New York's attorney general subpoenas eight banks and three ratings firms on their actions involving mortgage-backed securities.
Nathaniel Popper, Los Angeles Times
May 14, 2010
Reporting from New York
The investigation that has been focused on Wall Street titan Goldman Sachs Group Inc. is widening to include questionable business practices of several other major banks.
New York Atty. Gen. Andrew Cuomo subpoenaed eight banks and three ratings firms late Wednesday, seeking information on how the banks may have tried to influence the ratings of mortgage-backed securities that eventually lost value with the housing market collapse.
The banks on Thursday confirmed receiving the subpoenas and said they would cooperate.
The investigation by New York's top prosecutor came as the Wall Street Journal reported that federal investigators were expanding the inquiry into potential criminal activities at a number of the biggest banks, including Goldman, Morgan Stanley, JP Morgan Chase & Co. and UBS.
Several of these banks said they were unaware of any criminal investigation and had not been contacted by the U.S. attorney's office.
The Journal reported in late April that Goldman was facing a criminal probe by the Justice Department. That report sent Goldman's shares down 9.4% on April 30. Earlier this week Morgan Stanley, too, was said to be under criminal investigation by the federal government.
On Thursday, banking stocks were broadly lower, but the declines generally weren't much worse than the market drop as a whole. An index of financial stocks in the Standard & Poor's 500 fell 1.7% for the day, while the S&P 500 lost 1.2%.
The investigations highlight how mortgage-backed securities, such as collateralized debt obligations, have become the central legal issue in the financial meltdown.
But Wall Street's relatively muted reaction to Cuomo's inquiry suggests that the focus on the financial industry is no longer a surprise.
"This was something that people should have been expecting since the news about Goldman came out," said Michael Wong, a financial industry analyst with Morningstar. "It would be naive to think that Goldman was the only investment bank that engaged in this type of activity — or that it had activities that were so different than its peers."
Goldman was sued last month by the Securities and Exchange Commission, which alleged that Goldman had not told investors that a security the bank was selling had been designed by someone betting against it.
According to industry sources, the SEC sent out requests last year to most of the major banks requesting information about how they designed and marketed collateralized debt obligations — a security created by bundling together parts of different mortgages.
No other companies have been charged by the SEC, but Goldman was not the biggest creator of the debt obligations. Most rankings from the years before the crisis put Citigroup, Merrill Lynch, Deutsche Bank and Credit Suisse as the largest under writers of the security.
Federal prosecutors typically investigate cases being looked at by the SEC. But a criminal indictment would require a much higher standard of proof than a civil lawsuit like the one against Goldman, and many legal experts are skeptical of whether prosecutors could bring criminal charges.
"It is highly unlikely with the level of thought and sophistication and review that went into the creation of these instruments and their sale, that we will see criminal cases," said Jacob Frenkel, a Maryland lawyer who used to be in the SEC's enforcement division.
The more pressing matter for most banks will be the investigation by Cuomo's office, which sent subpoenas seeking documents to Goldman, Morgan Stanley, Citi, UBS, Credit Suisse, Deutsche Bank, Credit Agricole and Bank of America Corp., which now owns Merrill Lynch, as well as the three major credit ratings agencies.
In the past, big pension funds and institutional investors have sued ratings firms for providing high grades to securities that ended up tanking in value. Cuomo's probe is the first to look at whether the ratings agencies themselves may have been influenced by the banks that sold the securities.
The investigation is looking into whether the banks "manipulated" the ratings agencies into providing undeservedly high ratings, according to people close to the investigation. The probe is also looking into whether the banks accurately represented the mortgages that were packaged together in the securities.
The subpoenas did not mention any specific deals or individuals. Bank of America, Credit Suisse, Deutsche Bank as well as ratings firms Moody's Investors Service and Fitch Ratings all said they plan to cooperate with the attorney general. The other banks and Standard & Poor's, the third rating firm subpoenaed, did not comment.
"We believe that the Bank acted appropriately and will cooperate with the authorities to substantiate our position," said Ted Mayer, a spokesman for Deutsche Bank.
The ratings firms were the subject of a congressional hearing late last month, soon after Goldman executives came under fire at a hearing about the bank's marketing of the securities.
On Wednesday, the Senate approved an amendment to pending financial legislation that would create a federal regulatory board to oversee credit ratings agencies.
Nathaniel Popper, Los Angeles Times
May 14, 2010
Reporting from New York
The investigation that has been focused on Wall Street titan Goldman Sachs Group Inc. is widening to include questionable business practices of several other major banks.
New York Atty. Gen. Andrew Cuomo subpoenaed eight banks and three ratings firms late Wednesday, seeking information on how the banks may have tried to influence the ratings of mortgage-backed securities that eventually lost value with the housing market collapse.
The banks on Thursday confirmed receiving the subpoenas and said they would cooperate.
The investigation by New York's top prosecutor came as the Wall Street Journal reported that federal investigators were expanding the inquiry into potential criminal activities at a number of the biggest banks, including Goldman, Morgan Stanley, JP Morgan Chase & Co. and UBS.
Several of these banks said they were unaware of any criminal investigation and had not been contacted by the U.S. attorney's office.
The Journal reported in late April that Goldman was facing a criminal probe by the Justice Department. That report sent Goldman's shares down 9.4% on April 30. Earlier this week Morgan Stanley, too, was said to be under criminal investigation by the federal government.
On Thursday, banking stocks were broadly lower, but the declines generally weren't much worse than the market drop as a whole. An index of financial stocks in the Standard & Poor's 500 fell 1.7% for the day, while the S&P 500 lost 1.2%.
The investigations highlight how mortgage-backed securities, such as collateralized debt obligations, have become the central legal issue in the financial meltdown.
But Wall Street's relatively muted reaction to Cuomo's inquiry suggests that the focus on the financial industry is no longer a surprise.
"This was something that people should have been expecting since the news about Goldman came out," said Michael Wong, a financial industry analyst with Morningstar. "It would be naive to think that Goldman was the only investment bank that engaged in this type of activity — or that it had activities that were so different than its peers."
Goldman was sued last month by the Securities and Exchange Commission, which alleged that Goldman had not told investors that a security the bank was selling had been designed by someone betting against it.
According to industry sources, the SEC sent out requests last year to most of the major banks requesting information about how they designed and marketed collateralized debt obligations — a security created by bundling together parts of different mortgages.
No other companies have been charged by the SEC, but Goldman was not the biggest creator of the debt obligations. Most rankings from the years before the crisis put Citigroup, Merrill Lynch, Deutsche Bank and Credit Suisse as the largest under writers of the security.
Federal prosecutors typically investigate cases being looked at by the SEC. But a criminal indictment would require a much higher standard of proof than a civil lawsuit like the one against Goldman, and many legal experts are skeptical of whether prosecutors could bring criminal charges.
"It is highly unlikely with the level of thought and sophistication and review that went into the creation of these instruments and their sale, that we will see criminal cases," said Jacob Frenkel, a Maryland lawyer who used to be in the SEC's enforcement division.
The more pressing matter for most banks will be the investigation by Cuomo's office, which sent subpoenas seeking documents to Goldman, Morgan Stanley, Citi, UBS, Credit Suisse, Deutsche Bank, Credit Agricole and Bank of America Corp., which now owns Merrill Lynch, as well as the three major credit ratings agencies.
In the past, big pension funds and institutional investors have sued ratings firms for providing high grades to securities that ended up tanking in value. Cuomo's probe is the first to look at whether the ratings agencies themselves may have been influenced by the banks that sold the securities.
The investigation is looking into whether the banks "manipulated" the ratings agencies into providing undeservedly high ratings, according to people close to the investigation. The probe is also looking into whether the banks accurately represented the mortgages that were packaged together in the securities.
The subpoenas did not mention any specific deals or individuals. Bank of America, Credit Suisse, Deutsche Bank as well as ratings firms Moody's Investors Service and Fitch Ratings all said they plan to cooperate with the attorney general. The other banks and Standard & Poor's, the third rating firm subpoenaed, did not comment.
"We believe that the Bank acted appropriately and will cooperate with the authorities to substantiate our position," said Ted Mayer, a spokesman for Deutsche Bank.
The ratings firms were the subject of a congressional hearing late last month, soon after Goldman executives came under fire at a hearing about the bank's marketing of the securities.
On Wednesday, the Senate approved an amendment to pending financial legislation that would create a federal regulatory board to oversee credit ratings agencies.
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