U.S. Bancorp Files $720 Million Mortgage-Related Lawsuit Against Credit Suisse Unit

by Trefis Team
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Earlier this month, Credit Suisse’s (NYSE:CS) DLJ Mortgage Capital unit saw a lawsuit filed against it by U.S. Bancorp (NYSE:USB) acting as trustee on behalf of various investors in a mortgage bond offering. [1] U.S. Bancorp seeks to force DLJ to buyback the underlying loans to make good $720 million in losses which investors suffered from securities sold in 2006. The lawsuit is similar to the long list of existing mortgage-related lawsuits currently being heard out in courts across the country, alleging that the issuing bank misled investors about the actual risks involved in the loan portfolio underlying the security being sold. And, as we pointed out in our recent article Appeals Court Revives Mortgage Class Action Suit Against Goldman, many more such lawsuits can be expected against global banks in the near future.

We maintain a price estimate of $26 for Credit Suisse’s stock, which is about 25% ahead of its current market price. Recent profitability issues with the bank’s cornerstone wealth management business, stringent capital requirements imposed by Swiss regulators and the ongoing reorganization the bank is undergoing are largely responsible for the price difference.

See our complete analysis of Credit Suisse | U.S. Bancorp

Things don’t seem to be getting any easier for the second largest Swiss bank, which continues to face hurdles in its road to recovery since the economic recession of 2008. The latest hurdle comes in the form of a $720 million lawsuit against its New York based subsidiary DLJ Mortgage Capital by U.S. Bancorp.

U.S. Bancorp assumed the role of trustee for the issuance of the Home Equity Mortgage Trust Series 2006 mortgage-linked bonds by DLJ. It filed the lawsuit on behalf of investors who burnt their fingers when the underlying loans started going bad once the housing bubble burst in 2008.

This is not the first time Credit Suisse’s DLJ Mortgage Capital unit has come under fire for faulty pre-2008 security offerings. Late last year, another multi-million lawsuit filed against the unit by Ambac Assurance Corp was reinstated when Ambac proved that it had indeed been misled about the repaying capacity of individuals whose loans it had insured, and consequently suffered heavy losses on. [2]

If Credit Suisse is found guilty in the newly filed lawsuit, it would mean a significant one-time settlement of up to $720 million which would further drag down the profitability of its corporate banking business. We capture such expenses in our analysis of Credit Suisse through margins for its corporate and institutional clients banking unit. You can see how the payout will impact its estimated value by making changes to the chart above.

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Notes:
  1. Credit Suisse Unit Sued for $720 Million Over Mortgages, Bloomberg Businessweek, Sept 1 2012 []
  2. Judge reinstates Ambac fraud claim against Credit Suisse, Reuters, Oct 141 2011 []
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