Credit Suisse resolves US mortgage probe for $5.3bn

Bloomberg

Credit Suisse Group AG and the Justice Department completed a $5.3 billion agreement to settle a US investigation into the bank’s sales of toxic mortgage debt before the financial crisis. Credit Suisse will pay a $2.5 billion civil penalty and $2.8 billion in consumer relief, to be paid over five years after the settlement, the Justice Department said on Wednesday, in line with the bank’s Dec. 23 announcement of a preliminary
resolution.
As part of the settlement, the bank conceded that it sold investments containing loans that it knew were likely to fail. The civil settlement doesn’t preclude the government from seeking criminal charges against the company or individual executives. The deal is the latest in a flurry of action from the departing Obama administration, wrapping up investigations of Wall Street firms for creating and selling the subprime mortgage bonds that fueled the 2008 financial crisis.
The Justice Department announced a $7.2 billion settlement with Deutsche Bank AG on Tuesday and a $864 million deal with Moody’s Corp. last week, and sued Barclays Plc in December after the two sides failed to reach a deal. In all, the government has extracted some $60 billion in penalties from nine US financial institutions over how the bonds were packaged, rated and marketed. “Credit Suisse made false and irresponsible representations about residential mortgage-backed securities, which resulted in the loss of billions of dollars of wealth, and took a painful toll on the lives of ordinary Americans,” Attorney General Loretta E. Lynch said in a written statement.
Pretax Charge
Credit Suisse said it plans to take a pretax charge of about $2 billion, on top of existing reserves, to account for the settlement.
Chief Executive Officer Tidjane Thiam, who is shifting the bank’s focus away from capital-heavy investment banking toward wealth management, already tapped shareholders for 6 billion Swiss francs in late 2015 and is planning a partial public offering of the Swiss unit late this year to shore up capital.
Harris Associates, one of the biggest investors in Credit Suisse, has said the settlement terms are favorable enough that the bank wouldn’t even need to sell the Swiss unit, though there may be other reasons for pursuing a partial initial public
offering.

‘Complete Garbage’
Credit Suisse acknowledged that it had misrepresented the quality of some mortgage securities. For example, it approved the purchase of $700 million worth of loans originated by Resource Bank.
Credit Suisse traders referred to the loans as “complete crap” and “utter complete garbage.” Even so, the bank gave Resource Bank financial incentives in exchange for a stream of loans, and it securitized those loans for sale to investors, according to a statement of facts released by the Justice Department. Credit Suisse also admitted that third-party vendors conducting quality control on some loans that it was acquiring found that 25 percent of the loans under review “were designated ineligible because of credit, compliance and/or property defects,” the statement of facts said.
The Zurich-based bank agreed to hire a monitor to oversee its remediation efforts. The monitor named by the Justice Department, Neil Barofsky of Jenner & Block LLP, is already in place at the bank, having been appointed by New York’s Department of Financial Services in 2014 as part of a settlement related to allegations of tax evasion.

Pledge of Cooperation
Credit Suisse promised to cooperate with any ongoing probes. It remains under investigation by the Justice Department over its handling of US clients in Israel. The bank is also a target of several private antitrust cases in the US, including class actions related to foreign-exchange rates and interest-rate swaps. The Justice Department fined Credit Suisse $2.6 billion in 2014 for helping Americans dodge taxes in Switzerland.
In all, Credit Suisse has been slapped with more than $11 billion of fines and legal settlements since the start of 2008, the most of any European bank except Deutsche Bank, according to calculations by Bloomberg. That includes the civil penalty portion of the preliminary settlement with the Justice Department announced last month.

The company had 1.6 billion Swiss francs of legal reserves at the end of 2015 and disclosed more than 500 million Swiss francs of additional provisions in 2016, before announcing the settlement in December.
Thiam has updated investors twice on his turnaournd plan, which includes thousands of job cuts in New York and London. In December, the onetime insurance executive pledged more cost cuts and lowered targets for the international wealth management and its Asian unit.
Other European banks with pending investigations over toxic debt include HSBC Holdings Plc, UBS Group AG and Royal Bank of Scotland Group Plc.