HSBC to Pay $765 Million in U.S. Pact -- WSJ
October 10 2018 - 3:02AM
Dow Jones News
Bank was accused of covering up risks related to mortgages
before downturn
By Micah Maidenberg
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 10, 2018).
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 10, 2018 02:47 ET (06:47 GMT)
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