An enormous $24 billion lawsuit was filed yesterday against Credit Suisse accusing the bank of defrauding investors in a giant real estate scam. The loans involved were for properties in resort communities in Montana, Nevada, Idaho and the Bahamas. Although I can't seem to get my hands on all of the details, from the articles I've read on the suit this morning, I'm a little skeptical.
I'll be very interested to see the full allegations, and the facts of the case. But for now, here's what Reuters reports:
In a lawsuit filed Sunday in federal court in Idaho, the plaintiffs said Credit Suisse colluded with real estate firm and co-defendant Cushman & Wakefield in a "loan to own" scheme to artificially inflate the value of resort projects.
It said this scheme was designed to burden resorts and purchasers of property in resorts with too much debt, while winning Credit Suisse "enormous fees" and letting the bank foreclose on or take control of resorts at well below market value.
Saddling property owners with too much debt so that the bank can foreclose on the real estate in question? Sounds vaguely familiar, doesn't it? Oh yeah! That's what pretty much every bank in the U.S. was accused of doing with the subprime mortgage bubble. I have to wonder if this case is really any different than the complaints of millions of homeowners who say that banks purposely gave them loans that they knew wouldn't perform just to get fees from the borrowers and eventually force them into foreclosure.
And what's more suspicious is that most of these purchasers should have been a lot savvier than your typical subprime borrower. These were luxury properties sold to millionaires and billionaires, according to Reuters. Ever hear of a little thing called "buyer beware"? Did these guys happen to do any third-party due diligence to verify the value of these properties? Did they manage to do any of their own budgetary analysis to see if they could afford the debt they were taking on, given the terms of the loans given?
Again, we're not talking about some poor guy working two minimum wage jobs who doesn't understand what an adjustable-rate is, but was coaxed into taking a subprime mortgage. These are very rich people who should know a thing or two about managing their finances -- or at least have people working for them who do that kind of thing for them in a professional capacity.
I don't mean to pass an early judgment without all of the facts: Credit Suisse may very well have broken some laws -- I don't know. But unless there was widespread fraud and conspiracy involving Credit Suisse, appraisers, third-party auditors, financial consultants, etc., then I can't help but be cynical about these claims. Besides, it's hardly smart business for Credit Suisse to knowingly take advantage of rich people for a one-time gain. They could make a lot more money off these individuals if they cultivated relationships with them through legitimate loans over the course of many years.
So could Credit Suisse be culpable here? Sure. But from what we know so far, I have my doubts. I also have trouble feeling much sympathy for those filing the suit. It sounds to me like a bunch of wealthy real estate investors who are annoyed that the housing market collapsed after they bought a piece of some very expensive property with loan terms that weren't particularly generous.