New York State Attorney General Subpoenas Mortgage Giants

December 6, 2007

(Long Island, N.Y.) The Wall Street Journal on Wednesday reported that Some of the world’s biggest banks, Merrill Lynch & Co, Bear Stearns Cos and Deutsche Bank AG received subpoenas seeking information related to the packaging and selling of debt tied to high-risk mortgages. The subpoenas, sent by New York State Attorney General Andrew Cuomo, also request information about how debt was pooled into securities and the banks’ relationship with credit-rating firms.

Last month, Cuomo also subpoenaed mortgage giants Fannie Mae, and Freddie Mac, as part of the investigation. Cuomo attacked the mortgage industry for conspiring to “rip off homeowners and investors alike”. People will lose their homes, and that could create a lifetime of debt problems,” Cuomo said. “We do need new laws” to keep the subprime market liquid while protecting borrowers, he said.

The Bush administration is close to a plan to freeze mortgage rates temporarily for some homeowners who are threatened with foreclosure. Experts believe that as many as 2 million homes are at risk of repossession as a slump in the property market makes it difficult for struggling owners to refinance overly-aggressive mortgages.

Merrill Lynch joined Goldman Sachs this week in predicting that a recession is likely to grip the US next year. The bank predicted that the Federal Reserve will cut interest rates as low as 2% in an attempt to kick-start the economy.

Wall Street has played a major role in the boom in lending to buyers with weak credit records. It has extended credit to mortgage originators to allow them to offer more mortgages, bought companies that originate and service mortgages, and packaged the mortgages into securities to sell to investors.

By selling those securities, they are able to retain less risk and originate more loans; investors wanted to buy the securities because they had very high interest rates in an environment where general interest rates were very low.

The aftermath of the mortgage fallout has already claimed the jobs of two Wall Street chief executives and dragged on many banks’ profits.

Posted by News LI Editor · Edited by Brianna - Filed Under Money