Credit Suisse Group settled a three-year-old lawsuit by Assured Guaranty Ltd. accusing the bank of misrepresenting the quality of loans in mortgage-backed securities it insured.
Assured Guaranty reached an agreement to resolve the dispute, according to a statement posted on its website that didn't disclose the terms. The bond insurer sued Zurich-based Credit Suisse in New York State Supreme Court in October 2011, saying the bank’s misrepresentations exposed it to hundreds of millions of dollars in claim payments.
The news is a "solid positive" for Assured Guaranty as Credit Suisse was its largest counterpart in so-called representation and warranty cases that hadn't settled with the bond insurer, Mark Palmer, an analyst with BTIG LLC in New York, said in a note to investors.
There had also been a "widely held expectation" that Credit Suisse would go to trial with bond insurers next year or wait until a trial was imminent before starting settlement talks, Palmer said.
Credit Suisse still faces similar claims from MBIA Inc., which accused the bank in 2009 of making fraudulent misrepresentations in a $1 billion bond deal, as well as lawsuits by the states of New Jersey and New York.
"Insofar as Credit Suisse has been the most conspicuous holdout from entering into representation and warranty settlements among the banks — to the point that it wouldn't even hold discussions on potential settlements — we believe AGO’s deal bodes well for MBI as well as for the bank’s other counterparties," Palmer said in an email, referring to the companies by their ticker symbols.
Drew Benson, a spokesman for Credit Suisse, declined to comment on the agreement.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.
New York State Supreme Court Justice Shirley Werner Kornreich in 2012 dismissed Assured Guaranty's demand for a type of damages that would allow for a larger recovery. The judge said the insurer's remedies for a breach of the pooling and servicing agreements governing the trusts that issued the securities do not include such damages.
An appeals panel in Manhattan reinstated the claims in February, saying Assured Guaranty can recover rescissory and consequential damages because it didn't sign the pooling and servicing agreements. As a result, Assured Guaranty might have been able to collect more from Credit Suisse if it prevailed at trial.
The bond insurer said in its suit that it insured about $567 million worth of mortgage-backed securities sponsored by Credit Suisse's DLJ Mortgage Capital unit and sold to investors in six offerings between 2006 and 2007.
Assured Guaranty said it undertook its own review of the securities after members of Clayton Holdings LLC, a provider of third-party due diligence services, told a commission investigating the financial crisis in September 2010 that many banks weren’t conducting proper checks on loans they securitized.
The bond insurer said it identified about 93% of $1.9 billion in the Credit Suisse securitizations that violated representations and warranties.
Assured Guaranty said in a presentation to investors this month that it expects to recover about $294 million in the future from representation and warranty cases not covered by existing agreements. The amount of the Credit Suisse settlement may be higher, Palmer said.
