At a press conference Tuesday afternoon New York State Attorney General Eric T. Schneiderman announced he had filed a second complaint against a financial institution since the creation of the federal Residential Mortgage-Backed Securities Working Group. The complaint was filed against Credit Suisse Securities (USA) LLC and its affiliates for making fraudulent misrepresentations and omissions to promote the sale of residential mortgage-backed securities (RMBS) to investors.
According to the complaint, Credit Suisse led its investors to believe that the quality of the loans in its mortgage-backed securities had been carefully evaluated and would be continuously monitored. In fact, as in the case of other RMBS market participants, Credit Suisse did neither. Instead, it systematically failed to adequately evaluate the loans, ignored defects that its limited review did uncover, and kept its investors in the dark about the inadequacy of its review procedures and defects in the loans. The loans in Credit Suisse's mortgage-backed securities included many that had been made to borrowers who were unable to repay the loans, were very likely to default, and ultimately did default in large numbers. Schneiderman said the bank had consistently put its relationships with lenders before its obligations to investors.
During
the 2006-2007 period covered by the complaint Credit Suisse packaged $93.8 billion
in loans which have now suffered losses of approximately $11.2 billion. Schneiderman said the Credit Suisse
investigation started last June and has involved dozens of witnesses and over a
million pages of documents. The complaint
seeks investor damages to recoup these losses, as well as other equitable
relief.
The charges were brought under New York State's Martin Act. The New York Office had earlier filed a
similar suit against JPMorgan Chase.
The Attorney General said the suit was different from earlier actions brought by individuals against the bank in that it was a platform case. As such it did not involve one or more individual offenses but rather the entire way in which Credit Suisse did business during the time frame.
A reporter questioned the Attorney General's statement that Credit Suisse had favored originators. Schneiderman said that internal emails and information from third party due diligence companies confirm an internal battle at the bank with the conduit department pushing the bad loans and overriding complaints from other divisions of the bank. "It was a sellers' market," he said, "banks were bidding against each other and wanted to keep their relationships with the originations. Some of them," he added, "were among the worse in the country.
He told reporters that the fact that no individual or criminal charges have yet been brought by the working group does not foreclose the possibility they may be. While the statute of limitations is an issue, there are a variety of ways to extend them including a tolling agreement with some of the banks.