KEY POINTS:
The New York state Attorney-General is examining whether Wall St 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 St 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.
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 credit rating agencies which certified that many mortgage-backed derivatives were as safe an investment as government bonds.
However, 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.
Last month, as Cuomo's investigations began to take off, he said he would be guided by the first rule of legal investigations: follow the money. "In this case," he said, "that means follow the mortgage."
Multibillion-dollar rescue fund comes up short
A rescue plan aimed at preventing tens of billions of dollars of losses on secretive off-balance-sheet vehicles has attracted little support on Wall St and may have to be dramatically scaled back.
Citigroup said in October that it was leading a consortium to create a new US$80 billion-100 billion ($103 billion-128 billion) fund to buy up mortgage-backed debts that few other Wall St investors now want to buy. The plan was thrashed out at meetings organised by Treasury Secretary Henry Paulson.
Speculation yesterday was that its target size may be cut to around US$50 billion, but it remained unclear if it would get off the ground at all.
- Independent
