New York Attorney General Andrew Cuomo is investigating whether eight banks misled ratings agencies to inflate the grades of certain mortgage securities, US newspapers reported yesterday.
The investigation comes as federal authorities probe the business practices of a range of financial firms whose clients bought mortgage securities in the years leading to the collapse of the housing market in 2008 that helped trigger the global financial meltdown.
Cuomo’s office and the US Securities and Exchange Commission (SEC) are “working hand-in-hand” in the preliminary criminal probe, the Wall Street Journal reported.
The New York Times named Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch — now owned by Bank of America — Morgan Stanley and UBS as among the banks under scrutiny.
Cuomo’s office issued subpoenas late on Wednesday notifying the banks of his investigation, the Times reported on its Web site, citing two people with knowledge of the probe.
However, the Journal said the investigation was in the preliminary stage, with prosecutors gathering evidence and not yet issuing any criminal subpoenas yet.
Standard & Poor’s, Fitch Ratings and Moody’s Investors Service were the companies that rated the mortgage deals, it said. The agencies have taken flack for overstating the quality of mortgage securities that later lost value in the wake of the housing collapse.
Morgan Stanley has said it has not been contacted by prosecutors and denied any wrongdoing. The Times said spokespeople for Credit Suisse and Deutsche Bank declined to comment and other banks did not immediately respond to requests for comment.
Lawmakers are urging prosecutors to be more aggressive in their investigation of the crisis, with only a single criminal case stemming from the meltdown so far — against two Bear Stearns traders.
The Times, citing unidentified individuals with knowledge of the investigation, said Cuomo was also looking into a practice of bank mortgage desks hiring rating agencies employees to help create mortgage deals that secured better ratings than they were due.
Goldman Sachs is facing similar civil fraud accusations made by the SEC in a complaint last month. The Journal said Goldman had recently entered settlement talks with the government.
Cuomo was also scrutinizing the rating agencies’ fees arrangements, which allowed banks to shop their deals around to secure the best rating, the Times said. He was said to be focusing on information the banks provided to the agencies.
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