Credit Suisse to pay US$5.3 billion in US mortgage accord

Credit Suisse Group has agreed to pay US$5.28 billion (S$7.64 billion) to resolve a United States investigation into its business in mortgage-backed securities.
Credit Suisse Group has agreed to pay US$5.28 billion (S$7.64 billion) to resolve a United States investigation into its business in mortgage-backed securities. PHOTO: EPA

ZURICH (BLOOMBERG) - Credit Suisse Group agreed to pay US$5.28 billion (S$7.64 billion) to resolve a United States investigation into its business in mortgage-backed securities as officials work through a backlog of crisis-era bank cases.

The Swiss lender will pay a US$2.48 billion civil penalty and US$2.8 billion in relief for home owners and communities hit by the collapse in home prices, it said in a statement Friday. Credit Suisse will take a pretax charge of about US$2 billion in addition to its existing reserves during the fourth quarter.

The announcement follows a US$7.2 billion settlement in a related case by Deutsche Bank, which was announced earlier on Friday. The Justice Department on Thursday sued Barclays for fraud over its sale of mortgage bonds after the bank balked at paying the amount the government sought in negotiations. The lawsuit announced on Thursday is rare for big banks, which typically settle with the government rather than risk drawn-out litigation and a possible trial.

"With this settlement, the largest remaining major uncertainty is now eliminated" for Credit Suisse, said Peter Casanova, an analyst at Kepler Cheuvreux who has a buy rating on the stock. "This is good news".

The Obama administration is pressing to wrap up investigations of Wall Street firms for creating and selling the subprime mortgage bonds that fueled the 2008 financial crisis. Before the two deals on Friday, authorities had already extracted more than US$46 billion in fines from six US financial institutions over their dealings in mortgage-backed securities.

Bank of America, which had the largest such settlement, agreed to pay US$16.7 billion over bonds that were worth four times those of Deutsche Bank.

Deutsche Bank will pay a US$3.1 billion civil penalty and provide US$4.1 billion in relief to consumers under a settlement in principle with U.S. authorities. The fine will cut pretax profit by US$1.2 billion this quarter as the firm taps existing legal reserves to blunt much of that cost. The deal is far below the Justice Department's initial request of US$14 billion, which had spooked stock and bond holders earlier this year.

Deutsche Bank's deal "might help in the short run because a major source of uncertainty has been cleared," said Michael Huenseler, an investor at Assenagon Asset Management, which owns shares in the bank. "But it's still higher than many have expected and it will pose a long-term drag on profitability."

Deutsche Bank shares have fallen 21 per cent this year, and Credit Suisse is down 29 per cent.

Credit Suisse said it would pay the consumer relief over five years following the settlement. The bank had set aside about 2.1 billion francs (US$2.1 billion) in general litigation provisions by the end of the third quarter.

Chief executive Tidjane Thiam tapped shareholders for 6 billion Swiss francs in late 2015 while shifting the company's focus away from capital-heavy investment banking toward wealth management. Mr Thiam has updated investors twice on his plan, which includes a partial initial public offering of its Swiss unit in late 2017. In December, the former insurance executive pledged more cost cuts and lowered targets for the international wealth management and its Asian unit.