New York Attorney General Andrew Cuomo has opened an investigation of eight major banks, to find out whether they gave misleading data to rating agencies to pump up the ranking of mortgage-backed securities. The companies in the crosshairs are Citigroup, Goldman Sachs, Morgan Stanley, Credit Suisse, Deutsche Bank, UBS, Crédit Agricole and Merrill Lynch (aka Bank of America).

According to The New York Times, the probe centers on whether the banks misled the agencies, Moody’s, Standard & Poors, and Fitch; and whether former rating agency employees who went on to work for the banks gave them an inside track to influence ratings.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.
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Mr. Cuomo is also interested in 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, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.
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Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

None of the banks have commented publicly on the investigation. Earlier, a Goldman Sachs spokesman told The New York Times: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Cuomo Is Said to Question Banks’ Influence on Ratings [NYTimes.com]

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