HSBC will bail out two funds it manages

HSBC Holdings, Europe’s largest bank, said Monday that it would bail out two troubled investment funds it manages by transferring about $45 billion of their assets onto its balance sheet.

The bank said it would inject $35 billion into the funds, Cullinan Finance Ltd. and Asscher Finance Ltd., in a move to clarify responsibility for the funds and prevent liquidation of their assets.

The funds are “structured investment vehicles,” or SIVs -- bank-managed operations that sell short-term debt such as commercial paper to investors. The funds use the proceeds to buy longer-term assets such as mortgage-backed securities. When the short-term debt matures, the SIVs typically ask the holders of the debt to “roll over,” or extend, the securities.

U.S.-traded shares of HSBC fell $2.20, or 2.6%, to $82.54 after the announcement.

In August, however, the global credit crisis caused by the sub-prime mortgage meltdown dried up demand for the debt issued by the world’s 30 SIVs, creating liquidity problems for the funds, which manage about $320 billion in assets.

An SIV that could not continue borrowing money would need to find cash elsewhere or sell its investments.

Because mortgage debt has lost so much value -- some types are selling at less than 20 cents on the dollar -- that would probably lead to losses for investors in SIVs.

This month, bankers from Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. announced an agreement on a multibillion-dollar fund to buy distressed debt securities.

HSBC, whose SIVs are among the largest in the market, said it would not be participating in that fund.

The British bank’s plan will shield investors in its SIVs from losses caused by a need to sell distressed securities, HSBC said, but the investors will still bear any losses caused by mortgage debt that isn’t repaid.