Many financial institutions face legacy issues from precarious loans and mortgages. In particular, reinsurance companies and mortgage banks seem to be endlessly battling over who will take losses. Since valuing these companies is somewhere between challenging and impossible, prudent investors may wish to avoid these companies all together. Speculators who want to bottom fish should be very picky about which stocks they select.
MBIA complaints about CS mortgages
MBIA Inc. (NYSE:MBI) sued Credit Suisse Group AG (ADR) (NYSE:CS) for selling faulty securities to investors and in turn exposing them to risk of losses. Credit Suisse is said to have packaged flawed mortgage contracts into bonds and the deal involves more than $1 billion. The underlying loan contracts were meant to be repurchased by the mortgage companies in question due to underwriting errors or early defaults but Credit Suisse knowingly sold them to investors around the time when the Great Recession hit the U.S. market. Six years later, guarantors and investors are still handling court cases in attempt to have banks compensate them for the losses made. Credit Suisse spokesperson Drew Benson defended the company while expressing hope that the court would rule out MBIA’s claims. According to Benson, “MBIA’s amended complaint is built on discredited testimony and fragments from a handful of e-mails that emerged after a review of millions of messages – they are intentionally taken out of context.”
Credit Suisse further indicated that some of the email evidence presented in court related to deals that it did not accept and which had nothing to do with the mortgage bonds. New York’s Attorney General Eric Schneiderman also took Credit Suisse to court over mortgage bond losses of about $11 billion and he believes the company should he held liable for the misappropriations. According to Schneiderman, “You talk about people selling tens of billions of dollars of securities over a period of years in which their due diligence process was essentially a sham.”
Credit Suisse has had to pay the Securities Exchange Commission about $120 million in settlement for allegations of keeping reimbursements from lenders though it did not admit or refute the findings. Credit Suisse is also facing lawsuits from investors like Deutsche Industriebank and bond insurers like Assured Guaranty and Ambac Assurance but it continues to be on the defensive. MBIA, on the other hand, has had to pay over $386 million in claims related to Credit Suisse and continues to collect evidence for its lawsuit. MBIA also alleges that Credit Suisse was careless in its dealings by continually securitizing loans from lenders who had been blacklisted, amongst other misappropriations. It is not clear how the case will be judged, but both sides continue to gather evidence.
Sunesis Capital founder Manal Mehta analyzed the effect of the suits and all the private information that is usually publicized under the guise of evidence. According to Mehta, “Damaging e-mails and other documents uncovered by lawsuits such as this will only intensify the public’s disdain for a system that is viewed as being riddled with fraud and self-dealing.”
Bank of America sells servicing rights from Countrywide loans
Bank of America Corp (NYSE: BAC) recently closed a deal that settles unresolved demands made by private investors and pays about $11.7 billion to resolve a dispute with Fannie Mae. The figure paid to Fannie Mae will include a cash payment of about $3.6 billion for compensation for overdue claims and money to repurchase residential loans. The lender is also expected to improve its relations with regulators and sell rights to service about $300 billion worth of mortgages in a bid to get the home lending business back on track. Scotia Capital analyst Kevin Choquette spoke on the importance of dealing with pending legal issues. According to Choquette, “Resolving legacy issues allows the bank to shift attention from non-revenue-generating activities to focusing on growing business.”