--N.Y. AG says Credit Suisse disregarded due-diligence standards
in mortgage offerings
--Motive was to maintain relationships with originators and
ensure flow of loans, AG says
--Credit Suisse ignored loan defects when it discovered them,
case claims
(Updates with details from complaint in paragraph three and
response from Credit Suisse)
By Christian Berthelsen and Nathalie Tadena
The New York Attorney General accused Credit Suisse Group AG
(CS, CSGN.VX) of an $11.2 billion fraud Tuesday, alleging that the
Swiss bank ignored its own due-diligence standards to maintain good
relations with lenders and ensure a steady supply of home loans to
package into mortgage securities.
According to the attorney general's complaint, Credit Suisse
Securities (USA) LLC led its investors to believe the quality of
the loans in its mortgage-backed securities prior to 2008 had been
carefully evaluated and would be continuously monitored. However,
the firm instead failed to adequately evaluate the loans and
ignored defects its limited review did uncover, according to the
complaint.
Internally, traders and other employees at Credit Suisse
referred to mortgages they were getting as "crap" and "garbage,"
and graded some of their top-contributing originators as
consistently failing to comply with underwriting guidelines, the
lawsuit said. When Credit Suisse sought to buy subprime lender Lime
Financial Services and possibly improve underwriting standards, one
trader said he was "not sure if wolves [were] willing to learn
eating veggie."
In some cases, Credit Suisse shifted problematic loans from a
channel where they were sure to be individually reviewed to a
"bulk" channel where only a sample of loans were reviewed,
according to the suit. Despite push-back from traders over the
quality of loans, other bank officials continued to do business
with the same originators to keep volumes up and remain competitive
in industry "league tables" that rank banks according to their
amount of business, the suit said.
In a conference call announcing the case, Attorney General Eric
T. Schneiderman said the office's investigation uncovered evidence
showing how some bankers internally protested the quality of the
loans being put into the securities, but the complaints were
ignored to ensure access to more loans in the future.
"There was a battle going on inside Credit Suisse," Mr.
Schneiderman said. A group within the bank "were essentially
telling traders and others they had to put up with bad loans....
All complaints were overridden.
"It was a sellers' market, originators had lots of bidders for
loans and investment firms sacrificed quality for quantity and
subordinated their obligations and their responsibility to
investors to their desire to maintain good relations with
originators," Mr. Schneiderman added.
Of the $93.8 billion in mortgage securities sponsored and
underwritten by Credit Suisse in 2006 and 2007, investors suffered
losses on approximately $11.2 billion, or about 12% of total
initial balances, the attorney general said. The suit seeks
disgorgement of revenue from the alleged scheme, as well as
restitution, damages and interest.
In a prepared statement, Credit Suisse said it would fight the
case in court and added: "We firmly reject this complaint which
recycles baseless claims from private lawsuits and uses an
inaccurate and exaggerated number" to assess investor damages.
The case was filed under New York State's Martin Act, a powerful
law that doesn't require authorities to prove intent to defraud to
win a case. It is yet another outgrowth of a state-federal task
force launched by President Barack Obama earlier this year to go
after financial-crisis-era frauds in the mortgage-backed securities
market.
Last week, J.P. Morgan Chase & Co. (JPM) and Credit Suisse
agreed to pay a combined total of more than $400 million to settle
allegations of misleading investors through packaging and selling
of mortgage securities in the lead-up to the financial crisis, the
Securities and Exchange Commission said.
Write to Christian Berthelsen at
christian.berthelsen@dowjones.com
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