NY AG Andrew Cuomo Subpoenas Eight Banks in Widening Probe

May 14, 2010 (LPAC)—In a growing avalanche of investigations of the money changers on Wall Street, New York AG Andrew M. Cuomo, issued subpoenas on Wednesday night to eight banks in an investigation as to whether the banks misled ratings agencies about the quality of mortgage securities they were offering. The banks are Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, USB, and Merrill Lynch, now part of Bank of America.

The companies that rated the mortgage deals are Standard & Poors, Fitch Ratings, and Moody's Investors Service.

Cuomo is also investigating 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. For example, the Abacus 2007-AC1 Goldman Sachs deal now being investigated by the SEC was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005. At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Yukawa who had been working at much lower pay at the rating agencies.

Around the same time that Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank. In the fall of 2007, the Fitch analyst on a Goldman deal was a friend of Yukawa.

Also, the rating agencies may have facilitated the banks manipulation of the ratings by publishing their rating models on their corporate web sites. One former rating agency employee said: "The models were posted for bankers who develop CDOs to be able to reverse-engineer CDOs to a certain rating."