Program. The notes are non-callable and interest will be paid semi-annually each January 15th and July 15th, commencing January 15, 2009.

Subordinated debt includes $1,538 million and $1,683 million of debt instruments recorded at fair value at June 30, 2008 and December 31, 2007, respectively. Structured notes include $2,044 million and $1,760 million of debt instruments recorded at fair value at June 30, 2008 and December 31, 2007, respectively. Refer to Note 16, “Fair Value Option” of the consolidated financial statements for further details.

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Note 10. Related Party Transactions

In the normal course of business, HUSI conducts transactions with HSBC and its subsidiaries (HSBC affiliates). These transactions occur at prevailing market rates and terms. All extensions of credit by HBUS to other HSBC affiliates are legally required to be secured by eligible collateral. Related party balances and the income and expense generated by related party transactions are summarized in the following tables.

	June 30, 2008		December 31, 2007
(in millions)
Assets:
Cash and due from banks	$	175	$	97
Interest bearing deposits with banks		194		134
Federal funds sold and securities purchased under resale agreements		430		356
Trading assets (1)		15,066		11,640
Loans		2,838		2,007
Other		1,724		390
Total assets	$	20,427	$	14,624
Liabilities:
Deposits	$	12,498	$	13,050
Trading liabilities (1)		19,687		14,552
Short-term borrowings		884		982
Other		1,564		876
Total liabilities	$	34,633	$	29,460

(1) Trading assets and liabilities exclude the impact of netting in accordance with FASB Interpretation No. 39 and FSP FIN 39-1.

	Three months ended June 30					Six months ended June 30
	2008		2007			2008			2007
(in millions)
Interest income	$	54	$	39		$	112		$	65
Interest expense		48		106			125			209
Net interest income	$	6	$	(67	)	$	(13	)	$	(144	)
HSBC affiliate income:
Fees and commissions:
HSBC	$	18	$	18		$	44		$	29
HSBC Finance Corporation		6		6			12			11
HSBC Markets (USA) Inc. (HMUS)		2		4			5			6
Other HSBC affiliates		1		2			4			4
Gains on sales of refund anticipation loans to HSBC Finance Corporation		1		1			13			23
Other HSBC affiliates income		5		10			9			14
Total affiliate income	$	33	$	41		$	87		$	87
Support services expense from HSBC affiliates:
HSBC Finance Corporation	$	116	$	113		$	237		$	232
HSBC Markets (USA) Inc. (HMUS)		58		66			109			123
HSBC Technology & Services (USA) Inc. (HTSU) for technology services		60		62			120			123
Other HSBC affiliates		58		49			116			91
Total support services from HSBC affiliates	$	292	$	290		$	582		$	569

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Transactions Conducted with HSBC Finance Corporation
•	Support services from HSBC affiliates includes charges by HSBC Finance Corporation under various service level agreements for loan origination and servicing as well as other operational and administrative support.
•	In the second quarter of 2008, HSBC Finance Corporation launched a new program with HBUS to sell loans originated in accordance with the Federal Home Loan Mortgage Corporation’s (“Freddie Mac”) underwriting criteria to HBUS who then sells them to Freddie Mac under its existing Freddie Mac program. During the three months ended June 30, 2008, $14 million of real estate secured loans were purchased by HBUS under this program, with a total premium of $.4 million.
•	By agreement, HUSI purchases receivables generated by private label and MasterCard1/Visa2 credit card relationships daily at fair market value, as determined by an independent third party. HUSI purchased $9,538 million and $10,090 million of private label receivables and $2,346 million and $1,732 million of MasterCard/Visa receivables in the first half of 2008 and 2007, respectively. Premiums paid are amortized to interest income over the estimated life of the receivables purchased. HSBC Finance Corporation continues to service the customer receivables and charge HUSI a servicing fee. Fees paid relating to the servicing of private label receivables for the three months ended June 30, 2008 and 2007 totaled $95 million and $97 million, respectively and for the six months ended June 30, 2008 and 2007 totaled $194 million and $197 million, respectively. Fees paid relating to the servicing of MasterCard/Visa receivables for the three months ended June 30, 2008 and 2007 totaled $12 million and $4 million, respectively and for the six months ended June 30, 2008 and 2007 totaled $22 million and $9 million, respectively. As of June 30, 2008 and December 31, 2007, HSBC Finance Corporation was servicing $16,187 million and $17,427 million of private label receivables and $2,064 million and $1,988 million of MasterCard/Visa receivables.
•	HUSI services a portfolio of residential mortgage loans owned by HSBC Finance Corporation and receives a servicing fee. Servicing fee income received by HUSI during the three months ended June 30, 2008 and 2007 was $3.4 million and $2.5 million, respectively. Servicing fee income received by HUSI during the six months ended June 30, 2008 and 2007 was $7.0 million and $4.7 million, respectively.
•	In 2005, HUSI purchased a portfolio of higher quality nonconforming residential mortgage loans (the HMS portfolio) from HSBC Finance Corporation with the intent of holding these loans. HSBC Finance Corporation continues to service these loans, and charges HUSI a servicing fee. Servicing fees paid by HUSI during the three months ended June 30, 2008 and 2007 were $1.6 million and $2.2 million, respectively. Servicing fees paid by HUSI during the six months ended June 30, 2008 and 2007 were $3.4 million and $4.6 million, respectively.
•	HUSI’s wholly-owned subsidiaries HBUS and HSBC Trust Company (Delaware), N.A. (HTCD) are the originating lenders for a federal income tax refund anticipation loan program for clients of various third party tax preparers, which are managed by HSBC Finance Corporation. By agreement, HBUS and HTCD process applications, fund and subsequently sell these loans to HSBC Finance Corporation. For the six months ended June 30, 2008 and 2007, HBUS and HTCD originated approximately $13 billion and $17 billion, respectively, that were sold to HSBC Finance Corporation. This resulted in gains of $.6 million and $1 million for the three months ended June 30, 2008 and 2007, respectively, and $13 million and $23 million for the six months ended June 30, 2008 and 2007, respectively.
•	In 2007, HUSI acquired residential mortgage loans at fair value from HSBC Finance Corporation for the purpose of selling these loans. During the six months ended June 30, 2007, HUSI acquired $371 million of loans from HSBC Finance Corporation for a total premium of $.4 million.
•	Certain of HUSI’s consolidated subsidiaries have secured lines of credit totaling $1 billion with HSBC Finance Corporation. There were no balances outstanding under any of these lines of credit at June 30, 2008 or December 31, 2007.

1	MasterCard is a registered trademark of MasterCard, Incorporated.
2	Visa is a registered trademark of Visa USA, Inc.

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Transactions Conducted with HMUS and Subsidiaries

HUSI utilizes HSI for broker dealer, debt and preferred stock underwriting, customer referrals, loan syndication and other treasury and traded markets related services, pursuant to service level agreements. Fees charged by HSI for broker dealer, loan syndication services, treasury and traded markets related services are included in support services from HSBC affiliates. Debt underwriting fees charged by HSI are deferred as a reduction of long-term debt and amortized to interest expense over the life of the related debt. Preferred stock issuance costs charged by HSI are recorded as a reduction of capital surplus. Customer referral fees paid to HSI are netted against customer fee income, which is included in other fees and commissions.

HUSI has also extended a subordinated loan to HSBC Securities (USA) Inc. in the amount of $500 million, of which $500 million and $350 million was outstanding at June 30, 2008 and December 31, 2007, respectively, and has also extended a subordinated loan to HSBC Markets (USA) Inc. in the amount of $270 million, of which $215 million was outstanding at June 30, 2008.

HUSI has an uncommitted line of credit to HMUS or its subsidiaries not to exceed $1 billion, of which $64 million was outstanding at June 30, 2008.

Other Transactions with HSBC Affiliates

HUSI had an unused line of credit with HSBC Bank plc, a U.K. based subsidiary (HBEU), of $2.5 billion at both June 30, 2008 and December 31, 2007.

HUSI has extended loans and lines of credit to various other HSBC affiliates totaling $1.7 billion, of which $671 million and $225 million was outstanding at June 30, 2008 and December 31, 2007, respectively.

HUSI utilizes other HSBC affiliates primarily for treasury and traded markets services and, to a lesser extent, for global resourcing initiatives. Fees billed to HUSI for these services are included in support services from HSBC affiliates and totaled $67 million and $72 million for the three months ended June 30, 2008 and 2007, respectively, and $126 million and $135 million for the six months ended June 30, 2008 and 2007, respectively.

HUSI routinely enters into derivative transactions with HSBC Finance Corporation and other HSBC affiliates as part of a global HSBC strategy to offset interest rate or other market risks associated with debt issues and derivative contracts with unaffiliated third parties. The notional value of derivative receivables related to these contracts was approximately $940 billion and $996 billion at June 30, 2008 and December 31, 2007, respectively. The net credit exposure (defined as the recorded fair value of derivative receivables) related to the contracts was approximately $15 billion and $12 billion at June 30, 2008 and December 31, 2007, respectively. HUSI, within its Global Banking and Markets business, accounts for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.

Domestic employees of HUSI participate in a defined benefit pension plan sponsored by HNAH. Additional information regarding pensions is provided in Note 11, “Pensions and Other Postretirement Benefits of HUSI and HSBC Finance Corporation” of the consolidated financial statements.

Employees of HUSI participate in one or more stock compensation plans sponsored by HSBC. HUSI’s share of the expense of these plans on a pre-tax basis during the three months ended June 30, 2008 and 2007 was approximately $21 million and $16 million, respectively. During the six months ended June 30, 2008 and 2007, HUSI’s share of the expense of these plans on a pre-tax basis was approximately $38 million and $30 million, respectively. As of June 30, 2008, HUSI’s share of compensation cost related to nonvested stock compensation plans was approximately $109 million, which is expected to be recognized over a weighted-average period of 1.6 years. A description of these stock compensation plans begins on page 142 of the 2007 Form 10-K.

For the six months ended June 30, 2008, there were no common stock dividends declared and paid by HUSI in comparison to $470 million at the end of the same 2007 period.

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Note 11. Pensions and Other Postretirement Benefits of HUSI and HSBC Finance Corporation

The components of net periodic benefit cost reflected in HUSI’s Consolidated Statement of (Loss) Income are shown in the table below and reflect the portion of net periodic benefit cost of the HNAH defined benefit pension and postretirement benefits other than pension plans which has been allocated to HUSI.

	Pension Benefits						Other Postretirement Benefits
	2008			2007			2008		2007
(in millions)
Three months ended June 30
Net periodic benefit cost:
Service cost – benefits earned during the period	$	8		$	8		$	—	$	1
Interest cost		19			18			2		2
Expected return on plan assets		(23	)		(22	)		—		—
Recognized losses		1			1			—		—
Net periodic benefit cost	$	5		$	5		$	2	$	3
Six months ended June 30
Net periodic benefit cost:
S