It's Only the Beginning

There's one thing you can be sure of: as the red ink from the various bursting bubbles continues to flow, so will the hunt for miscreants (and scapegoats) who might have played some role, however minor, in creating the mess to begin with.

What's more, if history is any guide, the pressure will come from myriad fronts -- attorneys general, the Securities and Exchange Commission, congressional committees, and class-action lawyers, to name a few -- and will probably continue long after things have actually hit bottom.

In "N.Y., Connecticut Probing Wall Street Subprime Loan Disclosures" Bloomberg details the latest in what will seem like an endless parade of criminal and civil probes.

New York and Connecticut are investigating whether Wall Street banks failed to disclose sufficient information about risks involved in investments linked to subprime loans, Connecticut's attorney general said.

The new focus in existing probes of the mortgage industry is whether banks left out material details in their disclosures about the risks posed by extremely high-risk loans, deceiving credit-rating agencies and investors, Connecticut Attorney General Richard Blumenthal said today in a interview. The states are also investigating lax underwriting standards, he said.

"The point is whether the banks knowingly withheld information so the disclosures may have been deceptive or misleading," Blumenthal said. "These questions are front and center in an ongoing investigation that has reached no conclusions."

Defaults on subprime loans have led to bankruptcies of lenders of such mortgages, such as New Century Financial Corp., roiling stock markets. Banks that packaged subprime loans as investments, such as Citigroup Inc. and Bank of America Corp., may have to write down billions of dollars when they report their next earnings, analysts said. New York and Connecticut are among at least a handful of states investigating the mortgage industry as foreclosures have risen nationwide. Blumenthal said his office was cooperating with New York Attorney General Andrew Cuomo "as we always do when our investigations have similar interests."

The New York Times reported earlier that that Cuomo's and Blumenthal's new focus is on the disclosure of high-risk loans known as exceptions. The U.S. Securities and Exchange Commission is also investigating the matter, the newspaper said.

Cuomo Comment

Jeffrey Lerner, a spokesman for Cuomo, would not comment on the investigation. Cuomo previously said he is investigating the subprime industry, including investment banks, and was probing the secondary market for loans.

In November, Cuomo sued First American Corp., the largest U.S. title insurer, claiming its eAppraiseIT LLC unit inflated home values under pressure from Washington Mutual.

False appraisals can mislead investors about the risk of defaults in mortgage-backed securities by overstating the ability of troubled borrowers to sell their property or refinance to settle the debt.

Cuomo also subpoenaed Fannie Mae and Freddie Mac, the two largest sources of U.S. home loan financing, for information on whether loans they purchased were based on tainted property valuations as part of "widespread" industry collusion.

Blumenthal said he had sent out an estimated 30 subpoenas to investment banks, ratings agencies and diligence companies. He said the boilerplate disclaimers banks used may have been "overbroad or useless to many investors" about the real risks posed by bundled, mortgage-backed loans that involved the high risk loans known as exceptions. He also said underwriting guidelines may have been compromised.