Denver-based U.S. Attorney Bob Troyer announced Tuesday that global banking giant HSBC has agreed to pay $765 million in civil penalties related to allegations it misled investors and sold them securities backed by toxic mortgages between 2005 and 2007.
The mortgage securities weren’t specific to Colorado, and HSBC hasn’t acknowledged any wrongdoing. The Federal Housing Finance Agency asked Troyer and his legal team in the District of Colorado to take on the case after investors suffered huge losses.
“HSBC made choices that hurt people and abused their trust,” Troyer said in a statement. “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.”
The case is one of a handful remaining from last decade’s housing crash and financial crisis, when loan originators and borrowers fabricated information on mortgage applications on a massive scale. Those subprime loans were pooled together and sold to large banks, which then issued securities against them to unsuspecting investors, pocketing hefty fees in the process.
Troyer said the bad mortgage-backed securities caused investors who trusted HSBC to suffer losses. More broadly, the high volume of loan defaults the corrupted process generated depressed home values, caused foreclosures to spike, harmed countless families and blighted communities.
“If you make choices like this, beware. You will pay,” Troyer warned.
Federal regulators have won several large settlements linked to mortgage securities fraud, including $16.65 billion from Bank of America, $13 billion from JP Morgan Chase, and $7.2 billion from Deutsche Bank. Often those liabilities arose from troubled firms like Merrill Lynch, Countrywide and Washington Mutual that the big banks acquired during the financial crisis.
London-based HSBC, which has 7,500 locations in 80 countries, escaped the financial crisis relatively unscathed. But the U.S. Department of Justice alleges that the bank itself, not a subsidiary it acquired, misled potential investors regarding how robustly it was screening the loans it was purchasing and repackaging for sale to investors.
HSBC told investors it had a proprietary model to select 20 percent of the highest-risk or “adverse” loans in a pool for deeper analysis, and that another 5 percent would be selected randomly. But federal investigators allege the firm’s trading desk inappropriately influenced which adverse loans to study. And in some instances it didn’t use a random sample.
After loans were selected for review, HSBC turned to outside vendors to examine them. They flagged more than one out of four loans as having low grades between January 2006 and June 2007, even with the fudging that went on in the selection process. But HSBC employees would “waive” those loans through or recast their grades, according to government allegations.
The DOJ alleges that HSBC pushed forward with securitizations even when employees in the risk management group warned they were contaminated with loans that had gone immediately into default, a sign of fraud. Even when a quality control review found a specific originator was likely passing on fraudulent loans, the bank kept purchasing from that originator, the government alleges.
HSBC said in a statement that it was pleased to move past the investigation of activity that occurred more than a decade ago and that it had set aside enough to cover the penalty as of June 30. The company said the agreement doesn’t require it to admit to wrongdoing or liability.
“Since the financial crisis, HSBC has been strengthening our culture, processes and internal controls to ensure fair outcomes for our clients,” said Patrick J. Burke, president and CEO of HSBC USA. “The U.S. management team is focused on putting historical matters into the rear view mirror and completing the turn-around of HSBC’s U.S. operations.”
