Credit Suisse Settles FHFA Dispute - Analyst Blog
25 March 2014 - 2:00AM
Zacks
Reducing its litigation hassles to an extent, Zurich-based
Credit Suisse Group AG (CS) announced a settlement
with the Federal Housing Finance Agency (FHFA) – the conservator of
Government Sponsored Enterprises (GSEs) Freddie
Mac (FMCC) and Fannie Mae (FNMA). The
settlement is related to the fraudulent sale of mortgage backed
securities (MBS) to Freddie and Fannie.
Credit Suisse has to shell out a sum of $885 million for the
settlement of two lawsuits filed by the FHFA against the bank. The
settlement includes the resolution of all claims relating to
misrepresentation of loans underlying around $16.6 billion of
mortgage bonds sold by Credit Suisse to Freddie and Fannie between
2005 and 2007. Notably, the Swiss bank will pay $234 million to
Fannie and $651 million to Freddie.
As the settlement agreement has come up before Credit Suisse filing
its financial results for 2013, the company will adjust the
associated charge of 275 million Swiss francs ($312 million) with
the prior-year results. The bank will now report a net loss of 8
million francs for fourth-quarter 2013 and about 2.8 billion francs
for 2013. This compared unfavorably with previously reported profit
of 267 million francs for the fourth quarter and 3 billion francs
for the full year, respectively.
Credit Suisse is not the only major bank to be censured in the FHFA
lawsuit. The FHFA sued 18 international institutions for selling
faulty mortgages and securities to Fannie and Freddie in 2011.
After more than two years of filing lawsuits against 18 major
financial institutions, FHFA recovered approximately $10 billion
for taxpayers.
The financial institutions that have settled these charges include
JPMorgan Chase & Co. (JPM), General Electric
Company, Citigroup Inc., UBS AG, Deutsche Bank AG and Ally
Financial Inc. Of these, the biggest amount was recovered from
JPMorgan ($4.0 billion), followed by Deutsche Bank ($1.9 billion),
UBS ($885 million), Ally Financial ($475 million), Citigroup ($250
million) and General Electric ($6.3 million).
Additionally, Wells Fargo & Company, which was not part of the
above-mentioned litigation, agreed to settle similar charges for
$335.2 million in Nov 2013. Wells Fargo was able to evade the
lawsuit as its lawyers were already in negotiation with the FHFA
regarding a settlement.
Legal issues seem endless for Credit Suisse. To add to its woes, it
is likely that the Swiss bank will be sued by the U.S. Senate
committee for facilitating tax evasion by American clients.
Recently, the Senate committee alleged that Credit Suisse offered
banking services at the Zurich airport to customers’ accounts that
were hidden from the Internal Revenue Service (IRS). The bank also
resorted to carrying clients in a special elevator and fixing
appointments in locations outside its operating areas. We believe
that the U.S. Senate’s decision to crack the whip on Swiss banks
like Credit Suisse will be a step towards reducing the huge losses
incurred by the U.S. Treasury due to offshore tax evasion by
Americans.
This issue comes after the Swiss bank reached a settlement with the
SEC worth $196 million and accepted the charges related to
providing unregistered cross-border securities services to clients
in the U.S.
Such settlements by banks demonstrate their aim to resolve all
legal issues, thereby reducing costs over the upcoming period.
Moreover, such settlements are anticipated to aid in the further
revival of the economy. Alongside, these strategic decisions are
expected to bode well for banks and help gain investors’
confidence.
Though the bank is settling such litigation issues, stringent norms
and a sluggishly recovering economy will pose challenges to Credit
Suisse’s profitability going forward. At present, Credit Suisse has
a Zacks Rank #4 (Sell).
CREDIT SUISSE (CS): Free Stock Analysis Report
FREDDIE MAC (FMCC): Get Free Report
FANNIE MAE (FNMA): Get Free Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
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