States probe banks' role in risky loans

January 12, 2008 3:10:49 PM PST
Authorities in New York and Connecticut are investigating whether Wall Street banks hid crucial information about high-risk loans bundled into securities that were sold to investors, Connecticut's Attorney General said Saturday. The investigations, first reported Saturday by The New York Times, center around "no-doc" or "exception" loans, that did not even meet subprime standards, Attorney General Richard Blumenthal said.

"The loans were made to people who did not have any documents to verify their income or other verification for key requirements normally applied to mortgage borrowers," he said. "Many of the lenders made large amounts of loans, so that the exception swallowed the rule, or became the rule."

The loans were sold by subprime lenders to Wall Street firms that bundled them with other, less risky, loans into securities.

Investigators want to find out whether the banks properly disclosed the high risk of default on those loans when selling those securities to investors in Connecticut and elsewhere, Blumenthal said.

"The investment banks may have used very broad, boilerplate disclaimer language that effectively failed to disclose fully and fairly all the information," he said.

Blumenthal said Connecticut is cooperating with New York and that the investigation may eventually include the Securities and Exchange Commission.

The Times said charges could be filed in the coming weeks.

Jeffrey Lerner, a spokesman for New York Attorney General Andrew Cuomo, declined to comment Saturday.

In November, Cuomo said he issued subpoenas to government-sponsored lenders Fannie Mae and Freddie Mac in his investigation into what he claims are conflicts of interest in the mortgage industry. He said he wanted to know about billions of dollars of home loans they bought from banks, including the largest U.S. savings and loan, Washington Mutual Inc., and how appraisals were handled.

Spokesmen for both lenders said they require accurate appraisals and both agreed to appoint independent examiners as requested. Washington Mutual said it was conducting its own internal investigation into Cuomo's claims and that "the company will vigorously defend itself from all unfounded allegations and lawsuits."

Blumenthal declined to say which firms were under investigation, but said his office had issued over 30 subpoenas.

"These practices involving trillions of dollars in securities sold to ordinary investors go to the core of our financial system's integrity and efficiency," Blumenthal said. "We regard this investigation as a priority."

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Associated Press writer Michael Virtanen in Albany, N.Y., contributed to this report.


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