Credit Suisse’s $885 Million Mortgage Settlement With FHFA Drags Q4 Results Into The Red

March 24th, 2014 by Trefis Team
2.50
Trefis
CS: Credit Suisse logo
CS
Credit Suisse

Credit Suisse (NYSE:CS) now has one less problem to deal with, after the Swiss bank put to rest its biggest mortgage-related litigation late last week. [1] The global banking accepted a bill of $885 million to settle all its mortgage-related grudges with the Federal Housing Finance Agency (FHFA) for misleading Fannie Mae and Freddie Mac about the quality of mortgage-backed securities they bought from the bank prior to the economic downturn of 2008. Credit Suisse sold the two government-backed enterprises $16.6 billion worth of residential mortgage-backed securities between 2005 and 2007, a bulk of which lost money during the downturn.

The settlement impacts Credit Suisse’s reported results for the fourth quarter as well as full-year 2013, as it implies an after-tax charge of CHF 275 million (~$310 million). This means that the bank swung from a profit of CHF 267 million for Q4 2013 to a loss of CHF 8 million for the period, although its results for the current quarter (Q1 2014) will remain unaffected. The settlement is, no doubt, good news for the Swiss bank, which is currently under considerable fire for its role in helping U.S. citizens evade taxes.

Relevant Articles
  1. What To Expect From Credit Suisse Stock?
  2. What To Expect From Credit Suisse Stock?
  3. Where Is Credit Suisse Stock Headed?
  4. Credit Suisse Stock Missed The Street Expectations In Q3, What To Expect?
  5. Is Credit Suisse Stock Attractive At The Current Levels?
  6. Credit Suisse Stock Lost 21% Last Week, What’s Next?

The settlement does not materially impact our $33 price estimate for Credit Suisse’s stock, which is about 5% ahead of its current market price.

See our complete analysis of Credit Suisse here

In 2011, the FHFA launched a legal battle against some of the world’s biggest financial institutions in a bid to make them pay for the billions in losses they inflicted on mortgage enterprises Fannie Mae and Freddie Mac, by downplaying the underlying risks involved in scores of mortgage-backed securities they originated. The lawsuits – 18 in all – sought recourse for securities worth more than $200 billion.

Since then, the FHFA has reached settlements totaling $9.8 billion with nine firms including Credit Suisse – the others being JPMorganChase (NYSE:JPM), Citigroup (NYSE:C), Deutsche Bank (NYSE:DB), Morgan Stanley (NYSE:MS), UBS (NYSE:UBS), Societe Generale, Ally Financial and GE Capital. [2] The financial regulator also entered into a separate agreement with Wells Fargo (NYSE:WFC) over mortgage-related lawsuits last October despite not naming the mortgage lending giant in any lawsuit. [3]

The latest settlement with Credit Suisse will see the Swiss bank shell out $234 million to Fannie Mae and $651 million to Freddie Mac, to cover the losses they incurred on the wrongly sold mortgage securities. [4] As the bank did not have sufficient reserves set aside to cover this settlement, there will be a CHF 275 million (~$310 million) increase in expenses for the bank’s investment banking division for 2013 – something that marginally lowers 2013 operating margins for the division in the chart below.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis

Notes:
  1. Credit Suisse Announces Settlement of FHFA Litigation Relating to Mortgage-backed Securities Purchased by Fannie Mae and Freddie Mac between 2005 and 2007, Credit Suisse Press Releases, Mar 21 2014 [↩]
  2. Credit Suisse to pay $885 million in FHFA mortgage fraud case, Reuters, Mar 21, 2014 [↩]
  3. FHFA Recovers Nearly $8 Billion for Taxpayersin 2013 Through Settlements, FHFA Press Releases, Jan 2 2014 [↩]
  4. FHFA Announces $885 Million Settlement With Credit Suisse, FHFA Press Releases, Mar 24 2014 [↩]