Credit Suisse Overrode Due Diligence Standards And Accepted Questionable Loans: Court Filings

Top officials at Credit Suisse (NYSE:CS) instructed subordinates to override due diligence standards and accept questionable loans, which were later bundled into mortgage investments, news reports said citing documents filed in court by the European bank.

The documents, which were made public by a Massachusetts state court on Friday, showed that the bank's internal audits pointed toward a consistent fall in the quality loans made by the bank's mortgage unit since 2004. Between 2005 and 2007, when the housing sector was booming, Credit Suisse reportedly bundled $203 billion worth of mortgages into securities and sold it to private investors. The filings also show that the mortgage unit could open Credit Suisse “to a significant and unacceptable level of operational, financial or reputational risks,” according to the New York Times.

“Our diligence process is such a joke,” a Credit Suisse executive had written in an email in 2007, according to the Times. A borrower, who was reportedly a gas-station attendant living with his mother, stated that his annual earnings was $93,000 while a former sales clerk at Nordstrom claimed to be earning $110,000 annually, the Times reported, citing court filings.

The Federal Housing Finance Agency, or FHFA, had filed cases against the Swiss bank in 2012 asking for damages related to $14 billion in mortgage securities that Credit Suisse sold to government-sponsored mortgage giants, Fannie Mae and Freddie Mac.

New York Attorney General Eric T. Schneiderman also sued the bank in 2012 demanding $11.2 billion in losses for investors who bought mortgage securities from the bank in 2006 and 2007. However, Credit Suisse has asked the court to dismiss the case on the grounds that the lawsuit comes many years after the original mortgage transactions took place.

In February, four of Credit Suisse’s top executives testified before Congress about their involvement in helping wealthy Americans evade taxes by taking earnings offshore. Brady W. Dougan, Credit Suisse's CEO, denied knowledge of such cases until the bank began an internal probe and accepted that a small group of private bankers were assisting in the process of tax evasion.

"The evidence showed that some Swiss-based private bankers went to great lengths to disguise their bad conduct from Credit Suisse executive management," Dougan reportedly told Congress in February, reiterating that only a handful of executives were involved, according to Reuters.

Drew Benson, a Credit Suisse spokesman, reportedly said in a statement: “We are confident that the totality of the evidence will continue to show that our due diligence practices were robust and reliable, and we look forward to presenting our defense in court,” the Times reported.

The company provided the names of 238 employees and clients to authorities, who have criticized the company of helping about 22,000 Americans hide more than $10 billion in taxes from the Internal Revenue Service.

“After the UBS scandal broke, Credit Suisse began a series of Exit Projects, and took five years to close Swiss accounts held by 18,900 U.S. clients, leaving just 3,500 U.S. customers still with the bank. Credit Suisse also conducted an internal investigation, but produced no report and identified no leadership failures that allowed the bank to become involved in tax evasion,” the congressional subcommittee that is investigating the matter said in a statement last month.