On December 5, 2007, Wall Street Journal reporter Kara Scannell reported that New York Attorney General Andrew Cuomo has subpoenaed three Wall Street investment banks seeking information about their conduct in securitizing mortgages, including risky subprime mortgages, their knowledge of true risk of these securities, and their relationships with the firms that rated these securities as investment grade. The subpoenas were sent to Merrill Lynch & Co., Bear Stearns Cos., and Deutsche Bank AG, according to the article. Credit rating firms that have issued ratings on these securities include Standard & Poors, Moody’s, and Fitch. The article also says that the role of credit rating firms is being examined by federal and state regulators.
The article compared Mr. Cuomo’s actions to those of his predecessor, Eliot Spitzer (now the Governor of New York), who exposed “buy” ratings issued by a number of Wall Street investment banking firms that were ultimately confirmed by regulators to be fraudulent. In those cases, the fraudulent “buy” ratings were issued by investment banks seeking to generate fees from underwriting initial public offerings of the over-rated securities. In this case, Attorney General Cuomo appears to be seeking to uncover evidence that may show whether the investment banks ignored (or even conspired with the credit rating firms to produce) inflated credit ratings in order to generate fees by packaging and selling the risky securities to investors who thought they were buying safe, investment-grade bonds.
It was Deep Throat, in Woodward’s and Bernstein’s All The President’s Men, who said, “Follow the money.” In the Scannell article, Mr. Cuomo says, “The ‘follow-the-money’ expression is ‘follow the mortgage’ into the secondary market.”