UBS, Citigroup, Credit Suisse, Deutsche Bank, Credit Agricole, Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley are the subjects of a preliminary investigation into whether the risk involved in mortgage backed securities was downplayed in order to improve their credit ratings.
No charges have been brought against any of the banks and it is unclear if the investigation, led by New York attorney general Andrew Cuomo, could ultimately result in criminal or civil charges. Subpoenas have also been sent to the three credit rating agencies: Standard & Poor’s, Moody’s and Fitch.
Cuomo is investigating whether the banks leaned on rating agencies in order to bump up credit ratings for a variety of asset-backed securities including collaterlised debt obligations – packages of subprime mortgage bonds. The probe will look at whether banks provided misleading information to rating agencies on the health of the mortgages contained within the securities – in order to gain attractive triple-A ratings.
It will also scrutinise whether ties between the two sides are too close. Ratings agencies are reliant on banks for fees but are legally bound to be independent.
The documents requested are understood to include final and draft prospectuses, offering documents and investor lists for mortgage-related deals. Legal sources told City A.M. that investigators will be especially keen to trawl through email records.
The failure of collateralised debt obligations (CDOs) – which became worthless when people were unable to keep up mortgage payments – is credited with exacerbating the financial crisis. Deutsche Bank, UBS, Bank of America and Credit Agricole, S&P and Fitch all confirmed to City A.M. they have received subpoenas. Citigroup, Goldman, Morgan Stanley, Merrill Lynch and Moody’s all declined to comment.
The Cuomo probe comes as the US Securities and Exchange Commission (SEC) conducts a broader, preliminary criminal investigation of JP Morgan Chase, Citigroup, Deutsche Bank, UBS and Morgan Stanley and Goldman as to whether they misled investors. It is not yet clear whether the investigation, which includes mortgage bond deals, will lead to criminal charges.
The investigation comes less than a month after the SEC charged Goldman Sachs with civil fraud in connection with its marketing of a subprime mortgage product.
The US Senate yesterday voted to impose tighter regulations on credit-rating agencies. By a vote of 64 to 35, the Senate added the measure to a sweeping rewrite of financial regulations that could pass next week.
The proposal would set up a government clearing house to assign credit rating agencies to rate an issuer’s debt.
Backers said the clearing house could remove the pressure on agencies to produce overly rosy ratings for the firms that currently hire them directly.