Credit Suisse Warns of $380 Million Fourth-Quarter Legal Hit

Credit Suisse Group AG signaled a $380 million fourth-quarter hit related to a long-standing legal case surrounding residential mortgage-backed securities, adding to the bank’s woes after it wrote down its stake in hedge fund York Capital Management.

The Zurich-based lender is facing costs of as much as $680 million after the New York judge presiding over the case ordered the bank and municipal-bond insurer MBIA to submit estimates of damages related to the mortgages, issued in 2007, Credit Suisse said in a statement on Tuesday. It has already set aside $300 million to cover losses in the case.

Credit Suisse Warns of $380 Million Fourth-Quarter Legal Hit

The development adds to a trickle of bad news for Chief Executive Officer Thomas Gottstein that threatens to plunge the lender into a fourth-quarter loss, after it flagged a $450 million impairment on its stake in York Capital last week. It comes on the same day that Credit Suisse proposed Antonio Horta-Osorio to succeed Urs Rohner as chairman, tapping the first non-Swiss person for the role as it seeks to move past one of the most turbulent years in its history.

Rohner, who will step down next year after reaching his term limit, came under pressure last year when a damaging spying scandal culminated in a power struggle between him and Tidjane Thiam, the former CEO. Rohner prevailed, ousting Thiam and naming Gottstein to take over.

The new CEO has had to contend with a series of setback in his first year. Just last week, the bank said it would book a $450 million impairment on its stake in York Capital as the U.S. investment firm founded by Jamie Dinan winds down most of its hedge-fund strategies in the wake of this year’s market upheaval. The Swiss bank agreed to take a 30% stake in York in 2010, offering to pay at least $425 million at the time to give clients access to alternative investments.

While the size of the new legal provision could still change, Credit Suisse plans to increase the amount it needs to set aside in the fourth quarter unless it hears from the judge in the case before the end of the year, according to a spokesman. The bank will communicate the impact when it presents earnings in February.

Assuming the bank books the two hits as expected, “the numbers show a loss for the fourth quarter,” said Andreas Venditti, an analyst at Vontobel. “Analysts and investors seem to have forgotten about these mortgage cases” that Switzerland’s biggest lenders are still facing.

Most Exposure

Credit Suisse is among banks including Morgan Stanley, UBS Group AG and Nomura Holdings Inc. that are still defending themselves against claims on the sale of the securities that plummeted in value during the 2008 financial crisis, with billions of dollars at risk. Credit Suisse probably has the most exposure as it faces suits seeking more than $3 billion, according to Bloomberg Intelligence.

MBIA is seeking $740 million in damages from Credit Suisse for the bank’s alleged breach of contract. The bond insurer claims Credit Suisse did not make good on promises to repurchase RMBS transactions sold by the bank and insured by MBIA in 2007. Over the last 10 years, MBIA also brought claims of material misrepresentations, fraudulent inducement and breach of contract.

Switzerland’s second-biggest bank said earlier on Tuesday it still believes it has strong grounds for appeal. The lender said it would give an update on the expected impact on fourth-quarter results “in due course” because of the increase in provisions, without giving more details.

Last year, Credit Suisse resolved one of its largest cases related to mortgage-backed securities with the state of New York, paying an undisclosed settlement well below the $11.2 billion sought in damages, according to press reports at the time. In 2017, the bank agreed to pay $5.3 billion to settle a U.S. investigation into the bank’s sales of toxic mortgage debt before the financial crisis.

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