U.S. regulators are scrutinizing the books of Wall Street's largest investment banks amid questions they are hiding losses from subprime mortgages, people familiar with the inquiry said.
The Securities and Exchange Commission wants to see whether firms are calculating the value of subprime-mortgage assets on their books the same way they calculate those values for their brokerage clients, such as hedge funds.
Analysts and investors have raised questions whether there are unreported losses from subprime-mortgages and collateralized-debt obligations, or CDOs.
The regulatory checks are expected to include Wall Street's five biggest investment banks, starting with Goldman Sachs Group and Merrill Lynch . Goldman Sachs and Merrill Lynch declined to comment.
People familiar with the inquiry, first reported by the Wall Street Journal Friday, played down the checks as routine.
Wall Street banks are in a sensitive period as turmoil in U.S. mortgage markets generate losses for investors and push some lenders into bankruptcy. Yet few investment banks have disclosed significant subprime losses in recent periods.
The scrutiny may also help pinpoint whether hedge funds accurately report their results to investors, the Journal reported, citing an unnamed source. Regulatory checks into how firms calculate values of certain assets could boost the accuracy of performance reports to investors.
Marking subprime assets to market is tricky since they aren't easily traded, the Journal reported.
In late June, the SEC said it was probing about a dozen CDOs, which are securities that invest in mortgages and other debt.
In recent months mortgage losses have surfaced at some large investment firms. Swiss bank UBS was forced to shut down Dillon Read Capital Management less than two years after its launch following losses in mortgage markets.
Meanwhile Bear Stearns shares, and its reputation, were slammed as two of its mortgage funds suffered losses and filed for bankruptcy.