HSBC HSBC Holdings PLC

By Micah Maidenberg 

HSBC Holdings PLC will pay $765 million to settle Justice Department claims that it willfully covered up risks associated with residential-mortgage products in the run-up to the last housing-market downturn.

Between 2005 and 2007, the bank placed defective mortgages into residential mortgage-backed securities it created and sold, the Justice Department alleged Tuesday. Bank employees overlooked mortgages in the securities that were likely to default and failed to tell investors about the risks, according to prosecutors.

"When deals went south, investors who trusted HSBC suffered. And when the mortgages failed, communities across the country were blighted by foreclosure," Bob Troyer, U.S. Attorney for the District of Colorado, said in a statement.

In agreeing to pay the penalty, the London-based financial-services firm didn't admit or deny the government's claims. In prepared remarks, Patrick Burke, chief executive of the company's U.S. unit, said the firm was pleased to have resolved the matter.

"Since the financial crisis, HSBC has been strengthening our culture, processes and internal controls to ensure fair outcomes for our clients, " Mr. Burke said in a statement. "The U.S. management team is focused on putting historical matters into the rearview mirror and completing the turnaround of HSBC's U.S. operations."

By agreeing to pay the $765 million civil penalty, HSBC has become the latest bank to settle with the Justice Department over how it handled toxic mortgage-backed securities. In August, Wells Fargo & Co. said it would pay $2.09 billion to settle similar claims.

Other banks that have struck settlements with the Justice Department over the handling of residential mortgage-backed securities include Barclays PLC and Royal Bank of Scotland Group PLC, as well as Bank of America Corp. and JPMorgan Chase & Co.

As early as 2005, a credit-risk manager at HSBC expressed worries with how the bank was conducting due diligence regarding subprime loans it purchased and bundled for the securities, according to the Justice Department.

HSBC told investors that employees would review at least 25% of the loans for credit and compliance issues, the government said. But in some cases, HSBC examined just 5% of the pools used to create securities, according to prosecutors. Once, in 2007, a trader at HSBC said, "It will suck," regarding a mortgage-backed security HSBC was about to issue, the Justice Department said.

In another case of alleged wrongdoing, the Justice Department said the company's head of risk management for residential mortgage-backed securities once wrote in an email that a high default rate by mortgage borrowers could indicate systemic problems with the loan pool.

But the next day, the head of HSBC's whole loan trading risk management group said he was "comfortable that we need not make any further disclosures to investors," the government said. HSBC sold the security. A postsale review suggested that loans in the product "appear to have fraud or misrep (sic)," but HSBC purchased more loans from the originator, prosecutors added.

HSBC North America Holdings Inc., the holding company for the bank's U.S. operations, will pay the $765 million penalty, the company said Tuesday.

Write to Micah Maidenberg at micah.maidenberg@wsj.com

(END) Dow Jones Newswires

October 09, 2018 13:38 ET (17:38 GMT)

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