Is the day of reckoning approaching for Wall Street and its big names banks and other players over the subprime mortgage boom and the marketing of all those exotically named things called derivatives?
First it was Goldman Sachs being charged by the US Securities and Exchange Commission, then this week Morgan Stanley was mentioned as being the subject of interest by US regulators looking at the selling of mortgage bonds during the subprime boom.
The announcement of the Goldman Sachs on April 16 helped push Wall Street lower, aided by the fears over Europe.
Wall Street is down 2.3% or 260 point since then.
Goldman Sachs shares are down more than 17% since then, so the stakes are high for all the banks and ratings groups caught up in the investigations, and the wider market.
Overnight the probes widened with the aggressive New York State Attorney General, Andrew Cuomo reported to be probing eight leading US banks over the way mortgage bonds were rated.
Then a few hours later, the Wall Street Journal upped the ante by revealing that a criminal investigation is underway.
"U.S. federal prosecutors and the Securities and Exchange Commission are cooperating in a criminal probe into allegations banks misled investors about their participation in mortgage bond deals, the Wall Street Journal reported, citing a person familiar with the matter, the Journal reported.
The paper named JPMorgan Chase & Co., Deutsche Bank AG, UBS AG and Citigroup Inc. are being probed and have also received civil subpoenas from the SEC; Goldman Sachs Group Inc. and Morgan Stanley are already being investigated, the newspaper reported.
"The Manhattan U.S. Attorney’s office and SEC are working hand-in-hand. At issue is whether the Wall Street firms made proper representations to investors in marketing, selling and trading pools of mortgage bonds called collateralized debt obligations, or CDOs.
"Many major Wall Street banks created CDOs at the behest of players that made bets against the deals—and banks themselves sometimes bet against the deals. Bearish bets paid off when the mortgage market crashed."
In its story, the New York Times reported that Mr Cuomo’s investigation was aimed at the some of the same group of banks, plus ratings groups.
"Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Credit Agricole and Merrill Lynch, now owned by Bank of America," the Times reported.
"The companies that rated the mortgage deals are Standard & Poor’s. Fitch Ratings and Moody’s Investor Services.
"Investors used their ratings to decide whether to buy mortgage securities."
The Time said the New York AG was investigating the banks and the credit groups "to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.
"The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market," the New York Times reported.
The investigation will be massive: Just over $US1 trillion of CDOs were issued by Wall Street firms from 2005 to 2007.
Merrill Lynch, Citigroup and Deutsche Bank were the largest issuers in dollar amounts in that period, with J.P. Morgan, Morgan Stanley, UBS and Goldman were ranked Nos. 5, 7, 10 and 14, respectively, according to figures quoted from Thomson Reuters by the Journal.
And Moody’s revealed last Friday that it had been notified by the SEC that it was being investigated over its 2007 ratings licence declaration, part of which says that the firm (Moody’s was independent).
This SEC probe is separate to the others revealed this week.
