Cuomo Stalks Wall Street, Mortgage Edition

Andrew

Cuomo is on a fishing expedition for mortgage-related malfeasance on Wall

Street, specifically sins of omission:

The inquiry raises questions about the extent to which securities firms are

obligated to dig into the mortgages before slicing them up to sell to investors.

Many securities firms rely on third-party vendors to do this work; among the

questions is whether this effort was adequate, or if securities firms had

a duty to do further due diligence. Securities firms that underwrite securities

have an obligation to make sure that statements included in offering documents

are accurate.

Patrick Rucker of Reuters had an important article at the beginning of August

which is well worth reading in this context. The problem isn’t that due diligence

wasn’t done, or that it wasn’t diligent enough. The problem is that it was

done, it was often done very well, and then

it was ignored:

Investment banks that bundle and sell home mortgages often commissioned reports

showing growing risks in subprime loans to less creditworthy borrowers but

did not pass on much of the information to credit rating agencies or investors,

according to some of those who prepared the reports.

Tanta explained the

realities of the mortgage-securitization industry at the time:

I’ll confirm that yes, there’s tons of information that falls under the general

heading of "due diligence" that nobody paid any attention to…

I’d flip open the file to see, right on top, page after page of worksheets,

printouts, and memos from everyone else who had handled the thing so far indicating

some serious problems with it. Discovering what’s wrong with these loans involved

using the reading skills Miss Buttkicker taught me in the third grade. But

the loans were still in the deal, even though three or four people before

me had noticed something wrong.

During the credit boom enough people got lazy enough and greedy enough that

I daresay Cuomo will be able to put together a scary indictment or two should

he be so inclined. Which would be at least a little cathartic for the millions

of people burned by the housing bust, since then they’ll be able to point their

fingers at (alleged) criminals and lay the blame squarely at the doors of the

named institutions. But they’ll be deluding themselves, really. Everyone

was to blame in this mess, not just the people who will end up getting prosecuted.