By Kerry Harvey
kerry@caymannetnews.com

A Swiss bank that used its Cayman Islands’ branch to engage in what a US federal judge has branded “predatory lending practices” is being investigated by the US authorities.

Senior officials of Credit Suisse, Switzerland’s second largest bank, are facing claims that they pocketed millions of dollars by dishing out loans that were impossible to repay.

On Tuesday, 15 September, 31 of the bank’s officials received subpoenas demanding that they hand over internal documents that explain why they loaned $375 million to the now bankrupt Yellowstone Club in 2005.

The Yellowstone Club, founded by American tycoon Tim Blixseth, was once valued at more than US$1 billion.

It ran a service providing its uber-wealthy clientele - which included Microsoft billionaire Bill Gates and former American vice president Dan Quayle - with access to a string of luxurious properties across the globe.

The club’s portfolio featured an ocean front villa in Costa Rica, a slope-side chalet in Aspen, Colorado and a palatial nine-bedroom property on its own private island in the Turks and Caicos Islands.

However, the Yellowstone Club ran into severe financial difficulty last year after it struggled to keep up the repayments on a loan taken out with Credit Suisse against a sprawling resort it owned in Montana, US.

Credit Suisse has now been accused of loaning the money in an unorthodox and lucrative deal for the bank that federal bankruptcy judge Ralph B. Kirscher described in May this year as a case of “naked greed” that “shocks the conscience of this court.”

Mr Blixseth has now subpoenaed officials to try to uncover how and why the bank, which arranged the loan through its Cayman Island branch, developed the syndicated loan scheme.

Brady Dougan, the Chief Executive Officer of Credit Suisse First Boston, and Hans-Ulrich Doerig, Chairman of the Board of Directors, received the subpoenas along with past and current Executive Board officials and Credit Suisse’s Board.

“Bank officials have testified that Credit Suisse created a Cayman Islands ‘branch’ in 2005 to sell these loans.

“In reality, there was no phone and no staff in the bank’s phony branch.

“They used the Caymans to circumvent US banking laws and to issue inflated loans that Credit Suisse executives called a ‘gravy train’ in internal memos.“

“Credit Suisse pocketed tens of millions in fees in the process,” Mr Blixseth said.

As Judge Kirscher explained in a May Interim Order, Credit Suisse used the Cayman “branch” to skirt federal banking law and appraise the Yellowstone Club and other private resorts at grossly inflated values.

When Mr Blixseth owned the Yellowstone Club, he kept up-to-date on the Credit Suisse loan and never missed a payment.

However, he said that when his ex-wife Erda assumed ownership of the mountain resort in 2008, the Yellowstone Club quickly defaulted on the loan.

It became a common occurrence at other exclusive US resorts that also had taken the “Cayman Islands” loans, as Judge Kirscher wrote.

“Numerous entities that received Credit Suisse’s syndicated loan product have failed financially, including Tamarack Resort, Promontory, Lake Las Vegas, Turtle Bay and Ginn.”

“If the foregoing developments were anything like this case, they were doomed to failure once they received their loans from Credit Suisse,” Judge Kirscher wrote.

Judge Kirscher found that Credit Suisse’s greedy executives only earned fees if they sold the hyped loans.

He described them as “predatory lending practices”.

“The higher the loan amount, the fatter the fee to Credit Suisse. This program essentially puts the fox in charge of the hen house and was clearly self-serving for Credit Suisse.”

“The naked greed in this case combined with Credit Suisse’s complete disregard for the Debtors or any other person or entity who was subordinated to Credit Suisse’s first lien position, shocks the conscience of this Court.”

“While Credit Suisse’s new loan product resulted in enormous fees to Credit Suisse in 2005, it resulted in financial ruin for several residential resort communities.”

“Credit Suisse lined its pockets on the backs of the unsecured creditors,” Judge Kirscher ruled.

Mr Blixseth’s new subpoenas will unearth the internal documents Credit Suisse generated when devising their loans.

“In our ongoing discovery, we have had the opportunity to speak to many other Credit Suisse borrowers and their horror stories are shocking. The evidence indicates that this loan program was designed to fail – mostly through technical defaults – which in turn generated millions more in fees for Credit Suisse,” Mr Blixseth said.