It looks like the Fed's verdict against Raj Rajaratnam for insider trading may just have been an amuse bouche before the main course: going after the mortgage crisis. Over the weekend, the New York Times' Gretchen Morgenson predicted that the big fish for prosecutors would be the foreclosure fiasco and shady practices like robo-signing. But it's becoming increasingly clear prosecutors are also eager to probe Wall Street's role in mortgage securities, patient zero of the global financial contagion. On the heels of the SEC subpoenaing Goldman Sachs on Abacus and other collateralized debt obligations, New York Attorney General Eric Schneiderman announced that he will be investigating banks like Goldman Sachs, Morgan Stanley, and Bank of America for their role in packaging mortgage loans into securities, among other practices.
While the SEC, which already got a $550 million settlement from Goldman for the sale of CDOs, tries to go after more civil charges for Wall Street's $1 trillion sales of the complex pool of mortgages, Schneiderman appears to be contemplating criminal charges. He'll be meeting with executives from those banks in the coming week and requesting related documents from the firms. At Schneiderman's disposal is a powerful legal weapon, the 1921 Martin Act, used by his predecessor Eliot Spitzer. Unlike federal securities law, the Martin Act doesn't require prosecutors to prove intent to defraud. For months, the New York's new Attorney General has said said he intended to pursue legal claims for the mortgage meltdown, although it might not necessarily be the big get Wall Street critics were hoping for. In a note to investors, Miller Tabak wrote:
The authorities may, in fact, end up limiting the investment banks’ liabilities to a fraction of the potential investor losses the banks could be on the hook for in court proceedings. Still, at the moment, we think the ”headline risk” for investment banks remains high.”
Still, we're pretty sure Schneiderman just made Matt Taibbi's day.
New York AG Probes Banks Over Mortgage Securities [WSJ]
New York Investigates Banks’ Role in Fiscal Crisis [NYT]
New Probe of Banks Is ‘Headline Risk’ [Deal Journal/WSJ]
Earlier: Attack of the Wall Street Zombies: Goldman Sachs’s Abacus and Too Big to Fail