New York attorney general Eric Schneiderman has announced that he is investigating Goldman, Morgan Stanley, and Bank of America on their mortgage securitization activities. His office made a broad document request in recent weeks and has also asked to meet with these banks.
It is not yet clear what the focus of the probe is, but since Goldman and Morgan Stanley were not lenders, it could relate to their mortgage originations, their servicing operations (Litton for Goldman Saxon for Morgan Stanley) or their role as CDO issuers. With Bank of America, the investigation could cover additional ground.
Note that this announcement effectively blows up the 50 state attorney general settlement talks. Schneiderman has signaled early and often that he was not comfortable with the seriousness of the talks, particularly the fact that Tom Miller had not discussed with his fellow AGs what form of release from liability he was prepared to offer. This move by the New York AG is likely to embolden other AGs who are also unhappy with Miller’s effort to abandon the talks and launch their own probes.
From Gretchen Morgenson of the New York Times:
The New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses.
Officials in the office of the attorney general, Eric T. Schneiderman, have also requested meetings with representatives from Bank of America, Goldman Sachs and Morgan Stanley, according to people briefed on the matter who were not authorized to speak publicly. The inquiry appears to be quite broad, with the office’s requests for information covering many aspects of the banks’ loan pooling operations.
Update 12:00 AM Reader MBS Guy took note of the fact that the article mentioned that Schneiderman’s predecessor Andrew Cuomo had investigated this area but taken no action:
At the bottom, the article mentions that Cuomo made a few headlines by purporting to investigate, but ultimately did nothing. However, files from Cuomo’s investigations have been turned over to Schneiderman.
Cuomo pursued two areas of interest: the rating agencies and Clayton, the mortgage loan diligence firm used by most Wall Street banks.
On the rating agencies, Cuomo remarkably found no grounds for sanctions against the companies, but instead reached a fee restructuring settlement. This settlement required banks to pay for rating agencies to review deals, even if they didn’t rate them, in an effort to avoid banks shopping for the most favorable ratings and reducing the incentive for rating agencies to only give favorable ratings.
This was a truly remarkable outcome – the rating agencies screw up massively and deliver billions of dollars worth of inflated ratings and Cuomo’s solution: change the fee structure so they get paid more, even if they don’t rate the deals!
In addition, this outcome is almost the reverse of an earlier Clinton era anti-trust settlement brought by the DOJ against Moody’s for giving “hostile” ratings on bonds, even if they didn’t rate the deals. Back in the 1990’s, Moody’s used to rate deals for which they had not been hired or paid, as a means of communicating to the market that the issuer was using agencies who had lower credit enhancement requirements. The practice drove issuers and bankers crazy and they pushed the DOJ to bring the action. But in reality, it was a legitimate tool by Moody’s to inform investors that they were getting weaker ratings than if Moody’s had rated it. (This practice has apparently been endorsed now by Dodd-Frank).
The other big action by Cuomo was against Clayton. Again, no claims were brought. I remember when the investigation was announced, several friends of mine at investment banks were sure that this would be the big back-breaker for Wall Street – Clayton knew where the bodies were buried. In my opinion, Clayton was a shady, poorly run organization – they claimed to be reviewing the quality of subprime mortgages, but somehow never found anything wrong with any of the deals. The banks used their reports to immunize themselves from liability when the deals were issued and I’m sure Clayton knew this, but the money was too good.
Clayton’s image was rehabilitated a bit by the FCIC, without any mention of how they had failed to notice how terrible the loans were before the deals were issued.
That’s it – the AG at the center of the financial crisis basically found no meaningful wrongdoing.
Hopefully, Schneiderman will be more productive on these issues than Cuomo (it wouldn’t be hard).