Wall Street banks under scrutiny over mortgage loan packaging

Bank of America, Morgan Stanley and Goldman Sachs among those questioned by attorney general Eric Schneiderman Wall Street banks are facing fresh high-level scrutiny of their role in the credit crunch as New York’s attorney general opens an investigation into the packaging of mortgage loans into securities. Eric Schneiderman has called for meetings with several major institutions including Bank of America, Morgan Stanley and Goldman Sachs, according to reports in the US. The attorney general is not commenting on the investigation, which is believed to be in its very early stages. The banks and others have been blamed by politicians for worsening the financial crisis by encouraging the sale of high-risk financial instruments tied to mortgages. Schneiderman is reportedly interested in discussing the securitisation of mortgage loans and other mortgage related practices with the bankers. Schneiderman was appointed attorney general last November and follows Andrew Cuomo and Eliot Spitzer, both of whom led crackdowns on Wall Street. This month he reached a $90.8m (£55.9m) settlement with UBS over the “fraudulent and anti-competitive” sale of municipal bonds. The inquiry comes as banks continue to struggle with the legal fallout from the credit crisis. Civil suits have been filed by federal and state regulators since the financial crisis erupted in 2008 and private shareholders have also filed cases against the banks. In a sign of ongoing public anger towards the industry, eight people were arrested during protests outside JP Morgan Chase’s annual meeting in Columbus, Ohio, where demonstrators, greeted by a heavy police presence, chanted “make banks pay” and wielded placards with slogans such as “Chase gets rich, we lose homes, jobs and services”. Last year the Securities and Exchange Commission, the US financial regulator, levied a $550m on Goldman Sachs over claims the investment bank misled investors in collateralised debt obligations linked to subprime mortgages. It was the largest ever fine on a Wall Street bank. Banks packaged thousands of home loans into bonds known as mortgage-backed securities during the housing boom and sold them to investors around the world. Many of these bonds were given triple-A credit ratings, a grade supposedly denoting a safe investment, even though they were backed by high risk loans. The collapse of the US property market triggered a massive collapse in the value of the bonds, often to junk status. US officials have alleged banks, including Goldman Sachs, deliberately misled investors by encouraging them to invest in mortgage-backed securities they knew to be junk. The allegations are also being investigated by the SEC and the Justice Department. Schneiderman, like his predecessors, has a powerful legal tool at his disposal: the 1921 Martin Act. The act gives the prosecutor sweeping powers of investigation, allows him to subpoena any document he wants, and makes it easier for the attorney general to bring prosecutions. It was most extensively used by Spitzer after the stock market crash at the turn of the millennium. During his election campaign Schneiderman pledged to tackle Wall Street over the credit crisis. “The mortgage fraud crisis is devastating working families in every corner of New York State – it’s upending our economic recovery upstate and downstate,” he said. The broad nature of Schneiderman’s investigative powers make it uncertain where his investigations may lead but the attorney general has said he is interested in scam lenders and foreclosure practices as well as Wall Street investments. According to the New York Times, Schneiderman recently issued subpoenas to two investment firms linked to a paperwork-processing firm. The firm, Pillar Holdings, handled nearly 40% of all foreclosure cases filed in New York. The inquiry is believed to be unrelated to efforts by attorneys-general from all 50 states to reach a multibillion-dollar settlement with banks over allegations of improper foreclosure practices. Securities and Exchange Commission Banking Financial crisis Morgan Stanley Bank of America Goldman Sachs Dominic Rushe guardian.co.uk

Posted by on May 17, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.