After big Wall Street banks posted an incredible perfect quarter of trading, the government is doing what it can to cramp their celebration. Today, New York Attorney General Andrew Cuomo joins the popular cause of accusing big banks of wrongdoing: he is reportedly investigating whether eight big Wall Street banks misled the rating agencies. This follows SEC fraud charges against Goldman Sachs and federal investigations of rating agency Moody's, investment bank Morgan Stanley, and probably others. Cuomo didn't want to miss out on all the fun. But does he have a case, or does he just find big banks a politically convenient target?
In particular, Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch (now Bank of America) are in Cuomo's crosshairs. He believes that they provided misleading information to the rating agencies, which led to the high ratings they provided on mortgage-related securities that turned out to be junk. If that occurred, then the banks committed fraud.
From everything we know about the financial crisis, however, it's highly unlikely that misleading information caused these ratings. For starters, the data that banks provided was generally verified through third-party due diligence, so it couldn't have been false or we would have heard about gross fraud by now. Additionally, banks didn't need to lie to the rating agencies -- their mistakes are now pretty obvious. The agencies made poor assumptions, which they shouldn't have relied on the banks to form. Had the housing market continued to rise indefinitely, all those securities would have performed as expected. Of course, that's not what happened.