Following JPMorgan, Dutch Pension ABP Sues Credit Suisse Over Mortgage-Backed Securities

After filing a suit against JP Morgan, Stichting Pensioenfonds ABP (ABP) has sued Credit Suisse as many of the scheme's once triple-A rated securities now carry junk grades. 

(January 3, 2012) — Credit Suisse Group AG has been sued by the $324 billion Dutch pension giant Stichting Pensioenfonds ABP.

The scheme asserted that the Swiss bank misled the financial firm about the quality of residential mortgage-backed securities it bought. The result of  “multiple and material misrepresentations” in Credit Suisse’s offering documents resulted in significant losses, the Dutch pension said. However, the suit fails to mention exactly how much the fund purchased, HousingWire reported.

ABP claimed that since it purchased the securities between 2005 and 2007, default rates have skyrocketed on loans underlying nearly all of the securities. ABP aims to rescind its purchases and recoup its losses. 

The case is Stichting Pensioenfonds ABP v. Credit Suisse Group AG et al, New York State Supreme Court, New York County, No. 653665/2011.

ABP has been aggressive in targeting banks over mortgage-backed securities it purchased during the financial crisis. In early December, the Netherlands-based pension fund sued JPMorgan Chase & Co. According to the lawsuit, filed in New York State Supreme Court in Manhattan, the Dutch fund purchased the pools of home loans based on false and misleading statements. The lawsuit noted that the mortgage loans backing the securities were taken out by borrowers “who were much less creditworthy than had been represented.”

The SEC additionally exerted pressure on JP Morgan, announcing in June that the bank would pay $153 million to settle charges of allegedly selling $1.1 billion in mortgage-backed securities that were designed to fail. The US regulator asserted that as the housing market crumbled in March and April 2007, JP Morgan executives urged the marketing of Squared CDO 2007-1, a synthetic CDO linked to a collection of residential mortgages, without informing investors that a hedge fund — Magnetar Capital — helped select the assets in the CDO portfolio and had a short position in more than half of those assets. Consequently, the hedge fund was positioned to benefit if the CDO assets it was selecting for the portfolio defaulted.

“J.P Morgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests,” Robert Khuzami, the SEC’s director of the division of enforcement, said in a statement. “What JP Morgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection. With today’s settlement, harmed investors receive a full return of the losses they suffered.”

One implication among institutional investors of the deteriorating state of once triple-A rated securities is Norway’s $570 billion sovereign wealth fund recently ridding itself of all its holdings in US mortgage-backed securities. As part of its shift in its fixed-income portfolio, the fund now holds no mortgage bonds issued by Fannie Mae and Freddie Mac and an “insignificant” amount of private home loan-backed bonds, Yngve Slyngstad, chief executive officer of NBIM, told Bloomberg News in November. “We’ve reduced our holdings of mortgage-backed securities,” he said. “MBS has been taken out of our internal policy benchmark. This means that we don’t have mortgage-backed securities issued by Freddie Mac and Fannie Mae any longer.”

The sovereign wealth fund’s bond holdings returned 3.7% in the third quarter, fueled by gains in German and US government bonds. Meanwhile, the fund’s securitized debt gained 0.3% as measured in international currencies.

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