Major Banks Under Investigation for Mortgage Investment Fraud

Fri, May 14, 2010


Prosecutors are investigating eight major banks to determine if they provided misleading information to credit ratings agencies in order to deceive investors about the quality of mortgage-backed securities (MBS) they were selling.

New York Attorney General Andrew Cuomo has reportedly issued subpoenas to Citigroup, Goldman Sachs, Morgan Stanley, Bank of America’s Merrill Lynch, Credit Suisse, Deutsche Bank, Crédit Agricole, and UBS. According to news reports, the three major rating agencies — Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings — have also been subpoenaed.

Credit ratings agencies have been blamed for missing the mark in assessing the quality of mortgage bonds that ultimately tanked when the housing market came crashing down.

Some critics say the firms knowingly inflated MBS ratings to appease the banks selling the bundled mortgages, since they were also the ratings agencies’ clients for other financial services. Executives at two of the big raters, S&P
and Moody’s, have both publicly blamed the rat race of a competitive marketplace for their miscalculations.

But Attorney General Cuomo seems to think the ratings agencies were duped, and he’s putting Wall Street banks on the hook for flexing their big-business prowess to influence the agencies, and in turn investors and the market, to cloak sour mortgage deals as AAA-rated sound investments.

The federal Justice Department is also getting in on the inquisition. The Wall Street Journal reports that Citigroup, Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS, along with JPMorgan & Chase, are also being investigated by the U.S. Attorney’s Office in Manhattan for similar criminal misconduct related to information they provided to investors regarding collateralized debt obligations (CDOs) backed by mortgages.

The Journal says the companies have already been served civil subpoenas by the Securities and Exchange Commission (SEC), which is working hand-in-hand with federal prosecutors in Manhattan to build a case.

The raid on Wall Street all began with the SEC’s charges against Goldman Sachs last month, alleging that the firm defrauded investors about the investment quality of a CDO that hinged on the performance of subprime mortgages, all the while Goldman itself was betting on the loans behind the CDO to fail and making millions in the process, the SEC says.

A probe by a Senate investigative panel in late April concluded that big banks securities trading practices of packaging and repackaging the same risky mortgages into different CDOs served to spread the problems of the housing crisis to just about every corner of the nation’s financial market.


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