12.01.2008 10:00 Real Estate
Citing people with knowledge of the matter, the newspaper said the inquiry, begun last summer by state Attorney General Andrew Cuomo, was focusing on how banks bundled billions of dollars of exception loans and other subprime debt into complex mortgage investments.
Charges could be filed as soon as the coming weeks, the Times said. Connecticut Attorney General Richard Blumenthal told the newspaper he was also conducting a review and cooperating with New York officials.
The federal Securities and Exchange Commission is also investigating, the Times said.
Reports commissioned by Wall Street banks raised alerts about the high-risk loans, known as exceptions, which fell short of even the lax credit standards of subprime mortgage companies and the Wall Street firms, the newspaper said, but the banks failed to disclose those details to credit-rating agencies or investors.
The inquiries highlight Wall Street's leading role in igniting the mortgage boom that has imploded with a burst of defaults and foreclosures. The crisis is sending shock waves through the financial world, and several big banks are expected to disclose additional losses on mortgage-related investments when they report earnings next week.
EXCEPTION LOANS
Industry officials say the so-called exception loans make up anywhere from 25 percent to 80 percent of the $1 trillion subprime mortgage market among portfolios they had seen, the Times said.
The banks also failed to disclose how many exception loans were backing the securities they sold, with underwriters using such words as "significant" or "substantial," securities law requires banks to disclose all pertinent facts about securities they underwrite, the report said.
Blumenthal said the disclosures in the banks' securities filings appeared to be "overbroad, useless reminders of risks," the Times said.
"They can't be disregarded as a potential defense," the newspaper quoted him as saying. "But a company that knows in effect that the disclosure is deceptive or misleading can't be shielded from accountability under many circumstances."
New York state law would allow for criminal as well as civil charges, the Times said.
Cuomo declined to comment, but the Times said he had subpoenaed Wall Street banks including Lehman Brothers (LEH.N) and Deutsche Bank (DBKGn.DE), as well as major credit-rating companies Moody's Investors Service, Standard & Poor's and Fitch Ratings. Mortgage consultants including Clayton Holdings (CLAY.O) in Connecticut and the Bohan Group, based in San Francisco, were also subpoenaed.
Officials at Wall Street banks and the American Securitization Forum declined to comment, the Times said, while credit-rating firms would not say they had been subpoenaed, but that they were generally not provided due diligence reports even when they asked for them.
(Writing by Chris Michaud, editing by Patricia Zengerle)
