Global banking giant HSBC has paid out a $765m (£582m) fine over allegations it knowingly sold "contaminated" mortgage-backed securities to investors in the run-up to the financial crisis.
The US Department of Justice (DOJ) accused HSBC of deliberately "misrepresenting to investors" the quality of controversial Residential Mortgage-Backed Securities (RMBS), a type of loan that has been cited as a factor in the global financial crash in 2008.
The DOJ alleged that HSBC was alerted to the “abnormally large” and “alarmingly” high number of payment defaults – an indicator of potential impending losses.
It said that in 2006, HSBC's own head of risk management noted that the number of early payment defaults — when a borrower fails to make one of the first few payments on a mortgage — could be seen as “an indicator of higher expected loss on the pool” .
Despite this, the DOJ alleges that the head of HSBC’s loan trading risk management group stated he was comfortable with not making any further disclosures to investors ahead of issuing the securitisation.
According to the government regulator, one HSBC trader even referred to an RMBS as a product that "will suck", before the bank sold it on.
HSBC said the agreement to enter into the financial settlement was made "without admitting liability or wrongdoing".
It added: "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."
United States Attorney for the District of Colorado Bob Troyer said: “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.
"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.”
President and chief executive of HSBC in the US Patrick Burke said: “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 rear view mirror and completing the turn-around of HSBC’s US operations.”