Could HSBC Holdings plc Be Facing A $10bn Fine?

The US Justice Department has recently started to crack down on banks, after some criticism that the agency had treated financial institutions too lightly.

Indeed, so far this year the Department has fined BNP Paribas $8.9bn and Credit Suisse $2.6bn. Both of these fines were related to tax evasion and violating US banking laws.

However, the department is also placing hefty fines on banks for their role in selling mortgage-related products that contributed to the financial crisis.

Unfortunately, HSBC (LSE: HSBA) (NYSE: HSBC.US) was a large player in the US mortgage market before the financial crisis, which could mean the bank is heading for a hefty penalty.

Hefty penalties

As of yet, regulators have not accused HSBC of any wrongdoing directly. Nevertheless, the bank has already paid a $9.3bn fine along with several of its peers regarding foreclosure abuses. Specifically, this fine was levied across much of the banking industry with Aurora, Bank of America, Citibank, Goldman Sachs, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, US Bank, and Wells Fargo all contributing, as well as HSBC. 

However, during the past few months both Bank of America and Citigroup have been singled out by the Justice Department, for their individual roles in the financial crisis. 

Within the last few days Citigroup has been fined $7bn, as the bank admitted to knowing that the sub-prime loans it packed up and sold to investors were of poor quality and worth almost nothing. Meanwhile, JPMorgan paid a fine of $13bn relating to the trading of bad loans during 2013 and Bank of America is rumoured to be negotiating a similar sized settlement.

Guilty by association   

So, with the US Justice Department cracking down on banks, HSBC could be next. The bank used to own a huge $130bn US mortgage portfolio, much of which was subprime debt. 

Still, during the past few years the bank has been offloading its toxic debt, reducing the mortgage portfolio to less than $30bn. The total volume of toxic debt sold off by the bank during the past few years has exceeded $40bn. 

Unfortunately, HSBC did have a part to play in the financial crisis and the trading of risky subprime debt, which makes the bank guilty by association.

As of yet there have been no suggestions that HSBC could be liable for hefty fines, but with the Justice Department cracking down, there is a chance that HSBC could find itself at the centre of an investigation.