New York AG Schneiderman Investigating Goldman, Morgan Stanley, Bank of America Mortgage Operations

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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).

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  1. Poicephalus

    Gretchen gets the scoop.
    I always thought it would be Matt.

    Fingers crossed.

    And like Atrios said, “I hope he is hooker free”.

    Thanks Yves.


    1. Tao Jonesing

      I hope you don’t get a cramp in your crossed fingers.

      Spitzer actually tried to bring the banksters to justice and paid the price. Cuomo, learning from Spitzer’s mistake, decided to extort the bankers and, thus, joined their club.

      Schneiderman is following Cuomo and taking his entrance exam. The point is to launder the crimes into fines.

      “Note that this announcement effectively blows up the 50 state attorney general settlement talks.”

      Schneiderman is going to show the rest of the AGs how to play ball with the banksters. Just watch. He’s doing the opposite of blowing up the settlement talks: he’s going to make them a reality. He’s going to show how achieving the same results as what the broader set of talks are suggesting will be widely accepted by the voters of the state. The states need money, and the banksters are happy to pay them “fines” because they know they’ll get those fines back with a lot of interest.

      1. Yves Smith Post author

        Schneiderman is AG basically over the Democratic Party’s dead body. Cuomo and the NY Dem machine didn’t and haven’t supported him. And remember, there is more to financial services than big banks. Investors are mad as hell about what has happened (both the bailouts and continued abuses) and some are capable of writing large checks.

        1. David


          Thanks for the potentially good news.
          Could the “mad as hell” investors explain why I read
          that Wall Street is giving Obammer far less money
          for his re-election than what they gave him for his 2008
          campaign ?

        2. Hubert

          That may be so. But he too has to stop at some point. It might be a much more expensive points for the banks but it cannot cross over into criminal proceedings, otherwise Wall Street is toast and this, by all means, shall not be allowed to happen.

          1. attempter

            As long as everyone keeps thinking that way, so it shall be. (That’s just one of many things about what’s possible which are always asserted and never proven.)

            But I don’t doubt you’re right that everyone within the system will continue to think and do that way.

            The question is whether the people will ever stop thinking like that.

          2. Hubert

            Oh, I would love to see Schneiderman go for the whole thing. But he would be stopped (some way or the other). The higher ups are too connected to be jailed and they know too many incriminating things about their future “Ex-Friends”. So he will at most settle for some lower level material, if he is a politician.

          3. Middle Seaman

            Cutting Wall Street to size should be a national goal not something to avoid. As long as WS is about 40% of economy, we are all in trouble. Once WS is less than 10%, the country can start to recover seriously, build new industries, invest in the future, fix the infrastructure and, most importantly, get unemployment down to below 4%.

          4. DownSouth

            Hubert said:

            Oh, I would love to see Schneiderman go for the whole thing. But he would be stopped (some way or the other). The higher ups are too connected to be jailed and they know too many incriminating things about their future “Ex-Friends”. So he will at most settle for some lower level material, if he is a politician.

            You’ve certainly bought into the defeatist distortion hook, line and sinker.

            With about 90% of the American people wanting to see these sociopathic bankers stripped of their wealth, bound up in chains, dressed in bright orange jump suits and marched off to prison, it seems like anybody with the balls and the ability to do that could pretty much write his or her own ticket on the American political stage.

            And too, there really are people who have principles.

          5. Anonymous Jones

            Ding, ding, ding!!! False Dichotomy Alert!!! We have a winner!!!

            Just because a man thinks that some things are not possible does not mean he believes nothing is possible…

            [Of course, ideologues hate practicality and middle grounds and the slow march of progress. That’s one thing that has never changed and never will…it’s definitional]

          6. DownSouth

            attempter said: “The question is whether the people will ever stop thinking like that.”


            Spain may be blazing the trail in that regard. A couple of days ago there were some significant demonstrations throughout the country organized under the banner: REAL DEMOCRACY NOW! We’re not merchandise in the hands of the politicians and bankers.

            I was amazed, looking at the video, that the protesters were almost all young people. Of course young people, as well as those over 50, are the ones really taking it on the chin. The same thing is happening in the U.S. according to this CNN report:

            The brutal job market brought on by the recession has been hard on everyone, but especially devastating on the youngest members of the labor force.
            About 60% of recent graduates have not been able to find a full-time job in their chosen profession, according to job placement firm Adecco.

            It’s instructive to compare the video above of the May 15 demonstration in Spain to the coverage by Spain’s MSM. The MSM is definitely out to manipulate its coverage and commentary so as to demonize
            anyone with the audacity to challenge the banksters and their paid liars and bumsuckers, as this video demonstrates:

            Manifestación 15.05.11 Democracia Real ¡Ya! MANIPULACIÓN DE Informativo Matinal TELE5

          7. DownSouth

            Anonymous Jones,

            For someone who has a 7-figure income, as you’ve previously asserted in comments to having, the doings and contemplations of the little people may indeed be difficult to understand. But hopefully the following from Martin Luther King, Jr. will help you understand:

            In American life there is today a real crisis in race relations. This crisis has been precipitated, on the one hand, by the determined resistance of reactionary elements in the South to the Supreme Court’s momentous decision against segregation in public schools… The Ku Klux Klan is on the march again, determined to preserve segregation at any cost. Then there are the White Citizens Councils. All of these forces have conjoined to make for massive resistance.

            The crisis has been precipitated, on the other hand, by the radical change in the Negro’s evaluation of himself. There would probably be no crisis in race relations if the Negro continued to think of himself in inferior terms and patiently accepted injustice and exploitation. But it is at this very point that the change has come. For many years the Negro tacitly accepted segregation. He was the victim of stagnant passivity and deadening complacency. The system of slavery and segregation caused many Negroes to feel that perhaps they were inferior. This is the ultimate tragedy of segregation… It inflicts the segregator with a false sense of superiority while inflicting the segregated with a false sense of inferiority. But through the forces of history something happened to the Negro. He came to feel that he was somebody… With this new sense of dignity and new self-respect a new Negro emerged. So there has been a revolutionary change in the Negro’s evaluation of his nature and destiny, and a determination to achieve freedom and human dignity.

            This determination springs from the same longing for freedom that motivates oppressed people all over the world.

            History is the long and tragic story of the fact that privileged groups seldom give up their privileges voluntarily. Individuals may see the moral light and voluntarily give up their unjust posture, but as Reinhold Niebuhr has reminded us, groups are more immoral than individuals.

            We know through painful experience that freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed. Frankly, I have never yet engaged in a direct action movement that was “well-timed,” according to the timetable of those who have not suffered unduly from the disease of segregation. For years now I have heard the words “Wait!” It rings in the ear of every Negro with a piercing familiarity. This “Wait” has almost always meant “Never.”… I guess it is easy for those who have never felt the stinging darts of segregation to say, “Wait.” But when you have seen vicious mobs lynch your mothers and fathers at will and drown your sisters and brothers at whim; when you have seen hate-filled policemen curse, kick, brutalize and even kill your black brothers and sisters with impunity; when you see the vast majority of your twenty million Negro brothers smothering in an airtight cage of poverty in the midst of an affluent society; … when you are forever fighting a degenerating sense of “nobodiness”; then you will understand… There comes a time when the cup of endurance runs over, and men are no longer willing to be plunged into an abyss of injustice where they experience the blackness of corroding despair.

            It may well be that the greatest tragedy of this period of social transition is not the glaring noisiness of the so-called bad people, but the appalling silence of the so-called people. It may be that our generation will have to repent not only for the diabolical actions and vitriolic words of the children of darkness, but also for the crippling fears and tragic apathy of the children of light.

            ▬excerpted from “Letter from Birmingham City Jail” and “The Current Crisis in Race Relations,” New South, March, 1958

          8. just a passing shot

            On Mon. May 16, curlydan said: “[Geithner’s] means are relatively modest; his net worth is estimated in official disclosures between $770,000 and $1.8 million.”

            DownSouth says: “Anonymous Jones, For someone who has a 7-figure income, as you’ve previously asserted in comments to having, the doings and contemplations of the little people may indeed be difficult to understand”

            Just to put this into perspective. In one year, Anonymous Jones could be bringing in more than Treasury Secretary Geithner’s entire net worth.

            Is it any wonder that AJ is such a good friend of the banksters?

        3. Tao Jonesing


          Party affiliation is irrelevant. Whether Schneiderman and Cuomo are friends is irrlevant. You don’t need to be associated with or like someobody to learn by watching how they succeed or fail.

          No bankster is going to go to jail. No crimes will be found. Agreements will be struck that provide immunity to the banksters and money in the form of fines to New York State, and that money will be taken out of bank reserves created courtesy of the initial bailout, QE1 and QE2. Fines mean nothing when you’re paying with other people’s money.

    2. Debra Steidel

      Anonymous Jones: “….the slow march of progress”…yadda yadda yadda

      Cut the horseshit. What “progress” are you talking about? Your only raison d’être, now as always, is to undermine and attack anyone who thinks that banksters should be prosecuted and imprisoned for their crimes.

      Do you see anyone in jail?

      I didn’t think so. Shouldn’t that be good enough for you? That none of your friends are in orange jump suits isn’t enough for you? You also expect us to worship these bastards?

    3. nonclassical

      Gretchen was “there” in 2004 to document speculators selling
      off oil futures just in time to drive prices down for November Bushit re-election..

  2. readerOfTeaLeaves

    Note that this announcement effectively blows up the 50 state attorney general settlement talks.


  3. securecare

    Investors are mad as hell about what has happened

    No offense but I will believe the investors are something more than annoyed when I see some real perp walks and the guilty parties behind real bars for significant amounts of time. They DO have the clout to do something once they decide to actually follow through on the evidence on the public record, never mind the sheltered stuff.

    Too much kabuki dance so far.

  4. chris

    Nice Story Yves. Incredible isn’t it? I still get the feeling that the banks beleve they can stall and lie without repercusions long enough for all the scandle this to go away. They have gotten the government on their side and have been taking advantage of the system…..

  5. ambrit

    This could be just another step down the road to perdition. Two possibilities: Either Schneiderman takes the brief seriously, or not. In the first case, what will be interesting is how much opposition he gets, and from where. Second case would show who complains, and why. Either result should flush the serpents out of the grasses. Then we’ll know, really, just how fast or slow the collapse will be.
    One analogy I thought of, though cruel, says it all I think. When a child reaches for a flame, a good parent judges the kids ability to learn from experience, and either stops the child from hurting itself (the Nanny State, if you will,) or lets it burn itself and learn a painful lesson, (the back of the Hidden Hand.) What kind of rational parent burns itself, (bails out the bad actors with taxpayer funds,) and expects the child to get anything out of that except a good laugh?

  6. DavidE

    New York State and New York City depend on Wall Street. It is absolute foolishness to depend on the New York AG to rein in Wall Street excesses. It isn’t going to happen. The fact that New York State AG has prosectued when the federal government hasn’t only highlights how pathetic the federal government has been in dealing with Wall Street corruption.

  7. Cedric Regula

    The thing I find bizarre is that a sophisticated investment bank can select any outside firm it wants, like Clayton and the ratings agencies, believe and use their inputs as fodder to manufacture its securitization “products”, then claim they have no legal liability for the suitability or functionality of the product because the material they purchased came from somewhere else.

    Or as Lord Blankfein once said “Our clients come to us for risk”. So I guess we are all looking for a 5 Star disaster, and GS had just what the customer is looking for!

    I can’t think of anywhere else in life or biz where it works that way. At least without being called a crook or criminally negligent.

  8. Charlie

    I do not believe this investigation is going anywhere…what we have going on in government at the moment is all political parties auctioning off their influence to the highest bidder, the politician with the most charisma, the biggest lies and the least character gets the most money. Without a strong and honest leader or a national uprising this is only going to get worse until we have a major collapse, maybe just maybe after a big collapse we can have a serious course correction.

    1. Susan Truxes

      One thing bothering me today is the coincidence of the NYFed white paper in conjunction with some “law commission” and the NY AG looking into the same topic: securitization. I think some perverted synergy is being sought. All in an attempt to advise state judges.

  9. Virgil Ploce

    Nothing to see here, folks, move along. There are no bad guys, banksters are your friend. Just listen to alex and AJ:

    Anonymous Jones said: “…you are ascribing intent to a creature that does not exist….People like money…Water runs downhill. That’s the state of the world….”

    alex said: “….I also genuinely dislike the sort of anti-intellectual mob mentality that says… the world must be sorted into Good Guys and Bad Guys…”

  10. Lloyd C. Bankster

    DownSouth said: “With about 90% of the American people wanting to see these sociopathic bankers stripped of their wealth, bound up in chains, dressed in bright orange jump suits and marched off to prison, it seems like anybody with the balls and the ability to do that could pretty much write his or her own ticket on the American political stage.”


    Anonymous Jones, Transor Z, alex?

    You gonna stand for this? Go get him, boys.

  11. J

    You people are fucking crazy. The banks aren’t lending because they are too busy dealing with lawsuits and now another runt from NY wants to attack the banks and you all think it’s a good idea.

    Main street can go borrow shit.

    You people are seriously freaking deranged.

    1. Patrice

      Not only are we deranged but we’re also mad as well in addition to being very well armed.

      And we happen to have *you* people outnumbered.

      1. Patrice

        Um, that should have been “mad as hell in addition to being very well armed”. Stick that in your pipe and smoke it, you thieving bankster piece of shit.

        1. Patrice

          J said: “You’re going to shoot who exactly Patrice? The Cashier or the assistant clark?”

          No one, J, I’m not planning to shoot anyone, Mr Investment Banker, Sir. I was only taunting you, get you to express how you *really* feel about the little people. You know, those cashiers and clerks.

          But relax, you’re perfectly safe behind your multi-million dollar gated McMansion.

      1. J


        The banking system almost seized up. If the Tarp hadn’t been put together that weekend you would have be eating your pet and grass.

        Don’t believe me, then listen to Pelosi explain it if you don’t believe “bepublicans”.

        1. Yves Smith Post author

          Since when is Pelosi an authority on finance?

          Seems you are awfully keen to protect your meal ticket at the expense of all of us. The term of art is “looting”m and until recently was practiced only in fly-by-night companies and in third world countries until Wall Street figured out it was easier to steal than earn money the honest way.

          Not to say there aren’t some honest people on Wall Street but the level of denial about who and what caused the crisis says all.

  12. brian

    The insovlency of the large banks of the world is duly noted and few amongst the sane would argue.
    but to address the caller at 3:07; Where might I sign up to sue one of the banking institutions and help the people and attorney general of my state get our own state bank sooner than later? I want to do my part to put yours and other companies defined by RICO statutes as a business practice, out of same? hmmmm?

    1. J


      You’re an idiot. You simply don’t know what you’re talking about. RICO should be let loose on the one organization that deserves to be put through the ringer and that’s the Demolition party. Wasn’t it only last year we heard members of the NJ demolition party were trading in body parts?

  13. Lloyd C. Bankster

    J said: “You people are fucking crazy. The banks aren’t lending because they are too busy dealing with lawsuits and now another runt from NY wants to attack the banks and you all think it’s a good idea.

    Main street can go borrow shit.

    You people are seriously freaking deranged.”

    That you AJ?

    Attaboy! Git er done!

    1. DownSouth

      Well I must admit, Lloyd C. Bankster, with such accomplished polemicists on your payroll, how can you possibly lose?

      I haven’t seen anything as awesome as this since Cheney “shocked-and-awed” Iraq or McNamara unleashed his “search-and-destroy” missions on Viet Nam.

      The little people have about as much chance against this Blitzkrieg as the Red Army did against Hitler’s Panzers. “Be harsh and remorseless,” the Führer told his generals. “You are to act with brutality. Close your hearts to pity. The stronger man is always right.” “Wiping out the very power to exist of Russia! That is the goal,” proclaimed the German military genius as he gave the order to shoot all Soviet commissars who were captured. The supreme commander reckoned that within eight weeks they could capture Leningrad, Moscow, and the Ukraine, putting an end to organized resistance.

      And this new one you’ve just hired, J, he sure knows how to make friends and influence people. I’d rank him right up there alongside Lloyd “I’m doing God’s work” Blankfein. Why he’s better than a Nazi storm trooper with a potato masher.

      1. Lloyd C. Bankster

        Downsouth said: “And this new one you’ve just hired, J, he sure knows how to make friends and influence people.”

        J is on a 90 day trial, and needs to learn some anger management techniques. He’s supposed to take a “timeout” and count to 10, before responding to anything.

  14. J


    I’m not AJ, Lloyd. But I gues he or she was sane enough to realize most of you people here belong in a padded cell.

  15. J

    Hey Yves

    You’ve a self describe investment banker which I assume means that at one time you worked at one of the I-banks. So did I by the way.

    How much corruption and other bullshit that you seem to write about here and egg these morons on did you see every day? Answer that Yves.

    What a mendacious person you are egging on these lunatics for some cheap kicks.

    1. Rex

      Oh my, J. (Is that short for Jerk?)

      I guess we must be doing something right to get you so worked up, and name calling and everything. I’m sure you are accustomed to getting strokes for your brilliance and creativity and highly rewarded for gathering huge piles of money from your schemes and strategies. It must really grate your ego to see all these average Joes thinking that your great empire is counter productive to the broad human society and the future of the world in general.

      If we keep prodding you, is there any chance your type-A, sociopathic personality could explode with a cardiac arrest or a brain hemorrhage? I’d like to think so. If not, seeing a few of the masters of the universe put in cages would help some.

      1. nonclassical

        “Drinks all around!!..did you see that!?..killed him without
        firing a shot!!…(Big Boy; “Hi-Lo Country”)

  16. Rex

    Or did I rank you too high, given your finely honed persuasive skills? Maybe you are just a petty foot soldier to the guys behind the curtain.

  17. ScottS

    I had an epiphany today. The financial crisis will resolve itself when news gets out that Goldman Sachs, by that point the only firm left on Wall Street, shorted its own stock, and thus the entire economy collapses into a financial singularity.

    WRT to the original piece — I may be jaded, but the breadth of this investigation makes me skeptical. It seems like the standard approach of:
    1. Make pious noises about bringing the bad guys to heel
    2. Get all the bad guys in a room and negotiate a settlement aka get-out-of-jail-free card
    3. Ask if they’re hiring.
    4. Profit!

    I’m not generally a fan of moral relativism or adultery, but it seems like what Elliot Spitzer got caught doing was relatively minor and his penance is about up. Can he be talked out of his job at MSNBC and back into ass-kicking?

  18. 60sradical

    To Yves and the stalwart regulars: don’t waste much energy on this J cat. He seems to have the brain of a reptile who sleeps by the river Styx. Ingnore his juvenile pesonal attacks. He is flotsam in the putrid pool of the bangsta sea. Psychologically, an open-shut case of neo-con-like insecurity regarding his masculinity, hence, the bad-ass veneer. A garden variety punk.

  19. FatCat

    Nobody investigates MY guys, OK! Nobody! They work for ME!

    So back off, Schneiderman, or I’ll cut off your reelection fund.

    Is that clear?!


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