The Real Deal New York

AG sues Credit Suisse over RMBS practices

Suit is latest action from government task force investigating housing bust fallout

November 20, 2012 05:30PM
By Leigh Kamping-Carder

From left: Credit Suisse CEO Brady Dougan, AG Eric Schneiderman

Credit Suisse is the latest financial institution targeted in the government investigation into alleged wrongdoing in the sale of residential mortgage-backed securities. New York Attorney General Eric Schneiderman filed a lawsuit today claiming the banking giant misled investors about the quality of the home loans packaged into nearly $94 billion of RMBS.

The action, filed in New York State Supreme Court, claims that Credit Suisse told investors it carefully assessed the loans and loan originators but, in reality, “systematically failed to adequately evaluate these loans, and kept investors in the dark about the adequacy of their review procedures.”

The suit is the second filed by the Obama Administration’s government task force, known as the Residential Mortgage-Backed Securities Working Group, tasked with investigating misdeeds in the sale of RMBS in the run-up to the financial crisis. Schneiderman is the co-chair of the group, which also includes federal securities and housing officials.

In October, Schneiderman sued Bear Stearns & Co., now a unit of JPMorgan Chase, over similar allegations. Wells Fargo and Bank of America are also facing lawsuits from the U.S. Department of Justice in connection with their mortgage underwriting procedures.

Like the Bear Stearns case, the suit against Credit Suisse focuses on allegedly widespread practices at the institution, rather than specific deals. The suit accuses Credit Suisse of violations of the Martin Act, New York State’s answer to the federal securities laws, and seeks unspecified damages, restitution and other relief.

Victoria Harmon, a spokesperson for Credit Suisse, said in a statement that the bank would present its defense in court. “We firmly reject this complaint which recycles baseless claims from private lawsuits and uses an inaccurate and exaggerated number,” she said.

Schneiderman claimed that, like other banks, Credit Suisse turned a blind eye to supposed problems with the loans backing the RMBS in order to sell an ever-greater volume of the financial instruments.

“The due diligence process was dysfunctional,” Schneiderman told reporters on a conference call today.

Traders at the bank focused on maintaining relationships with loan originators, including “some of the worst lenders in the country,” in order not to jeopardize their ability to participate in loan auctions, Schneiderman told reporters.

In some cases Credit Suisse extended loans worth millions of dollars to the originators, so they could write thousands more mortgages, despite one trader calling the loans “garbage,” the complaint says, quoting an internal email.

Many of the borrowers ultimately defaulted on their mortgages, causing billions of dollars in losses. Schneiderman estimated that Credit Suisse had underwritten or sponsored about $93.8 million of RMBS, which had lost $11.2 billion as of August.

Schneiderman’s office started investigating Credit Suisse last spring and first subpoenaed the bank in June, he said. The investigation included interviews and depositions with dozens of witnesses, generating more than 1 million documents, Schneiderman said.

Among the alleged victims were Fannie Mae and Freddie Mac, which Federal Housing Finance Agency Inspector General Steve Linick said had “sustained significant losses, which to date have been borne by taxpayers.”

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