HSBC accused of undervaluing subprime mortgage bonds
HSBC Holdings is being sued by a US real estate fund for allegedly deliberately undervaluing the market price of several subprime mortgage bonds, the Wall Street Journal reported yesterday.
The lawsuit was filed on Thursday by Luminent Mortgage Capital, a San Francisco firm that invests in residential mortgage securities. It claims that London-based HSBC's New York office placed an improperly low valuation on nine subprime mortgage bonds, which were being sold by the fund's subsidiaries in return for loans.
Pierre Goad, an HSBC spokesman in London, declined to comment on individual cases yesterday but said losses were now common in the US credit market and the group could not respond until they actually received the documents. The bank's spokeswoman in Hong Kong was not available for comment.
HSBC bought the bonds, with a total face value of US$24 million, at large discounts to market fair value, the complaint filed at US District Court in New York said.
In at least one case, the bond auction involved only one other bidder and HSBC could conveniently submit the highest bid for all the bonds.
'The complaint seeks damages for HSBC's cynical use of the recent disarray in the capital markets to rip off its trading counterparties,' said Luminent attorney Sean O'Shea. 'HSBC's putative 'winning bids' for certain of the bonds were for little more than half of the bonds' true market value.'
HSBC shares gained last week on hopes that the subprime mortgage crisis had run its course. Its American depositary receipt in the US closed at US$150.99 on Thursday, up 0.25 per cent on Hong Kong's closing price on Thursday. It has hovered on either side of HK$140 for much of the year.
The stock was downgraded from 'buy' to 'neutral' by UBS yesterday in a report that said the lender's shares were 'relatively fully priced'. It cut its estimate of next year's pre-tax profit at HSBC's US unit by more than US$1.3 billion to an 'earnings trough' of US$897 million.
'Third quarter is set to look bad' for HSBC Finance, the bank's US subprime unit ... 'and we do not expect the group to make any effort at providing reassurance as to the near-term outlook,' the report said.
HSBC Asia-Pacific chief Sandy Flockhart said on Monday the US subprime woes were far from over, as many banks were still showing impairment charges in their results.