If this holds, it's delicious.
A New Wall Street Investigation: Is the Hammer Finally Coming Down? | Rolling Stone Politics | Taibblog | Matt Taibbi on Politics and the Economy
Morgenson reported that Schneiderman is focused on at least three companies: Morgan Stanley, Bank of America, and old friend Goldman, Sachs.
This investigation has the potential to be a Mother of All Nightmares situation for the banks for a couple of reasons. For one thing, the decision to go after the securitization process is a total prosecutorial bullseye. This is the ugly heart of the wide-scale fraud scheme of the bubble era. Again, the business model during this time was a giant bait-and-switch scam. Sleazy lenders like Countrywide and New Century first created huge masses of bad loans, committing every conceivable kind of fraud to get people into loans (from doctoring income statements with white-out to phonying FICO scores to engineering fake appraisals). They then moved the bad loans quickly to the big banks, which pooled them and chopped them up (this is the “securitization” process), sprinkled hocus-pocus math on them, and them sold them to suckers around the world as AAA-rated securities.
The questions Schneiderman will seek to answer are these: did the banks securitize loans they knew were fraudulent, throwing the rotten mortgages into the stew before serving them to customers? Did they also commit insurance fraud by duping the bond insurers (known as “monocline” insurers) into thinking the mortgages were not as risky as they really were? And did they participate in the fraud scheme on a more basic level by lending huge amounts of money to the Countrywides of the world, knowing that they in turn would immediately use that money to create the bad loans? In other words, did the banks finance the fraud in addition to brokering it?
The reason this is such a potentially deadly investigation for the banks is that they seemed to be so close to getting away scot free. There is another investigation into the banks’ mortgage abuses by the states’ Attorneys General, led by Iowa AG Tom Miller, that was rumored to be headed toward a settlement, despite the fact that nothing like a complete investigation has been done. The expectation for some time has been that the banks would eventually have to pay a significant, but eminently survivable, settlement for abuses during the bubble era. Although the Miller probe was focused on practices like robo-signing and other such documentation abuses, it could theoretically have covered securitization as well.
. . .