Credit Suisse Faces Mortgage-Backed Securities Probe

October 5th, 2012 by Trefis Team
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The Residential Mortgage-Backed Securities Working Group formed by President Obama in January is in a hurry to bring to justice all the banks that played a role in fueling the housing bubble of 2008 through their faulty mortgage practices. The state-federal action group is reportedly investigating Credit Suisse (NYSE:CS) over its mortgage securitization practices in the years leading to the economic crisis. [1]

News of this ongoing investigation comes within a week of the state-federal action group filing a lawsuit against JPMorgan Chase (NYSE:JPM) over mortgage-backed securities worth tens of billions originated and sold by its Bear Stearns unit during 2003-2007. The investigation is clearly one of many that the group is conducting – or intends to conduct over the coming months – and it would not be a surprise if similar investigations or lawsuits are announced against the likes of Bank of America (NYSE:BAC), Citigroup (NYSE:C) or Goldman Sachs (NYSE:GS) in the near future.

We maintain a price estimate of $26 for Credit Suisse’s stock, which is about 20% above the current market price. We attribute the significant difference in price largely to growing concerns about the European debt situation. The Swiss bank’s flagging profitability in recent quarters are also responsible for the currently depressed share price.

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See our complete analysis of Credit Suisse here

Credit Suisse is reportedly being probed by the Justice Department and New York Attorney General Eric Schneiderman for securitizing faulty mortgages worth billions and then misleading investors into buying them. Credit Suisse issued a notable amount of mortgage bonds prior to 2008, with estimates pegging the face value of such securities at almost $130 billion from 2004 to 2008. [1]

The second largest Swiss bank already faces numerous lawsuits related to its mortgage lending and securitization practices. Notably, the bank was among the 17 financial giants that were sued by the Federal Housing Finance Agency (FHFA) for mis-selling loans to Fannie Mae and Freddie Mac. [2] The housing regulator is pushing Credit Suisse for refund of almost $16.1 billion related to the loans it sold to the government-sponsored entities.

The ongoing investigation is subsequently expected to result in a lawsuit against Credit Suisse – a conclusion that draws from Schneiderman’s recent comment that the lawsuit against JPMorgan would act as a “template for future actions” (see Politically Charged JPMorgan Lawsuit A “Template” For More Headache To Follow). This would only mean another multi-million dollar settlement for the Swiss bank over the coming years, which will drag down its already suffering investment banking margins lower.

You can see how a reduction in Credit Suisse’s investment banking margins affects our price estimate for the bank’s stock by making changes to the chart above.

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Notes:
  1. Exclusive: Credit Suisse probed over mortgages – sources, Reuters, Oct 4 2012 [↩] [↩]
  2. FHFA Lawsuits, FHFA Website [↩]