The commission appointed by the US Government to look into the causes of the financial crisis has opened an investigation into the banks’ sales of billions of dollars’ worth of dud mortgages.
Wall Street’s biggest banks are already being investigated by the Securities and Exchange Commission (SEC) and the Department of Justice over allegations that they sold rotten mortgage products during the housing boom, costing investors billions when the market collapsed in 2007-08.
The New York Attorney-General is investigating whether the banks tricked ratings agencies into giving those mortgage products top credit ratings in order to sell them more easily to investors.
The Financial Crisis Inquiry Commission (FCIC), which has the power to subpoena banks and others for documents, has now promised to turn over any evidence that its new investigation uncovers to federal prosecutors who can bring criminal charges.
Phil Angelides, the former California treasurer who chairs the FCIC, said: “We’re in contact with regulators and are doing our own investigation.”
The commission’s hearing on June 2 will look into the role played by the ratings agencies in the financial crisis. Last month it issued a subpoena to Moody’s for information, accusing the ratings agency of failing to respond to requests for data in a “timely manner”.
Mr Angelides said that other areas of inquiry would include complex derivatives such as the collateralised debt obligations (CDOs) and credit default swaps that caused some of the worst losses during the financial crisis.
“When I started hearing the term ‘toxic assets’ I had a vision of something that had turned bad,” Mr Angelides said. “But it turns out that it was never good to start with.”
The SEC charged Goldman Sachs last month with misleading two investors into buying a mortgage-related CDO that, the regulator alleges, contained mortgages chosen particularly because they would default. The investors ended up losing $1 billion (£700 million). Goldman denies the charges.
Mr Angelides, who at a hearing of the FCIC in January accused Goldman’s chief executive Lloyd Blankfein of acting like a used-car salesman, said that Wall Street bosses had not accepted their culpability for the financial crisis.
“They almost see it as if it was business as usual and then some mysterious third-party force came down from the heavens and caused this catastrophe,” he said. “At almost every hearing the fingers point away from the people testifying.”
The FCIC, a bipartisan committee chosen by Congress, has until December 15 to report its findings.
Although President Obama is expected to sign new financial reform legislation into law by July 4, Mr Angelides said that it would not be too late for the FCIC to influence America’s financial system. The new reforms do not deal with key issues including ratings agencies and government-guaranteed lenders, he said.
“We’ve got miles to go,” Mr Angelides said. “The problems are so deep that they won’t be swept away with one piece of legislation.”
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