HSBC, the global banking giant, has paid out a fine amounting to $765 million (£582 million) over the allegations that it knowingly sold “contaminated” mortgage-backed securities to investors in the run-up to the financial crisis.
The Department of Justice (DOJ) of the United States accused HSBC of deliberately “misrepresenting to investors” the quality of the controversial Residential Mortgage-Backed Securities (RMBS). RMBS is a type of loan that has been noted as a factor in the global financial crash that happened in 2008.
The DOJ said that HSBC was notified regarding the “abnormally large” and “alarmingly” high number of payment defaults – which was an indicator of possible impending losses.
It said that in 2006, the own head of risk management of HSBC noted that the number of early payment defaults — when a borrower is unable to make one of the first few payments on a mortgage — could be regarded as “an indicator of higher expected loss on the pool.”
Despite this, the DOJ claims that the head of the loan trading risk management group of HSBC disclosed that he was comfortable with not making any more disclosures to its investors before issuing the said securitisation.
The government regulator said that an HSBC trader even claimed that an RMBS is a product that “will suck,” before the bank sold it on.
HSBC said that the agreement to enter into the financial settlement was made “without admitting liability or wrongdoing.”
It continued: “The settlement releases HSBC from potential civil claims by the DOJ related to its securitisation, issuance and underwriting of RMBS during the period from 2005 through 2007, and requires no additional remedial action.”
Bob Troyer, a United States Attorney for the District of Colorado, stated: “HSBC made choices that hurt people and abused their trust. HSBC chose to use a due diligence process it knew from the start didn’t work. It chose to put lots of defective mortgages into its deals.”
He added: “When HSBC saw problems, it chose to rush those deals out the door. When deals went south, investors who trusted HSBC suffered. And when the mortgages failed, communities across the country were blighted by foreclosure. If you make choices like this, beware. You will pay.”
Patrick Burke, the president and chief executive of HSBC in the US, stated: “We are pleased to put this investigation related to activity that occurred more than a decade ago behind us. Since the financial crisis, HSBC has been strengthening our culture, processes and internal controls to ensure fair outcomes for our clients. The US management team is focused on putting historical matters into the rearview mirror and completing the turn-around of HSBC’s US operations.”