New York Attorney General Andrew Cuomo has reportedly opened an investigation into the relationship between Wall Street and investment rating agencies. According to a Bloomberg report, Cuomo’s office is trying to ascertain whether or not the banks misled the agencies about mortgage-backed securities they offered during the housing boom.
According to Bloomberg, a person familiar with the investigation said subpoenas went out yesterday to Goldman Sachs Group Inc., Morgan Stanley, UBS AG, Credit Suisse, Deutsche Bank AG, Citigroup Inc., Credit Agricole SA and Merrill Lynch & Co.(now owned by Bank of America). According to the Washington Post, the three major rating agencies — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — have also been subpoenaed.
During the housing boom, Moodyâ€™s Investors Service, Standard & Poorâ€™s and Fitch Ratings gave top grades to subprime-mortgage backed securities and collateralized debt obligations that lost value after the collapse of the housing market. Investors who lost millions in the collapse had relied heavily on these agencies’ ratings to decide whether to buy mortgage securities.
The investigation by Cuomo’s office comes on the heels of a New York Times report that detailed questionable tactics banks used to influence ratings. The investigation found that investment banks frequently hired away some of the very people who had devised the formulas rating agencies used to evaluate securities. Those hires often went on to help create mortgage deals that got better ratings than they deserved.
The Times also found that rating agencies may have facilitated the banksâ€™ actions by publishing their rating models on their corporate Web sites. One former rating agency employee told the Times that this enabled banks to “reverse engineer” their mortgage securities to garner higher ratings.
According to the Times, Cuomoâ€™s current focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive.