Mark Palmer of BTIG Research issued an investors note yesterday afternoon highlighting the fact that it appears Credit Suisse Group AG (ADR) (NYSE:CS) is finally going to address its mortgage putback liabilities. On Thursday last week, the Swiss banking giant announced it was setting aside CHF339 million (US$378 million) to cover litigation costs relating to the sale of mortgage-backed securities.
This announcement could, of course, be read as ponying up a huge war chest to pay attorney’s fees for years of litigation, but most analysts see it as a sign the Credit Suisse Group AG (ADR) (NYSE:CS) has finally acknowledged the obvious and is going to settle with mortgage bond insurers MBIA Inc. (NYSE:MBI) and Assured Guaranty Ltd.(NYSE:AGO).
Credit Suisse was last holdout
Palmer points out that Credit Suisse Group AG (ADR) (NYSE:CS) was one of the last of the major banks holding out in settling with mortgage insurers regarding mortgage-putback claims. Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC) (Countrywide Financial) and others have all settled or in the process of negotiating settlements, but to date Credit Suisse has refused to even meet with representatives from the mortgage insurers to discuss the case.
Mortgage insurers perplelxed
MBIA Inc.(NYSE:MBI) and Assured Guaranty Ltd.(NYSE:AGO) have both said they are perplexed that CS had for years not even made provision for potential losses associated with mortgage-backed securities. They even expressed surprise that Credit Suisse’s auditors had not required that some funds be set aside. The bond insurers have also publicly commented they were very comfortable taking the case to trial.
The allegations against Credit Suisse Group AG (ADR) (NYSE:CS) are different than those against Countrywide Financial and most other major targets of mortgage-putback litigation. Countrywide and others were said to have violated the representations and warranties (R&Ws) in the mortgages it underwrote and securitized, whereas CS management allegedly selected specific mortgages it knew were going to default to include in a number of securitizations.
Assured Guaranty Ltd.(NYSE:AGO) CEO Dominic Frederico addressed the situation with Credit Suisse Group AG (ADR) (NYSE:CS) during AGO’s 3Q 2013 conference call. He mentioned that refiling its mortgage-putback and warranty lawsuit against Credit Suisse to include additional charges of fraud had not prompted a response from the tight-lipped Swiss bank. “Our phone has still not rung from our friends at Credit Suisse,” Frederico said, throwing in “if it was me” the refiled complaint “would get my attention.”
Frederica ended his comments on the CS situation with a clear warning. “We’re at Defcon 4, so we’re ready to fire” in the Credit Suisse case, but that people should “expect a couple of birthdays before we get it into a courtroom.”