(Bloomberg) -- Credit Suisse Group AG and the Justice Department completed a $5.3 billion agreement to settle a U.S. investigation into the bank’s sales of toxic mortgage debt before the financial crisis.
Credit Suisse will pay a $2.5 billion civil penalty and $2.8 billion in consumer relief, to be paid over five years after the settlement, the Justice Department said on Wednesday, in line with the bank’s Dec. 23 announcement of a preliminary resolution.
As part of the settlement, the bank conceded that it sold investments containing loans that it knew were likely to fail. The civil settlement doesn’t preclude the government from seeking criminal charges against the company or individual executives.
A Sudden Burst of Activity on Mortgage Litigation: QuickTake Q&A
The departing 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 Credit Suisse deal and a $7.2 billion agreement with Deutsche Bank AG announced on Tuesday, authorities had extracted more than $46 billion from six U.S. financial institutions over their dealings in mortgage-backed securities.
“Credit Suisse made false and irresponsible representations about residential mortgage-backed securities, which resulted in the loss of billions of dollars of wealth, and took a painful toll on the lives of ordinary Americans,” Attorney General Loretta E. Lynch said in a written statement.
Credit Suisse has said it plans to take a pretax charge of about $2 billion in the fourth quarter, on top of existing reserves, to account for the settlement.
Chief Executive Officer Tidjane Thiam, who is shifting the bank’s focus away from capital-heavy investment banking toward wealth management, already tapped shareholders for 6 billion Swiss francs in late 2015 and is planning a partial public offering of the Swiss unit late this year to shore up capital.
Harris Associates, one of the biggest investors in Credit Suisse, has said the settlement terms are favorable enough that the bank wouldn’t even need to sell the Swiss unit, though there may be other reasons for pursuing a partial initial public offering.
“It looks like it wasn’t such an egregious settlement,” David Herro, chief investment officer of Harris Associates, said in a Bloomberg TV interview on Jan. 6. “There doesn’t seem to be a lot more negative in the pipeline as far as settlements and penalties and fines.”
Credit Suisse acknowledged that it had misrepresented the quality of some mortgage securities. For example, it approved the purchase of $700 million worth of loans originated by Resource Bank. Credit Suisse traders referred to the loans as “complete crap” and “utter complete garbage.” Even so, the bank gave Resource Bank financial incentives in exchange for a stream of loans, and it securitized those loans for sale to investors, according to a statement of facts released by the Justice Department.
Credit Suisse also admitted that third-party vendors conducting quality control on some loans that it was acquiring found that 25 percent of the loans under review “were designated ineligible because of credit, compliance and/or property defects,” the statement of facts said.
The Zurich-based bank agreed to hire a monitor to oversee its remediation efforts. The monitor named by the Justice Department, Neil Barofsky of Jenner & Block LLP, is already in place at the bank, having been appointed by New York’s Department of Financial Services in 2014 as part of a settlement related to allegations of tax evasion.
Pledge of Cooperation
Credit Suisse promised to cooperate with any ongoing probes. It remains under investigation by the Justice Department over its handling of U.S. clients in Israel. The bank is also a target of several private antitrust cases in the U.S., including class actions related to foreign-exchange rates and interest-rate swaps. The Justice Department fined Credit Suisse $2.6 billion in 2014 for helping Americans dodge taxes in Switzerland.
In all, Credit Suisse has been slapped with more than $11 billion of fines and legal settlements since the start of 2008, the most of any European bank except Deutsche Bank, according to calculations by Bloomberg. That includes the civil penalty portion of the preliminary settlement with the Justice Department announced last month. The company had 1.6 billion Swiss francs of legal reserves at the end of 2015 and disclosed more than 500 million Swiss francs of additional provisions in 2016, before announcing the settlement in December.
Thiam has updated investors twice on his turnaournd plan, which includes thousands of job cuts in New York and London. In December, the onetime insurance executive pledged more cost cuts and lowered targets for the international wealth management and its Asian unit.
Among the other remaining targets of mortgage-related investigations is Barclays Plc, which balked at paying the amount sought by the government in settlement negotiations, leading the Justice Department to sue the bank last month. It’s rare for the U.S. to sue big banks, which typically negotiate a settlement with the government rather than risk drawn-out litigation and a possible trial. The breakdown in talks suggests that the bank is willing to take its chances with incoming enforcement officials in the Trump administration.
Other European banks with pending investigations over toxic debt include HSBC Holdings Plc, UBS Group AG and Royal Bank of Scotland Group Plc.
(Updates with details of pact starting in 10th paragraph.)
--With assistance from Nicholas Comfort and Greg Farrell To contact the reporters on this story: Jeffrey Vögeli in Zurich at email@example.com, Jan-Henrik Förster in Zurich at firstname.lastname@example.org. To contact the editors responsible for this story: Sara Forden at email@example.com, David S. Joachim
©2017 Bloomberg L.P.