Wall Street faces legal probe on sub-prime crisis

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The Independent Online

The New York state attorney general is examining whether Wall Street turned a blind eye as mortgages were foisted on borrowers who could not pay them back, and then misled investors when they sold them mortgage-backed securities.

Andrew Cuomo has sent subpoenas to several of the biggest Wall Street firms as part of his widening legal investigation into the causes of the mortgage market crisis.

Bear Stearns, Merrill Lynch and Deutsche Bank are among the companies which have been asked for information about how they assessed the quality of the home loans underlying derivatives such as mortgage-backed securities and collateralised debt obligations (CDOs). These derivatives have collapsed in value as low-income Americans begin defaulting on loans in record numbers.

The subpoenaed banks yesterday either declined to comment or said they would co-operate with all regulatory requests.

With millions of homeowners finding that they cannot refinance their mortgages before the expiry of low introductory interest rates, politicians fear a wave of foreclosures that could damage the wider US economy.

So far, most of the fury has been trained on unscrupulous mortgage brokers and on the credit rating agencies, which certified that many mortgage-backed derivatives were as safe an investment as government bonds.

However, Mr Cuomo's subpoenas suggest that the investment banks that created the derivatives may yet face scrutiny. They had a legal responsibility to ensure the accuracy of statements in the prospectus for derivatives they were selling to investors.

Many of the banks are already struggling to quantify the billions of dollars they have lost on the derivatives on their books.

Last month, as Mr Cuomo's investigations began to take off, he said that he would be guided by the first rule of legal investigations: follow the money. "In this case, that means follow the mortgage," he said.

By pursuing an aggressive hunt for malfeasance on Wall Street, Mr Cuomo is following in the footsteps of Eliot Spitzer, his predecessor as New York attorney general. Mr Spitzer was elected Governor of New York last year, partly as a result of the reputation he gained when he won multi-billion settlements from investment banks over conflicts of interests that arose as the dotcom boom turned to bust.