Southern California Real Estate Bubble Crash Blog

This morning, Bloomberg tells us that Credit Suisse is being sued by buyers of subprime loans packaged as bonds. This is the next step in our evolution of the credit crunch. With the housing bubble still chugging away on the fumes of credit, the only thing left is to clamp off the funding entirely and kill the beast off through starvation.

The suit, filed in Florida by Bankers Life Insurance Co., is “one of three to five in the pipeline” involving securitizations by Credit Suisse, Switzerland’s second-largest bank, said Dale Ledbetter of Ledbetter & Associates P.A., one of two law firms representing the Bankers Financial Corp. unit.

“We suspect that once people understand what occurred here, there’s going to be a lot more,” Ledbetter said. A total of $302.6 million of bonds were originally issued in the deal.

I concur. Once people understand the implications, the flood of lawsuits will make even the security packagers wary to get involved. Nothing like a little risk in the system to flush out the bad blood.

What are the charges?

Credit Suisse units caused Bankers Life to lose money by overstating how much of losses after foreclosures on the loans insurance would cover; accepting “shoddy, inferior” loans; failing to buy back fraudulent ones; and covering up delinquencies, according to a complaint filed April 23 in Tampa. Payments were being advanced on borrowers’ behalf to “maintain the illusion” defaults weren’t occurring, Bankers Life claims.

Whoah. If true, noone will touch a Credit Suisse bank with a 10 foot pole. Those are some heavy accusations of outright fraud for a company whose livelihood is based on trust in their products.

The natural question asked would be… but Chuck, haven’t you been telling us all along that many of these securities are sold with default insurance when they are packaged? I mean, insurance companies are willing to accept lower returns as long as it is guaranteed, after all state insurance commissions won’t allow risky investments, right?

Good point, readers, except in this case, the insurer denied the claim. Didn’t think that could happen? Think again:

Triad, which provided both loan and pool insurance, failed to pay claims for default loans because it claimed they were fraudulent, without responding to Bankers Life’s requests for more information, the complaint said. Bank of New York failed to report when the claims weren’t being paid, Bankers Life says.

The insurer also claims Credit Suisse misrepresented that the loans were from “highly credible financial institutions” when they were made by smaller lenders; put adjustable-rate loans in pools that borrowers couldn’t later afford; and didn’t pursue foreclosures and insurance claims appropriately.

The next question is the best… will we see any cross-defaults when more of these surface? If so, hold on for the financial ride of a lifetime… it’s gonna be a doozy.