HSBC Holdings is in talks to resolve a U.S. probe into its sale of toxic mortgage bonds a decade ago, according to people familiar with matter, a negotiation that could offer an early look at how the Trump Justice Department will deal with global banks.
The London-based bank has had at least one meeting with the Justice Department and is scheduled to meet again, said three people who asked not to be named because the negotiations are confidential. The two sides remain far apart in discussions with Justice Department lawyers, while Trump administration appointees have yet to weigh in, one of the people said. A resolution, if one can be reached, is still weeks or even months away, the people said.
If HSBC reaches an agreement with the government, it could give an early indication of how the new administration will levy financial penalties. Attorney General Jeff Sessions last month issued a departmentwide memo requiring settlement funds to be paid to the U.S. Treasury or to victims. The prior cases allowed billions of dollars in penalties to be paid through consumer relief measures — mortgage modifications, repayment plans and short sales, among other remedies. The Justice Department hasn’t said whether those so-called soft-dollar portions of the penalties will be allowed under the new policy.
"Consumer relief is a way for companies who’ve engaged in harmful conduct to acknowledge their role in creating the problem and to be a part of the solution," said Christopher Casey, a former Justice Department official who worked on mortgage-bond cases during the Obama administration. "That’s why those provisions in the settlements that had been reached previously in my view were positive parts of the settlements and they were effective."
HSBC said that government lawyers told the bank late last year that their preliminary view was that the bank was liable for bad securities sold between 2005 and 2007, according to the company’s annual report filed in March. HSBC said in the report that it had disagreed with the Justice Department and would argue its position at a later time. The bank’s position hasn’t changed, said one of the people.
The talks show that Justice Department lawyers — primarily operating from U.S. attorney offices — continue to push forward with outstanding mortgage bond cases left over from the Obama administration. However, it’s unclear how involved the new Justice Department leadership is in those efforts. Under Obama, the mortgage bond cases were overseen by the Justice Department’s No. 3 official, who took an active role in negotiating multibillion-dollar settlements with global banks. Rachel Brand, the Trump-appointed official in that post has been on the job for a little over a month, while the Justice Department’s Civil Division — another key player in the previous settlements — is operating under temporary leadership.
There is no guarantee that the two sides will reach an agreement. The Justice Department sued Barclays PLC in December after settlement negotiations broke down in that case.
The Justice Department declined to comment. An HSBC spokesman pointed to the bank’s comments on the matter in its annual report and declined to comment further.
Any final resolution may be worked out under new leadership at the bank, which has approached Peter Hancock, the former boss of American International Group, as a potential replacement for Stuart Gulliver, who is retiring next year, a person familiar with the matter said. HSBC declined to comment.
It is unclear how much money is at stake for HSBC, which said in the annual report that its mortgage-bond business was smaller than those of other banks. HSBC said it had set aside $2.4 billion for legal proceedings and regulatory matters as of the end of 2016 but didn’t earmark any of that money for the mortgage-bond case.
Under the Obama administration, seven global banks settled with the government for a total of $58 billion for their role in contributing to the financial crisis by selling securities backed by faulty loans.
HSBC said that the previous settlements offered no clear guidance as to how the penalty amounts were calculated. As a result, it isn’t "practicable to estimate any possible financial effect of this matter, which could be significant," HSBC said in the report.
Almost a decade after the financial crisis began, HSBC is one of a handful of European lenders, including UBS Group AG and Royal Bank of Scotland Group PLC, that have yet to settle long-running U.S. probes into their sale of mortgage bonds.
At the end of April, Ewen Stevenson, RBS’s chief financial officer, said that the change in administrations had delayed negotiations with the Justice Department but that its case could be resolved by the end of the year. RBS has reserved 6.8 billion pounds ($8.6 billion) for its mortgage bond cases — that includes the Justice Department investigation as well as a six-year-old lawsuit brought by the Federal Housing Finance Agency.
UBS, which is the focus of multiple investigations regarding its purchases and sales of mortgage bonds, has set aside $1.5 billion. In its annual report, made public in March, UBS said it was continuing to provide information to prosecutors.
In previous settlements, banks were able to pay down the consumer relief portion over a period of several years. They also received extra credit for principal forgiveness offered in the first couple of years.
For some banks, the consumer relief portion was more than half of the total penalty paid to the U.S. Treasury. Deutsche Bank AG’s $7.2 billion penalty — agreed to in December — includes $4.1 billion in consumer relief.
Some of the bank settlements called for donations to third-party groups that provide housing counseling, which Republicans criticized as being slush funds used by the Obama administration to funnel money to liberal interest groups, including some that had been explicitly defunded by Congress.
Under the new Justice Department policy, it’s unclear whether mortgage modifications and other loan remedies fall under the exception of "payment or loan that provides restitution to a victim or that otherwise directly remedies the harm that is sought to be redressed."
The consumer relief provisions were designed to fix the structural harm to the economy, so if broadly defined, the new policy could allow such payments to continue, said Casey, the former Justice Department official who is now a partner at Hogan Lovells in Washington.
"It will depend on how they interpret it," he said.
HSBC has resolved a separate matter involving its mortgage securities operations in the U.S. during the same time period being investigated by the Justice Department. It paid $550 million to settle a case with the FHFA in 2014 involving mortgage bonds sold to Fannie Mae and Freddie Mac.