Finance

Everybody's Investigating Banks' Mortgage Deals

It's starting to feel like every bank is being investigated by everybody over mortgage-related securities issued during the boom.

To put a finer point on it: JPMorgan Chase, Citigroup, Deutsche Bank and UBS are all under "early-stage criminal scrutiny" from federal prosecutors, and they've received civil subpoenas from the SEC, the WSJ reports this morning. The paper has already reported on early-stage criminal probes of Goldman Sachs and Morgan Stanley.

And Goldman, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Credit Agricole and Merrill Lynch (now owned by Bank of America) are being investigated by New York Attorney General Andrew Cuomo, this morning's NYT reports.

In the criminal probes reported by the WSJ, prosecutors want to know whether banks misled investors in mortgage-backed securities known as CDOs. No criminal charges have been filed against any of the banks.

The SEC filed a civil case against Goldman a few weeks back; Goldman says it didn't mislead investors.

Cuomo, meanwhile, is looking into whether the banks provided misleading information to the big ratings agencies in order to get inflated ratings on mortgage-backed securities. Lots of AAA-rated (supposedly super-safe) mortgage investments got clobbered in the housing bust.

Defenders of the ratings say that's because the large, widespread declines in housing prices were unprecedented and couldn't have been predicted. And, they argue, the agencies had access to all the information they needed to make their own decisions about what ratings to assign to the securities.

But it's also the case that it was in the banks' interest to get the highest rating possible on the securities.

The dance between the banks and the ratings agencies was described in The Watchmen, a Planet Money/This American Life episode that aired last year. It starts on p. 15 of the transcript.

One former Bear Stearns employee said in the show that eking the highest rating out of every deal was just part of the business.

"I knew I was doing things to get around the rules," she said. "I wasn't proud of it, but I did it anyway."

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