Andrew Cumo Investigating Whether Banks Duped Rating Agencies
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NEW YORK — New York's attorney general has launched an investigation into eight banks to determine whether they misled ratings agencies about mortgage securities, according to a person familiar with the inquiry.
Attorney General Andrew Cuomo is trying to figure out if banks provided the agencies with false information in order to get better ratings on the risky securities, said the person, who asked not to be identified because the investigation has not been made public.
Cuomo's office is investigating Goldman Sachs Group Inc., Morgan Stanley, UBS AG, Citigroup Inc., Credit Suisse, Deutsche Bank, Credit Agricole and Merrill Lynch, which is now part of Bank of America Corp.
A spokesman from Bank of America, which is based in Charlotte, N.C., said it is cooperating with the attorney general's office.
Representatives from Goldman Sachs, Citigroup and Credit Agricole declined to comment. Spokesmen from the other banks were not immediately available for comment.
During the housing boom, Wall Street banks often packaged pools of risky subprime mortgages together. The securities were then typically given top-notch ratings and investors purchased them, in part, because of their high ratings.
The ratings, issued by Standard & Poor's, Moody's Investors Service and Fitch Ratings, are used as a guide for investors to assess how risky an investment might be.
As the housing market collapsed and more customers fell behind on repaying their mortgages, the securities' value began to fail.
The securities have been widely blamed for exacerbating the credit crisis and costing investors and the banks themselves billions of dollars in losses. The ratings agencies have come under fire for having given such high ratings to securities that soured.
The attorney general's probe comes as federal regulators are investigating whether some of the banks misled investors when marketing and selling the securities and other investments that were tied to mortgages.
The Securities and Exchange Commission charged Goldman Sachs with fraud over its packaging of mortgage securities. Goldman is facing a separate criminal investigation into the same securities. Goldman has denied the charges and plans to defend itself.
Earlier this week it was reported that federal prosecutors are investigating whether Morgan Stanley misled investors about its role in a pair of $200 million derivatives whose performance was tied to mortgage-backed securities.
The increased scrutiny over how banks managed, packaged and portrayed mortgage securities and derivatives comes as Congress discusses a major overhaul of financial regulations. Politicians have said an overhaul would add more transparency to investments and trading.
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STEPHEN BERNARD 05/13/10 01:56 PM ET Associated Press