Canada's Housing Bubble

May 14, 2010 Janet Whitman Financial Post

New York -- U.S. authorities are stepping up their clampdown on Wall Street with sweeping probes into some of the actions believed to have exacerbated the financial crisis.

New York Attorney-General Andrew Cuomo is reported to have subpoenaed eight big banks as he investigates whether they misled credit-rating agencies to get high ratings on the bundles of mortgages they were peddling to investors.

At the same time, federal prosecutors and securities regulators are said to have expanded their preliminary criminal investigation into Goldman Sachs Group Inc.'s questionable selling and trading of mortgage-related securities to several other big-name banks, including Morgan Stanley, JP Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG.

The probes, which came to light Thursday in news reports, likely came as a welcome relief to Goldman Sachs, which for the past month has been the only big bank in the spotlight after the U.S. Securities and Exchange Commission accused it of defrauding investors by misleading them about a subprime mortgage investment.

Such criminal investigations are tough to win.

In the wake of the near-meltdown of the financial markets in 2008, U.S. prosecutors have brought only one case to trial so far - against two former hedge fund managers at Bear Stearns Cos. In November, a jury in a Brooklyn courtroom found the pair not guilty.

Still, at minimum, the investigations promise to keep banks under the public glare, which should pave the way for the passage of far-reaching financial reforms by lawmakers in Washington, D.C.

The investigation by federal prosecutors in Manhattan, who are working alongside SEC investigators, is at an early stage and may or may not lead to criminal charges, according to reports. Investigators are looking into whether Wall Street banks may have falsely represented some of the bundles of mortgages they were marketing, selling and trading.

Goldman, for example, has been accused of failing to disclose that a major hedge fund chose some of the securities that went into the bundle and that the hedge fund was betting against the deal.

Mr. Cuomo is believed to be investigating the relationship between big banks and the top U.S. credit-rating agencies to see if misleading information was given to get top ratings on certain mortgage securities.

Eight banks - including Goldman Sachs, Morgan Stanley, Citi­group Inc., Deutche Bank, UBS, Credit Agricole, Credit Suisse, and Merrill Lynch, which was acquired by Bank of America - along with the three major U.S. ratings agencies - McGraw-Hill Cos.' Standard & Poor's, Fimalac SA's Fitch Ratings and Moody's Corp.'s Moody's Investors Service - reportedly were sent subpoenas on Wednesday.

Many of these bundled mortgage securities that were given top ratings turned out to be full of risky subprime mortgages and were fast downgraded practically to worthless as the home-mortgage meltdown hit.

Mr. Cuomo's office is said to be also investigating possible conflicts by banks that ended up wooing employees from credit-rating agencies who might have given favourable ratings in hopes of securing a job down the road.

In a 2008 settlement with Mr. Cuomo's office, the credit-rating agencies agreed to a change in their fee structure to make it harder for banks to play the agencies against each other to get higher ratings.