The idea that necessity is the mother of innovation may generally be more popular with Wall Street scions than state regulators, but in Massachusetts last week the tables turned.

A legal settlement in the state may have opened a new path for regulators to stamp out bad loans from the securitization process. It could also give investment bankers a headache.

Last week Goldman Sachs reached a settlement agreement with the Massachusetts attorney general´s office in which Goldman said it would pay $60 million essentially to halt the state AG´s investigation in to whether it engaged in deceptive practices while securitizing subprime mortgages.

Without admitting or denying wrongdoing, Goldman took responsibility for the existence of poorly underwritten subprime loans in securities it created and sold. As part of the agreement, the bank said it would modify the loans to Massachusetts residents that it owns, in some cases affording large principal write downs.

While the cost to Goldman is small, and only 714 borrowers will actually benefit from this agreement, it could still be a game-changer. Other states may take up similar investigations and both borrowers and investors could use the Massachusetts precedent to file class action suits.

"Once this kind of thing becomes popular, you´re going to get a number of attorney generals that are going to jump on the bandwagon and bring some suits," said Ron Glancz, a partner at Venable LLP. "It´s a way for the attorneys general to reach the investment bankers and the folks that do the securitizing of these assets. It seems in this case they´ve also reached the servicer, because Goldman is a servicer of some of these mortgages."

Glancz said the lawsuits could prove an expensive prospect for the investment banks, and the future cost of securitizing assets would likely increase.

"This really raises some issues now as to what´s the due diligence that a bank has to do on its own loan portfolio," Glancz said.

"I would call this decision sort of precedent setting...It will make the investment community sort of leery about what they securitize. From the consumer standpoint they´re going to say this is absolutely right. But if you´re going to look at it as an investment banker it creates an additional expense."

Glancz said the long-term effects could be mixed. "I don´t know where it´s going to dry up the securitization market," he said. "In the long run, is this good for the securitization market or is it bad? I don´t know."

The Goldman case also casts new light on a battle between the Office of the Comptroller of the Currency and state banking regulators currently simmering in the Supreme Court.

"This is a way to get around federal preemption," Glancz said.

"Regardless of the preemption," he added, "the states still have a role here, particularly in regard to institutions that are not banks. We´ve seen the need now for enforcement on all levels. I´ve talked to local prosecutors and I really think we´ve fallen down in certain cases in terms of going after consumer violations."