Credit Suisse Lawsuit: What are the developers doing with these excessive loans?
[I read this article](http://online.wsj.com/articles/emails-about-precrisis-loans-plague-credit-suisse-1417561282) and wanted to get your guys' thoughts on it. Basically, Credit Suisse is being sued by investment funds for exaggerating real estate values to collect large fees from brokering the inflated loans. 

If I'm understanding the article correctly, the real estate developers were getting a $1 billion loan that was secured by a $500 million project. The developers then take out the excess ~$500 million for other purposes.

This just seems like a huge risk for the developer and I'm not sure what the upside for them is. 

If they are using the excess money for other projects, could the investment funds holding the loan not just go after these additional assets if the developer defaults? Even if the investment fund cannot go after other assets, it seems like the developer would be ripe for a fraud lawsuit.

Any thoughts and comments would be appreciated.



 

[{"id": "cmntt06", "text": "I would suspect the loans were not structured correctly with recourse to the borrowers, which would allow the lenders or noteholders to claim assets other than the unfinished development. Typically, the loans will only have a claim on the collateral even if the developer took the proceeds to do something else. That's why they would borrow so much money because the upside is all the profit above the loan amount and the downside is losing a property your money was never in in the first place. Counterintuitive, but the risk for the developer actually goes down the more money they take out with the loan because they no longer have any skin in the game.\n\nThe developers can't be easily sued for fraud because they didn't lie or misrepresent anything about their project. If I were a developer and I thought my project were worth $100m and you, as a lender, thought it was worth $200m and were willing to give me a loan on it for $160m, I'm not going to complain and tell you to give me less money for your benefit. However, whatever CS did to misrepresent the value of the assets could be construed as fraud and that's the whole reason why there's a lawsuit in the first place.\n\nHonestly, I think these funds just didn't do their homework on the deals they were buying into. It probably would not have taken that much time to understand the project and realize they weren't worth as much as the appraisals were claiming. If you're going to invest in real estate based on an appraised value, you're going to have a bad time.", "replies": [{"id": "cmo0q13", "text": "&gt; I would suspect the loans were not structured ~~correctly~~ with recourse to the borrowers\n\nWell, I'm not going to subscribe to read the article so I'll stipulate that there may be something in the article that implies or says that the investors expected the loans to be recourse and they weren't papered that way.  Otherwise, I'd delete \"correctly\" - most loans of this size and nature are non-recourse except for the bad boy carve outs.", "replies": [{"id": "cmowul4", "text": "Agreed.  I doubt there are a lot of $470 mm loans with recourse.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]