The battle between the bond insurers and the investment banks — as regards who knew what about mortgage-backed securities — intensified on Monday.
MBIA, once the mightiest of the monolines, filed a lawsuit in Manhattan court against Credit Suisse that accuses the bank of making “fraudulent misrepresentation” about MBS. These misrepresentations caused the insurer to have to cough up more than $290m in claims, according to the complaint.
More from Bloomberg:
The complaint against Credit Suisse Securities (USA) LLC, filed yesterday in New York State Supreme Court in Manhattan, also names as defendants two other units of the bank, DLJ Mortgage Capital Inc. and Select Portfolio Servicing Inc.
Credit Suisse made “pervasive and material misrepresentations” about a mortgage-backed securities transaction that was sponsored, marketed and serviced by the Credit Suisse units and insured by MBIA, according to the complaint.
The transaction, involving thousands of residential mortgages in a pool later transferred to a trust formed to issue securities that were to be paid down based on the cash flow from the loans, closed in April 2007, said Armonk, New York-based MBIA Insurance, a unit of MBIA Inc.
“CS Securities fraudulently induced MBIA to participate in the transaction,” MBIA said in the complaint. MBIA said the bank claimed it had “used certain strict underwriting guidelines to select the loans sold into the transaction when in fact it did not.”
Bruce Corwin, a Credit Suisse spokesman, declined to comment.
This is not the first case of the type, and certainly not the first involving MBIA, which is also embroiled in a similar dispute against Merrill Lynch.
MBIA’s lawyers have certainly been busy, because on December 9 the bond insurer filed a breach of contract lawsuit against Rabobank, the Bank of New York Mellon Trust Company and Paragon CDO. That complaint, filed jointly with Lacrosse Financial Products, centres around CDS protection sold against a CDO issued by Paragon.
But as various learned counsel told FT Alphaville, it is not going to be easy for MBIA to win a lawsuit alleging fraudulent misrepresentation, because the benchmark for these types of cases is extremely high.
As one attorney put it:
Bond insurers were supposed to be some of the smartest players on Wall Street. MBIA is going to have to convince a court not only that fraud existed, but that it wasn’t savvy enough to recognise its presence.
Bit of a Catch-22 that, since in order for MBIA to succeed, it will have to convince a court that its much-vaunted underwriting and due diligence weren’t actually all that great.
Then again, the fact that the bond insurers are in such dire financial straits does support that contention…
Related links:
Global banks sue MBIA over split – FT
Bond insurers vs investment banks, redux – FT Alphaville
MBIA not screwing around in suit against Merrill – Economics of Contempt
Who’s super senior? – FT Alphaville