The three biggest credit agencies are on the hook—along with eight Wall Street banks—in a probe involving whether they misled investors in toxic, mortgage-backed securities, CNBC has learned.
A source told CNBC that the investigation being spearheaded by New York Attorney General Andrew Cuomo is “very significant,” and that the deals were at the heart of the global financial crisis of the last few years.
Subpoenaed by the attorney general's office on Wednesday were the agencies Moody’s, Standard and Poor’s and Fitch and the banks Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Merrill Lynch and Credit Agricole.
Specifically, Cuomo wants to find out whether the Wall Street banks misled the credit rating agencies to get them to “bless” toxic mortgage-backed securities; whether the agencies “looked the other way” in exchange for the business they were getting from the banks; or whether there was something more serious at play—collusion in the back and forth between banks and the agencies.
The source said that the ratings [from the credit agencies] were the main point of contention: If the banks could secure an investment-grade rating on the securitized mortgages, they could sell them to the big institutions. When the housing boom went bust, those bad mortgages with the inflated ratings infected the global economy.
Goldman Sachs, Credit Suisse, Morgan Stanley and Citigroup declined to comment. However, Citigroup directed CNBC to the following language in its quarterly SEC filing on April 19, which predated the subpoena from the attorney general’s office.
"In addition, Citigroup continues to cooperate fully in response to subpoenas and requests for information from the Securities and Exchange Commission and other government agencies in connection with various formal and informal inquiries concerning Citigroup's subprime mortgage-related conduct and business activities. Citigroup is involved in discussions with certain of its regulators to resolve certain of these matters."
UBS confirmed to CNBC that it has received a subpoena and will comply with its requests.
Deutsche Bank issued the following statement: "We believe the bank acted appropriately and will cooperate with the authorities to substantiate our position."
Merrill Lynch, now owned by Bank of America, said: "We are cooperating with the attorney general's office in this matter."
CNBC has been unable to reach Credit Agricole for a comment.
As for the credit rating agencies, Fitch spokesman David Weinfurter told CNBC that the firm "intends to cooperate with the attorney general's inquiry."
Moody's said it was cooperating with the attorney general. Standard and Poor's declined to comment.