Wall Street's biggest banks are facing a new legal onslaught, as regulators and state and federal prosecutors pore over their activities in the mortgage market in the run-up to the credit crisis.
Andrew Cuomo, the attorney-general of New York state, has opened an investigation into whether any of the eight leading banks misled the credit rating agencies, who mistakenly certified that $1 trillion (£680bn) of complex mortgage derivatives could be as safe as government bonds.
And the federal Department of Justice has begun taking an interest in whether the investors who bought these toxic mortgage derivatives were duped by their Wall Street brokers.
The intensity of the civil and criminal investigations has increased since Goldman Sachs was charged last month with fraud by the finance industry regulator, the Securities and Exchange Commission, and politicians stepped up their attacks on Wall Street's activities.
Mr Cuomo is understood to have sent subpoenas to eight banks: Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Credit Agricole and Merrill Lynch, which is now part of Bank of America. He is seeking information on the companies' dealings with rating agencies, which were hired to grade the creditworthiness of complex mortgage derivatives called collateralised debt obligations (CDOs).
Mr Cuomo has previously agreed a settlement with the three major rating agencies, Standard & Poor's, Moody's and Fitch, designed to end the conflicts of interest that he said led them to issue inflated ratings for CDOs.
Now he is examining if banks hid important information from the agencies, or hired rating agency staff to help them to manipulate the mathematical models that the agencies used.
Successive Congressional and journalistic investigations have revealed how banks often created CDOs at the behest of hedge funds that wanted to bet against them, and sometimes even bet against them themselves.
In the CDO deal at the heart of the Goldman Sachs fraud case, the bank is accused of helping its hedge fund client to stuff the CDO full of bad mortgages and hiding important information from the investors who ultimately bought the CDO.
As well as facing civil charges from the SEC, Goldman is also under criminal investigation over the same deal.
Morgan Stanley shares fell after a report that it, too, is under suspicion of having misled investors – although it said it had not been contacted by the Department of Justice.
Mr Cuomo's investigation could lead to either civil or criminal charges.
All the investigations are at a preliminary stage, and the banks are co-operating with investigators. Over the course of two years of recriminations and inquiries into the causes of the credit crisis, which began in the overheated mortgage market, the banks have denied any wrongdoing.Reuse content