Ambac Financial Sues Credit Suisse Over Mortgage Security

Ambac Financial Group Inc. (ABK) filed a lawsuit Tuesday against Credit Suisse Securities LLP, a unit of Credit Suisse AG (CS, CSGN.VX), asking that the Swiss banking giant make good on a mortgage-backed security Ambac insured that has racked up millions of dollars in claims.

In the suit filed in New York State Supreme Court, Ambac charged that it provided insurance on a $170 million security, packaged by Credit Suisse and affiliate DLJ Mortgage Capital in March 2007, based on flawed information they provided on the 2,500 home-equity loans contained in the security.

After more than 30% of the original loan balance went into default and Ambac paid around $44 million in claims on the security, according to the lawsuit, Ambac examined a sample of the loans and found that 80% breached the representations made by DLJ and Credit Suisse. Ambac is asking for compensatory and punitive damages and lawyers fees.

So far, DLJ and Credit Suisse have refused to make good on any of the $83 million in loans Ambac has challenged, the suit said.

Ambac's review found various problems, including that "fraud by borrowers, brokers and/or originators was so rampant that Credit Suisse either knew or recklessly disregarded its prevalence," the lawsuit alleged.

Credit Suisse spokesman Bruce Corwin said Tuesday in response: "We believe this lawsuit is without merit and we intend to defend ourselves vigorously."

The lawsuit is the latest of several that have been filed by bond insurers against investment banks that packaged mortgage-backed securities that defaulted at high rates, putting the insurers in line to cover losses on loans that they say should never had been written.

In its third-quarter earnings report filed with the Securities and Exchange Commission, Ambac said it has run into this problem with second-lien mortgage-backed securities before, and issuers have generally resisted making good on bad loans by replacing them or covering the losses. This is Ambac's second such suit, and it said in its earnings report it expects to file more such lawsuits.

-By Lavonne Kuykendall, Dow Jones Newswires; [phone]; [e-mail]