This New York Attorney General lawsuit against Credit Suisse is mostly the same as all the other lawsuits by all the other regulators against all the other banks. Here is a summary, based on the complaint:
- Some mortgage originators made crappy loans, because that was the style at the time.
- They sold them to Credit Suisse to bundle into MBS.
- Credit Suisse’s due diligence was of the form “hi, is this a loan? APPROVED,” in part because they sucked or whatever but mostly because there were competitive pressures where if they didn’t buy the loan someone else would1 and if you’re the guy whose job is to buy loans and you buy zero loans and say “well the thing is, they were all bad loans,” you are fired, so your incentives are not socially optimal.
- The offering documents for the MBS said things like “ooh our due diligence is so good, so good,” though no specific falsifiable claims are made about the quality of the mortgages or the diligence, and every claim of the form “we only approve good mortgages” is followed immediately by “unless we decide to approve bad ones.”2
- Dumb emails were sent because, you know how mortgage traders are with their email.3
- The MBS lost value for an assortment of reasons, some due to Credit Suisse’s bad diligence, some not.
- That all certainly seems fraudy, so New York is suing CS “for making fraudulent misrepresentations and omissions to promote the sale of residential mortgage-backed securities (RMBS) to investors.”
- Credit Suisse has a nontrivial argument that it didn’t break the letter of the law, fraudulent-misrepresentation-wise, since it never specifically said “these loans are good” but only things of the form “we have pondered the goodness of these loans in our heart, except when we haven’t.”
- But its loans, and its diligence process, and its emails, are all sufficiently dumb that there’ll probably be a settlement with a high-8/low-9-figure dollar amount and no admission of guilt.
Whatever, boring, the end. But then I came to this: Read more »