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NY 'Investigates' if Banks Misled Ratings Agencies


US federal prosecutors are investigating whether Morgan Stanley misled investors about financial derivative deals against which it sometimes bet, The Wall Street Journal reported Wednesday. (AFP/Getty Images/File)

NEW YORK - New York Attorney General Andrew Cuomo is investigating whether eight banks misled ratings agencies to inflate the grades of certain mortgage securities, US media reported Thursday.

The investigation comes as federal authorities probe the business practices of a range of financial firms whose clients bought mortgage securities in the years leading to the collapse of the housing market in 2008 that helped trigger the global financial meltdown.

Cuomo's office and the Securities and Exchange Commission (SEC) are "working hand-in-hand" in the preliminary criminal probe, The Wall Street Journal reported.

The New York Times named Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch -- now owned by Bank of America -- Morgan Stanley and UBS as among the banks under scrutiny.

Standard & Poor's, Fitch Ratings and Moody's Investors Service were the companies that rated the mortgage deals, it said. The agencies have taken flack for overstating the quality of mortgage securities that later lost value in the wake of the housing collapse.

Morgan Stanley has said it has not been contacted by prosecutors and denied any wrongdoing.

Lawmakers are urging prosecutors to be more aggressive in their investigation of the financial crisis, with only a single criminal case stemming from the meltdown so far -- brought against two Bear Stearns traders.

The latest investigation remains in its preliminary stages, the Journal noted, with prosecutors gathering evidence and not yet issuing any criminal subpoenas yet.

The Times, citing unidentified individuals with knowledge of the investigation, said Cuomo was also looking into a practice of bank mortgage desks hiring rating agencies employees to help create mortgage deals that secured better ratings than they were due.

Wall Street giant Goldman Sachs is facing similar civil fraud accusations made by the SEC in a complaint last month. The Journal said Goldman has recently entered settlement talks with the government.

Cuomo is also scrutinizing the rating agencies' fees arrangements, which allowed banks to shop their deals among the agencies to secure the best rating, the Times said.

He is said to be focusing on information the investment banks provided to the rating agencies and whether bankers knew the ensuing ratings were overly positive.

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