--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 [email protected]
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