When doing earnings conference calls, Assured Guaranty (AGO) CEO Dominic Frederico takes the opportunity to highlight some of the worst offenders among his bank counterparties when it comes to compliance with R&W (representations and warranties). Credit Suisse (CS) was featured on Tuesday's call, and it is downright ugly:
Specifically, the total original collateral pool for the six Credit Suisse transactions was $4.4 billion of mortgages, against which Assured insured only $567 million of gross prior securities or approximately 13% of the total. To date, $1.1 billion of the mortgages have already defaulted. As stated in our lawsuit, Assured Guaranty has reviewed approximately $1.9 billion of defaulted or delinquent mortgages and found that 93% or $1.8 billion, contained breaches of representations and warranties.
Incredibly, Credit Suisse has not repurchased even one of the $1.8 billion in put backs that we have delivered. By contrast, we have collected $1.7 billion to date from eight different counterparties in connection with rep and warranty breaches. Further, we have agreements in place, which represent as much as an additional $800 million in payments we could further collect depending on future losses. In addition, the activity in the press and in the courts regarding rep and warranty exposure, continues to support liability for originators, servicers and bankers for defective mortgage securitizations.
In our own book as I stated, eight counterparties have recognized some level of liability, but not Credit Suisse. Maybe this is an appropriate question for Credit Suisse’s auditors, Board of Directors and regulators, are they comfortable with Credit Suisse’s current disclosure and recorded liability for RMBS? We have attempted to engage their regulator, who has so far refused to talk to us because we are a party to this litigation. Based on public information, Credit Suisse reports that they sold $128 billion of non-agency securitizations going back to 2004.
To date, those RMBS transactions have experienced $15 billion of losses. Assured Guaranty only insures 3.4% of these transactions, and today on that 3.4% we have put back $1.8 billion of defective mortgages. Yet Credit Suisse publicly reported last week that they have taken only a $53 million provision for repurchase claim provisions and substantially all of this is against their liabilities to the GSEs.
It should be noted that MBIA (MBI) has experienced similar problems with Credit Suisse. From a complaint filed with the Supreme Court of NY State:
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What both MBIA and Assured Guaranty have experienced is 85% or worse of Credit Suisse's mortgages breached representations and warranties, and the bank has refused to repurchase even one.
A Culture of Secrecy and Lawlessness
Swiss Banks, Credit Suisse among them, notoriously appropriated the money left behind in accounts belonging to holocaust victims. By 1998, some 53 years after the war ended, the nation's (and the industry's) conscience was reportedly cleansed by a settlement made with survivors and the descendants of victims.
Less reprehensible, but still bad, Swiss banks have long been safe havens for tax evaders, including many wealthy US citizens. So called banking laws provide legal cover for the assistance these institutions gave, and continue to give, to those who are unwilling to shoulder their share of the burden of financing the Sweet Land of Liberty.
That will be changing as the US tracks down tax evaders.
Credit Suisse paid $536 million to settle with the DOJ over money laundering committed on behalf of Iran.
Of course, CS also had an episode of rogue trading, very expensive, in spite of their purported internal controls.
The point is that Swiss bankers have long enjoyed a culture of secrecy, which has provided cover for lawless profiteering. Given that culture, it can come as no surprise that this rogue bank was a leader in creating fraudulent mortgages, selling them off to unsuspecting investors, and then refusing to honor their legal obligations.
Not as Strong as It Seems
Credit Suisse, being part of Europe's beleaguered banking system, is already suspect. Add to that the bank has substantial liabilities for its fraudulent conduct with regard to mortgage securitizations. It is worse than Bank of America (BAC). BAC at least has made some settlements, is negotiating to make more, and has been assiduously raising funds to meet its obligations. Credit Suisse has yet to repurchase one mortgage. Not even one.
The Swiss National Bank, in its 2011 Financial Stability Report (.pdf), notes that for the two big banks:
First, compared to last year, there has been no notable decrease in the level of risk at the big banks. Second, the big banks’ economic capital situation is less comfortable than their risk-weighted capital ratios under Basel II might suggest.
Credit Suisse is morally bankrupt, and not necessarily as financially strong as it appears. Investors will do well to avoid long positions. For those who are inclined to short-selling, or the use of naked CDS for speculative purposes, it makes a tempting target. I personally would avoid any involvement with this distasteful situation. There are far better ways to make money.
Additional disclosure: I have no positions in the banks mentioned.