NY AG Investigates Bank's Relations to Ratings Co's
On May 12, it was reported that New York Attorney General Andrew Cuomo was launching an investigation of eight major banks in relation to the information they provided to the ratings agencies tasked with grading mortgaged-backed securities offered to investors. This investigation comes at the same time as other investigations by federal authorities into many types of financial services companies and their actions in the months and years leading up to the collapse of the housing market and ensuing financial crisis.
According to The New York Times, the New York AG's office has served subpoenas on eight banks; Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, now owned by Bank of America.
Unlike other investigations, such as that by the SEC concerning Goldman Sachs, which are delving into the exchange of information (or lack thereof) between banks and investors, this investigation is focused on the information flowing between the banks and the ratings agencies. These agencies, with Standard & Poor's, Fitch Ratings and Moody's Investors Service being the three who rated mortgage deals, have been criticized for the ratings given to mortgage-backed securities which lost so much value when the housing market collapsed. Investors depend on these ratings to give an indication of the relative risk of a given investment.
According to The Times, New York Attorney General Cuomo may have reason to believe that the agencies could have been mislead by one or more of the banks who are now the targets of his investigation.
Further, Cuomo is looking at the revolving door for employees between the ratings agencies, with lower salaries and the banks, where opportunities for better pay abound. The Times cites one example linked directly to the focus of the SEC/Goldman investigation. The deal under scrutiny there, "Abacus," was "devised in part" by a former employee of the Fitch Ratings agency, who had moved over to Goldman.
Goldman Sachs responded to an April Times article that preceded the AG's investigation and which was critical of the interaction between the banks and the ratings agencies. Goldman Sachs spokesman, Samuel Robinson, said: "Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies' processes and the ratings they assigned."
Mr. Cuomo is also concerned about the agencies' fee arrangements, which allowed banks to shop their deals between agencies, seeking the best rating.
Under New York law, Attorney General Cuomo can file either a civil or criminal complaint against the targets of the investigation if the evidence warrants.
- Prosecutors Ask if 8 Banks Duped Rating Agencies (New York Times)
- SEC Sues Goldman Sachs, VP, for Mortgage-Backed Securities Fraud (FindLaw's In House Blog)
- Business Banking and Securities Articles (FindLaw)
- Banks and Banking (FindLaw's LawBrain)