HSBC attempts to profit from subprime, get sued instead

A few months ago we said lawsuits would begin as investors sort out the subprime mess. What happens if fund managers discover that their bonds have been improperly rated? Take a look at what happened when HSBC tried to profit from the subprime mess. Some analysts think HSBC created part of the subprime problem to begin with, buying mortgage contracts from brokers until it was too late.

A U.S. real estate fund has sued HSBC Holdings alleging the British bank’s U.S. mortgage trading operation took advantage of the credit crisis to profit at the expense of the fund, the Wall Street Journal reported. In the lawsuit, Luminent Mortgage Capital, a San Francisco firm that invests in residential mortgage securities, says HSBC’s New York office placed an improperly low valuation on nine subprime-mortgage bonds, which the fund’s subsidiary had put up as collateral for loans.

According to the complaint, HSBC bought the bonds at a deep discount to their fair value, in at least one case employing an auction that included only one other bidder, the Journal reported in its European edition on Friday. The Journal said the complaint was filed on Thursday in the U.S. District Court in New York. The total face value of the bonds in question was $24 million.