Credit Suisse Group
(
CS
) seems to be in sticky waters with litigation issues arising from
the sale of mortgage backed securities (MBS). The U.S. regulator
for credit unions has sued its unit, Credit Suisse Securities
(USA), for misrepresentation in the underwriting and sale of MBS
worth over $715 million to three credit unions -- U.S. Central
Federal Credit Union, Western Corporate Federal Credit Union, and
Southwest Corporate Federal Credit Union, which collapsed later.
The Allegation
Credit Suisse has been accused by the U.S. regulator for credit
unions -- National Credit Union Administration (NCUA) of issuing
misleading statements and omitting important details from the
offering documents of the MBS in question.
This led to obscurity regarding the risks associated with the MBS
when they were sold. The credit unions perceived them to be less
risky when in fact, the securities bore substantial risk. Moreover,
it has been alleged that Credit Suisse has been ignoring the
underwriting guidelines specified in the offering documents.
As a result, when these MBS lost their value for defaults in the
underlying assets, the value of investments of the credit unions in
these MBS plummeted. Subsequently, the three credit unions
collapsed, leading to a crisis in the credit union industry.
Others in the Same Pool
Similar suits have been filed in the past by NCUA against other big
shots like
JPMorgan Chase & Co.
(
JPM
),
Royal Bank of Scotland Group Plc.
(
RBS
) and
Goldman Sachs Group Inc.
(
GS
). Moreover, last year, NCUA reached settlements with
Deutsche Bank AG
(
DB
) and
Citigroup Inc.
(
C
) worth over $165 million.
Our Take
We believe that such suits would lead to mounting litigation risks
for Credit Suisse, which pose a menace for both the company's image
as well as its financials. If found guilty, it is liable to be
fined by the authorities.
Often, the company itself opts for settlements in order to
reduce litigation hassles. Such a step on behalf of the company
exhausts its financials, which could instead have been invested in
growth initiatives. We remain skeptical and wait to see what the
future holds.
On the other hand, recoveries by NCUA would result in lowering of
losses that arose from the failure of the credit unions.
The shares of Credit Suisse retain a Zacks #3 Rank, which
translates into a short-term Hold rating.
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