More Investigations of Wall Street

Things are heating up for the banks: 

Wall Street Probe Widens, by Susan Pulliam, Kara Scannell, Aaron Lucchetti, and Serena Ng,WSJ: Federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals, according to a person familiar with the matter.

The banks under early-stage criminal scrutiny—J.P. Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG—have also received civil subpoenas from the Securities and Exchange Commission as part of a sweeping investigation of banks’ selling and trading of mortgage-related deals… Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley, as previously reported by The Wall Street Journal. …

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. …

Prosecutors so far are simply gathering evidence. … It’s possible the probe could end with no charges being brought against any of the firms. …

And:

Prosecutors

Ask if 8 Banks Duped Rating Agencies, by Louise Story, NY Times: The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities…

The investigation parallels federal inquiries into … interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities. … The inquiry … suggests that … the agencies may have been duped by one or more of … Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch…

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. … Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is … interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved… His … focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive…

Edmund Andrews says financial reform legislation is not yet a done deal, and could still be watered down to appease banking interests:

Financial overhaul, perils ahead, by Edmund L. Andrews: It’s tempting to think that financial regulatory reform is already a done deal in Congress… Don’t be fooled. It’s true that the Senate is likely to pass some kind of bill. Unfortunately, the legislation is still at risk of death by a thousand cuts: scores of seemingly anodyne amendments that, if passed, turn the bill into a cynical joke.

You know the drill…, some people – on Wall Street, or at the banks — want to spare us from “unintended consequences.”

Today, Senate Democrats managed to vote down a major Republican push to gut portions of the bill to regulate derivatives, like the credit-default swaps that blew apart AIG. …

Tomorrow, Republican Sam Brownback will push an amendment to exclude car dealers from oversight by the new Consumer Financial Protection Bureau. …

But I would like to focus on a third imminent that seems drier than derivatives or car loans but is at least as important: federal pre-emption of state financial regulations. And this time, it’s moderate Dems who are carrying water for the banks.

In the run-up to the mortgage meltdown, federal bank regulators fought hard to pre-empt any state efforts to crack down on shady bank practices. A number of states, like North Carolina and New York, were trying to crack down on abusive mortgage practices by subprime lenders. But many of the lenders were subsidiaries of national banks, and the Office of the Comptroller of the

Currency declared that states had no right to touch them whatsoever. …

The amendment to watch out for in the days ahead actually comes from a Democrat: Tom Carper of Delaware. Carper’s amendment would forbid state attorney generals from prosecuting banks that violate national consumer laws, much as the fed’s blocked Elliott Spitzer and Andrew Cuomo of New York from investigating racial and ethnic targeting by subprime lenders. It would also allow the Feds to override state consumer laws…

 Don’t let it happen.

The bill needs to be made stronger, not weaker, so let’s hope that amendments to water down the bill’s impact continue to lack the necessary support.

On a broader note, there seems to be a shift in the narrative about what caused the crisis. Fraud, deception, and other questionable if not illegal behaviors are beginning to take on a larger role in the story of what happened to bring about the problems in the financial sector. The turning point was, of course, the investigation of Goldman, and the investigations have been growing more numerous ever since.

The shift in attitude has probably helped to stave off challenges designed to weaken the legislation, and if a smoking gun turns up in one of the investigations like those described above, that would likely make it even harder for banks get the political support needed to water down the legislation. But I’m not counting on that happening, and as noted above, the deal isn’t done yet. It’s still possible for the legislation to be weakened, and as pointed out above there’s no shortage of attempts to do just that.


Originally published at Economist’s View and reproduced here with the author’s permission.
 
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