economics

January 16, 2010

SEC subpoenas big banks over CDOs

Filed under: Uncategorized — ktetaichinh @ 9:37 pm
Tags: , , , ,

By Joanna Chung and Francesco Guerrera in New York

Published: January 16 2010 00:08 | Last updated: January 16 2010 00:08

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// ]]>Several leading international banks have received subpoenas from US regulators investigating one of the complex securities markets at the heart of the financial crisis, people familiar with the probe say.

The Securities and Exchange Commission sent subpoenas last month to banks including Goldman Sachs, Credit Suisse, Citigroup, Bank of America/Merrill Lynch, Deutsche Bank, UBS, Morgan Stanley and Barclays Capital, these people said. Requests for information were also made by the Financial Industry Regulatory Authority, which oversees broker-dealers.

The regulators are seeking information about the sale and marketing of so-called synthetic collateralised debt obligations during the financial crisis.

The SEC and Finra declined to comment on the investigation, which is at an early stage. The banks declined to comment. None has been accused of wrongdoing. CDOs are pools of bonds or mortgages and other loans that are sold to investors. Synthetic CDOs are backed by derivatives known as credit default swaps – a form of credit insurance – rather than actual loans or bonds themselves.

Securities regulators, who are under pressure to investigate possible wrongdoing related to the crisis, have been focused on whether investors in the market were provided accurate and relevant information or misled in some manner.

People familiar with the investigation said regulators are particularly interested in whether banks that created such instruments also bet against the clients who purchased them – thereby profiting while investors lost money.

Synthetic CDOs have been blamed by many analysts for exacerbating the financial crisis. Because synthetic CDOs are not backed by actual loans or bonds, but by derivatives, the market grew rapidly during the credit boom that ended with the collapse of the US subprime mortgage market.

However, because so many synthetic CDOs were ultimately linked to subprime mortgages, defaults by home buyers with poor credit histories reverberated around the global financial system. Investors came to discover than tranches of synthetic CDOs that had been rated triple A were, in fact, worthless.

Mary Schapiro, SEC chairman, told a commission investigating the financial crisis on Thursday that the SEC was probing complex debt securities that were sold by big banks in late 2006 and 2007.

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