New York Attorney General Andrew Cuomo is subpoenaing several Wall Street firms, including Deutsche Bank AG, Merrill Lynch & Co, and Bear Stearns, for information about packaging and selling debt connect to high-risk mortgages.
Prosecutors want to look at the way investment banks review the quality of mortgages before turning them into packaged products that can be sold to investors. They also want to find out how debt is being turned into securities and learn more about the credit-rating firm-bank relationship.
This past summer, mortgage-backed securities affected by growing default and delinquency rates had high debt ratings despite the backing of loans issued to lenders.
Two hedge funds run by Bear Stearns fell apart-instigating the credit markets crisis. The collapse cost investors some $1.6 billion. The collapse cost Merrill Lynch, a big investor in the fund and other subprime mortgage securities close, to $8 billion.
The investigation will look at the way relationships among third-party due-diligence firms, mortgage companies, credit-rating firms, and securities firms and their connection to the firms’ involvement with the subprime mortgage crisis. Underwriting standards will also be reviewed.
Last month, NY Attorney General Cuomo sent subpoenas to investment banks as part of his investigation into U.S. mortgage loans. Fannie Mae and Freddie Mac were among those subpoenaed.
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