The Association of Financial Guaranty Insurers doesn't exactly mince words. In a newly-released letter to Credit Suisse CEO Brady Dougan, the executive director of the bond insurance group, Teresa Casey, accused the bank of "materially" understating its obligation to repurchase deficient underlying mortgage loans securitized in Credit Suisse MBS offerings. "We estimate that Credit Suisse's obligations in respect of the securities insured by AFGI members aggregate billions of dollars," the AFGI letter said. "We seek to understand the reasons why the full magnitude of the liability has not yet been recognized by Credit Suisse."
The letter is further evidence of the looming issue of bank liability for breaches of the representations and warranties on underlying mortgage loans. You'll recall that the Securities and Exchange Commission sent MBS players a letter last October, warning them about disclosing reps and warranties liability and reserves; the Public Company Accounting Oversight Board also put out an MBS alert for auditors in December 2010.
The bond insurers that comprise the membership of AFGI have been in the vanguard on MBS reps and warranties claims; both MBIA and Ambac have been litigating against Credit Suisse in New York state supreme court for years. The AFGI letter cites that litigation, as well as more than a dozen other MBS cases against Credit Suisse, in asserting that "well more than half" of the mortgage loans backing Credit Suisse MBS "were ineligible for securitization."
The letter includes a not-so-veiled threat, in a not-so-veiled attempt to force settlement discussions: "Some of our industry members have pursued a laborious loan-by-loan representation and warranty put-back process, with Credit Suisse refusing to repurchase any loans whatsoever," the bond insurers said. "The failure by Credit Suisse to make any effort to honor its obligations can only be interpreted as bad faith.We write in the hope of resolving Credit Suisse's contractual and legal obligations in a manner that will case the least disruption to Credit Suisse while preserving our rights in advance of Credit Suisse's year-end audit that we expect will put increasing pressure on accounting and disclosure obligations surrounding this liability."
Did you catch that, Credit Suisse? The bond insurers are going to be scrutinizing your regulatory filings if you don't come to the table. (For the record, in Credit Suisse's most recent filing, the bank reported $1.6 billion in outstanding mortgage repurchase claims in the second quarter of 2011, up from $504 million in the first quarter.) "Our industry seeks acknowledgment and resolution of the massive debts owed by the major RMBS sponsors due to their breaches of representations and warranties of the quality of the mortgage loans underlying their RMBS," said AFGI executive director Casey, in an e-mail statement to me.
Credit Suisse isn't the first bank to get a reps and warranties letter from the bond insurance group. In September 2010, Bank of America CEO Brian Moynihan received a similar AFGI letter, claiming BofA's put-back liability just to bond insurers was $10 to $20 billion. Within months, Bank of America reached a $2 billion reps and warranties settlement with Assured Guaranty, a leading member of the bond insurance group. (BofA and Countrywide are still in litigation with other monolines.)
It's important to note, though, that Credit Suisse isn't BofA (much as BofA would undoubtedly like company in its MBS misery-fest). Credit Suisse is known for holding out even when other banks settle, as in the Enron securities class action. The bank has taken a hard line on MBS put-back claims, arguing that it has no obligation to buy back valid underlying mortgage loans-and that the bond insurers' repurchase claims are often inflated. (In an August conference call with analysts, Assured said it had submitted more than $1.1 billion in repurchase claims to Credit Suisse, and the bank hadn't agreed to buy back a single loan.)
"AFGI's letter adds nothing new," the bank said in an e-mail statement to me. "It simply repeats the meritless accusations made in court filings by AFGI members who wish to evade responsibility for their own investment decisions. Credit Suisse will continue to fight these lawsuits." It's a safe bet that Credit Suisse won't be the last bank to receive an AFGI letter bomb. In that August earnings call, Assured execs said that after the insurer reached a settlement with BofA, "we reallocated resources towards the other counterparties who provide us with rep and warranty protection, specifically Credit Suisse, UBS, JP Morgan Chase, Deutsche Bank, and Flagstar." If you're looking for a bank target list, that's probably a pretty good one.
(Reporting by Alison Frankel)
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