NEW YORK — The financial sector largely shrugged off reports of new federal investigations into banks' roles in mortgage-bond deals, with shares slightly lower as additional investigations largely were expected.
Federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals, a person familiar with the matter told The Wall Street Journal. Many major Wall Street banks created collateralized debt obligations at the behest of players that made bets against the deals — and banks themselves sometimes bet against the deals. Bearish bets paid off when the mortgage market crashed.
The banks under early-stage criminal scrutiny — JPMorgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG — also have received civil subpoenas from the U.S. Securities and Exchange Commission as part of a sweeping investigation of banks' selling and trading of mortgage-related deals, the person said. Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley.
Meanwhile, the New York attorney general is starting an investigation into eight banks to determine if they provided misleading information to rating agencies to inflate the grades of certain mortgage securities, The New York Times reported, citing two people with knowledge of the investigation. The targets include Goldman Sachs, Morgan Stanley, UBS, Citigroup, Deutsche Bank, Credit Suisse Group, Credit Agricole SA and Merrill Lynch, which is now owned by Bank of America Corp., the report said.
Credit Suisse lost 1.6% to $43.40, and Bank of America climbed 5 cents to $17.12. Credit Agricole fell 3.7% to $6.34, while Goldman Sachs slipped 0.3% $146.81.
Sandler O'Neill analyst Jeff Harte said news of more investigations should have been expected by investors as the SEC has been looking into at least 12 different companies since June.
"If 12 are being looked at, it's safe to assume anyone with a large CDO portfolio is at least being preliminarily investigated," Harte said. "Today's news helps to solidify the belief this is an industry issue as opposed to an individual company issue."
He added that additional probes could be forthcoming.
The investigation into Morgan Stanley, which was reported Wednesday, weighed on the bank's shares throughout the day. They ended the session down 2%, which netted it an upgrade to outperform from market perform by FBR Capital Markets analyst Steve Stelmach. Shares rose 0.5% to $27.95.
Stelmach noted that given the stock's recent pullback, the valuation offers an attractive entry point for a company in transition into a more stable, retail-oriented model.
"While we do view the pending regulatory environment as having the potential to be fairly onerous on the industry, on a relative basis, MS should be better positioned than more institutionally focused peers," Stelmach said, adding Morgan Stanley doesn't have any more or less exposure to regulatory risks than its competitors.
