Credit Suisse Settles FHFA Dispute

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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).

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