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article imageNY attorney general set to investigate 8 banks

By Lynn Herrmann     May 13, 2010 in Crime
New York’s attorney general has begun an investigation into eight banks to decide whether information they provided to mortgage securities ratings agencies was misleading
The New York Times reports today that NY Attorney General Andrew Cuomo’s office issued subpoenas late Wednesday to notify the banks of the investigation, according to two sources with knowledge of the investigation.
The new investigation runs parallel to federal inquiries concerning business practices of many financial companies in the lead-up to the housing market collapse.
While federal investigations have focused on banks and clients who bought mortgage securities, the NY investigation expands that effort by including the relationship between banks and agencies that rate securities.
Those banks targeted include Citigroup, Morgan Stanley, Goldman Sachs, UBS, Credit Suisse, Credit Agricole, Deutsche Bank, and Merrill Lynch, now owned by Bank of America.
Companies that rated the mortgage securities deals are Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. Investors used their ratings to determine purchases of mortgage securities.
According to the Times report, spokespeople for Morgan Stanley, Credit Suisse and Deutsch Bank declined to comment when contacted after the subpoenas were issued. Other banks did not respond in a timely manner to request for comments.
An April article in the Times described certain techniques bankers used to produce desired ratings from the agencies.
Samuel Robinson, a spokesman for Goldman Sachs, responded to that article by stating: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”
Also at issue for the attorney general investigation is the revolving door manner for employees of the ratings agencies connected with the bank mortgage desks that helped create the inflated ratings of certain mortgage deals.
At the height of the housing bubble, companies like Goldman Sachs offered ratings agency employees million-dollar pay packages to bring their expertise on board. Once hired by the banks, they then conducted dealings with former colleagues and friends at the ratings agencies.
Shin Yukawa, a former Fitch Ratings employee, was recruited by Goldman Sachs in 2005. He devised a deal known as Abacus 2007-AC1 which is center to civil fraud accusations issued in a complaint last month by the Securities and Exchange Commission.
Investors lost billions of dollars in investment bank deals on over-rated securities due to a series of mortgage loans bundled into securities and often rebundled one or two more times.
Although big banks were put on notice last year of a number of investigations, the SEC civil case against Goldman Sachs is the most prominent one to date. Further actions could be taken by the FBI, the Justice Department or the Financial Crisis Inquiry Commission.
Although criminal cases carry a higher burden of proof than civil cases, New York state law allows Cuomo’s office to conduct a criminal or civil case.
More about Bank fraud, Attorney general, New york
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