Cuomo Subpoenas Goldman, UBS in Rating Service Probe
Morgan Stanley subpoenaed by New York Attorney General Andrew Cuomo. Photographer: Daniel Acker/Bloomberg
May 13 (Bloomberg) -- New York Attorney General Andrew Cuomo subpoenaed Goldman Sachs Group Inc., Morgan Stanley, UBS AG and five other banks to see whether they misled credit-rating services about mortgage-backed securities. Bloomberg's Dominic Chu reports. (Source: Bloomberg)
New York Attorney General Andrew Cuomo subpoenaed Goldman Sachs Group Inc., Morgan Stanley, UBS AG and five other banks to see whether they misled credit-rating services about mortgage-backed securities, according to a person familiar with the investigation.
Cuomo, 52, is probing whether the banks manipulated the companies’ ratings models, the person said. The attorney general is also examining whether bank employees who previously worked at the services got favorable ratings for securities because of their prior relationships, said the person, who declined to be identified because he wasn’t authorized to speak publicly.
“You can’t prevent people from moving around,” Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said in a phone interview. “The elephant in the room that isn’t being addressed is the massive unmanageable conflict of interest of the issuers-investment banks selecting the rating firms.”
Egan-Jones, a rating service, charges investors for its assessments; other rating services are paid by issuers or investment banks.
State and federal regulators have been looking into why Moody’s Corp., Standard & Poor’s and Fitch Ratings gave top grades to subprime-mortgage backed securities and collateralized debt obligations that later plummeted in value. Cuomo’s latest subpoenas went out to eight banks yesterday and also went to the rating companies, the person said.
Held Accountable
Cuomo’s investigation will help hold rating services accountable “even though it is directed against the investment banks and asking whether they have misled the ratings agencies,” Connecticut Attorney General Richard Blumenthal said today on conference call coordinated by the White House about U.S. Senator Christopher Dodd’s financial overhaul bill.
In 2008, Cuomo and the rating services reached agreements that he said included a new fee structure designed to keep investment banks from shopping for ratings for residential mortgage-backed securities.
Moody’s said this month that it may face civil claims by the U.S. Securities and Exchange Commission that it filed false and misleading descriptions of its credit-rating policies.
Blumenthal, 64, sued Moody’s and McGraw-Hill Cos.’ Standard & Poor’s in March for allegedly “catering” to the investment banks and other issuers of structured debt securities. He said Cuomo’s latest probe may uncover evidence that helps ensure that states, consumers and investors are compensated for the rating services’ possibly deceptive practices in evaluating some securities.
‘Abusive Practices’
“Whether the blame is on the investment banks or the credit-rating agencies, hopefully, the relief will go to investors and others harmed by the abusive practices,” said Blumenthal, who is running to replace Dodd, a fellow Democrat, in the Senate. Dodd, who turns 66 this month, is retiring.
According to the person familiar with Cuomo’s probe, subpoenas also went out yesterday to Credit Suisse, Deutsche Bank AG, Citigroup Inc., Credit Agricole SA and Merrill Lynch & Co., which was acquired by Bank of America Corp.
“The bank acted appropriately and will cooperate with the authorities to substantiate our position,” said Deutsche Bank spokesman Ted Meyer, who declined to comment on the subpoena.
UBS received a subpoena from the New York attorney general and will comply, said Doug Morris, a spokesman. Michael Duvally, a Goldman Sachs spokesman, and Morgan Stanley’s Mark Lake declined to comment.
Cooperating With Cuomo
Bank of America is cooperating with the attorney general, spokesman William Halldin said in a telephone interview. He declined to provide other details.
“We are cooperating with the AG’s office,” said Alex Samuelson, a spokesman for Citigroup.
Credit Agricole received a subpoena and is cooperating, said Anne-Sophie Gentil, a spokeswoman.
“It is our practice to cooperate fully with regulatory authorities,” said Duncan King, a New York-based spokesman for Credit Suisse.
“We are cooperating with the N.Y. Attorney General’s Office in their investigation of this matter,” Moody’s spokesman Michael Adler said in an e-mail.
Chris Atkins of Standard & Poor’s had no comment.
“Fitch intends to cooperate with the attorney general’s inquiry,” said David Weinfurter, the company’s head of communications.
In November, Ohio Attorney General Richard Cordray sued Moody’s, S&P and Fitch on behalf of five Ohio public employee retirement funds, saying improper ratings of mortgage-backed securities cost the funds more than $457 million.
To contact the reporter on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net.
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