Credit Suisse’s decision to fight lawsuits over financial crisis-era residential mortgage-backed securities has seen its potential damages almost double, long after most of its main rivals settled their cases.
Even after signing a $5.3bn RMBS settlement with the US Department of Justice in 2017, the Swiss bank faces at least a dozen investor lawsuits over mortgage debt the bank securitised and which plummeted in value during the 2008-09 crisis. An appellate court last month ruled in favour of the bank’s challengers, allowing some of the cases to proceed to trial.
The Swiss bank held $681m in litigation reserves at the end of 2018. Regulatory filings by the bank say it is facing damages in lawsuits that could exceed its reserves by up to $1.4bn.
One case is scheduled to go to trial in January at the New York Supreme Court in Manhattan. The plaintiffs are three trusts that issued securities backed by 23,900 mortgage loans purchased from a Credit Suisse subsidiary. The trusts claim the bank misrepresented the quality of the mortgage loans by misstating the borrowers’ income, employment and debt levels.
Among the securities owners standing behind the trusts are hedge funds, including Fir Tree, which bought the distressed securities following the crisis. The amount of damages the claimants are seeking — $730m — has roughly doubled since the case was filed because of the 9 per cent annual interest they accrue.
A Credit Suisse spokeswoman said the bank “categorically rejects any suggestion that it defrauded any investors in RMBS”.
“Our due diligence and investor risk disclosures met or exceeded RMBS industry standards,” she added. Investors losses “were not a result of Credit Suisse misconduct, but rather due to the decline in the housing market and the broader economic downturn”.
Credit Suisse has a reputation among New York trial attorneys as one of the banks most willing to drag out litigation. One lawyer said the bank was likely to be doing so to avoid becoming a target for frivolous lawsuits.
“It’s the scenario they’ve built for themselves,” the lawyer said. “After deciding not to settle early on, they get to the point where it becomes more worthwhile to fight for the sake of fighting. They’ve doubled down on their gamble . . . they figure, let’s just play it out and maybe we’ll get something good from the court.”
“Their strategy, I don’t think, has worked for them,” the lawyer added.
While Credit Suisse’s US regulatory filings disclose at least 12 open RMBS court actions with investors, the mortgage insurer MBIA, the New Jersey attorney-general and the receivers of several failed banks, other big banks’ reports reflect a less aggressive approach.
Bank of America, which was heavily involved in RMBS issuance before the crisis, does not list any open RMBS actions in its annual filings, and neither does JPMorgan Chase. Citigroup, another major RMBS backer, lists just four open actions, several in the final stages.
Credit Suisse is awaiting a verdict in another RMBS case that went to trial in July in Manhattan, filed by MBIA, which insured the securities. MBIA also claims the Swiss bank defrauded them by lying about the quality of the loans.
The bank’s hardball tactics may have helped it in at least one case. In 2012 then New York attorney-general Eric Schneiderman sought $11bn from the bank, again over claims it misrepresented the quality of mortgages. An appellate court ruling limited the scope of the case, and it was settled in January for $10m.
John Coffee, a Columbia Law School professor and securities litigation expert, said: “It is easier to settle cases when there are a fair number of precedents that are on point and enough settlements to establish the settlement range. Here there are.”
The current RMBS suits are also the last vestiges of a lucrative hedge fund trade. Funds snapped up the securities for cents on the dollar in 2009 and 2010 as the banks and other holders desperately tried to unload them. In some cases, the securities regained their value after homeowners began making payments on their mortgages again. In other cases, hedge funds turned to the courts to press the banks for settlements.
“Most of these defendants have seen the writing on the wall, and a large number have settled,” said John Libra, a lawyer at the law firm Korein Tillery with experience in RMBS litigation. He said he thought the bank might be holding out for favourable court decisions.