NY AG Probes Whether Banks Gave Misleading Information to Ratings Agencies
New York Attorney General Andrew Cuomo is reportedly investigating eight banks to determine whether they gave misleading information to ratings agencies, resulting in ratings for mortgage products that they knew were too positive.
Cuomo has issued subpoenas to eight banks notifying them of the investigation, the New York Times reports. The story identifies them as Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, now owned by Bank of America.
A prior story in the New York Times says “one of the mysteries of the financial crisis” is why bad investments got good ratings from agencies such as Moody’s, Standard & Poor’s and Fitch. The story suggests an answer. In an effort to be less secretive, the ratings agencies made public the computer models they used to devise the ratings, giving banks the information they needed to tinker with mortgage deals to change the ratings, the Times found.
“In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested,” the story said. The banks got help by hiring away some of the ratings agency employees who had created the computer models, sometimes offering million-dollar compensation packages, the Times says.
