|Goldman CEO Lloyd Blankfein worries that proposals to limit subprime borrowing and markets will go too far. |
NEW YORK (CNNMoney.com) -- Several top Wall Street firm face a New York State probe into whether their packaging and selling of debt tied to high-risk mortgages violated the law, according to a published report.
The Wall Street Journal reported Wednesday that the office of New York State Attorney General Andrew Cuomo sent subpoenas to Merrill Lynch (Charts, Fortune 500), Bear Stearns (Charts, Fortune 500) and Deutsche Bank (Charts), asking such information as how the debt was pooled into securities and the banks' relationship with credit-rating firms.
The paper said that a spokesman for Cuomo's office couldn't be reached. It said Bear Stearns and Deutsche Bank declined to comment and a Merrill spokesman would only say, "We always cooperate with regulators when asked to do so."
Many of the mortgage-backed securities that ran into trouble due to rising default and delinquency rates this summer had high debt ratings, even though they were backed by loans made to lenders without top credit ratings themselves, or who had not provided full documentation of their income.
The Journal says this latest inquiry apparently is looking at what role securities firms played in the current crisis with their underwriting standards, in particular, the relationships between mortgage companies, third-party due-diligence firms, securities firms and credit-rating firms.
Two of the firms receiving subpoenas, Bear Stearns and Merrill, have been at the center of the meltdown of the mortgage security market, although Deutsche Bank has thus far been relatively unscathed by problems in the sector. Deutsche's third-quarter earnings rose 31 percent despite $3.2 billion in writedowns due to subprime problems.
By comparison, two hedge funds run by Bear Stearns' asset-management division collapsed this past summer, helping to spark the crisis in credit markets and costing investors an estimated $1.6 billion. It also led to a 61 percent drop in earnings at Bear in the third quarter.
Merrill Lynch was one of the major investors in that fund and other subprime mortgage securities - bets which cost it nearly $8 billion and also led to the ouster of CEO Stanley O'Neal.
A month ago Cuomo announced he had issued subpoenas to government-sponsored lenders Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500) in his investigation into what he said are conflicts of interest in the mortgage industry.
He said he wanted information about loans Fannie and Freddie purchased from banks, including Washington Mutual. (Charts, Fortune 500) He charged at that time that Washington Mutual improperly pressured appraisers to provide inflated values.