The New York attorney general is investigating whether eight Wall Street banks misled ratings agencies to inflate the grades of certain mortgage securities.This is very significant in the effort to find out exactly what happened to nearly throw the U.S. and the world into a second Great Depression. A number of very important points are being addressed in this investigation. First, it has been clear since the Wall Street banks collapsed in September 2008 that a central pillar of the fraud in mortgage securities that set it off was the inflated reports of the rating agencies, http://www.guardian.co.uk/business/2010/may/13/wall-street-banks-investigated-mortgages-ratings. So far it has been eighteen months since the financial collapse in September 2008, and there has been no public investigation of the activities of the rating agencies.
The attorney general of New York, Andrew Cuomo, sent subpoenas to eight banks last night, according to the New York Times. The paper named Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch – now owned by Bank of America – Morgan Stanley and UBS as the banks under scrutiny.
The companies that rated the mortgage deals are Standard & Poor's, Fitch Ratings and Moody's Investors Service. The agencies have come under fire for overstating the quality of mortgage securities that later slumped in the wake of the housing collapse, helping to trigger the financial crisis.
The attorney general's inquiry suggests that he thinks the agencies may have been duped by one or more of the banks under investigation. He is scrutinising the rating agencies' fees arrangements, which allowed banks to shop their deals among the agencies to secure the best rating.
Cuomo is also looking into the practice of bank mortgage desks hiring rating agencies employees to help create mortgage deals that may have secured better ratings than they deserved.
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That leads to the second question this report leads to. This investigation is being led by the New York Attorney General, NOT by the federal government. This financial fraud and the resulting disaster was nation- and world-wide. Why is the New York Attorney General, a state officer, the taking the lead in this investigation? The corrective actions, which will include regulation of the rating agencies both for their transparency and the manner in which they are chosen and paid for their services, will have to be primarily federal. Otherwise the banks will simply go state-shopping to find the least regulating state for them to operate in, just as the banks do with choosing the states they issued credit cards from.
This investigation is going to be worth following closely. Expect the Wall Street banks to take every possible action to shut it down or shut it up.