Probe Into Big Banks' Activities in Mortgage Securities Widens

Federal prosecutors are conducting a preliminary criminal probe into several major Wall Street firms. Working with securities regulators, the prosecutors are looking into whether the banks misled investors in marketing, selling and trading pools of mortgage bonds called collateralized debt obligations (CDOs), according toThe Wall Street Journal.

The banks under early-stage criminal scrutiny are Deutsche Bank (DB), JPMorgan Chase (JPM), Citigroup (C) and UBS (UBS), reports the Journal. It notes: "Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley."

In addition, The New York Timesreports that New York Attorney General Andrew Cuomo is looking into whether some big banks "provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities."

This investigation involves Goldman Sachs (GS), Morgan Stanley (MS), UBS, Citigroup, Credit Suisse (CS), Deutsche Bank, Crédit Agricole (CRARY) and Merrill Lynch (BAC). The rating agencies who gave the problematic ratings were Moody's (MCO), Standard & Poor's and Fitch. The mortgage securities given top ratings turned to out be highly unstable and were eventually were cut to "junk" status. Some of these instruments have been viewed as a major cause of the financial crisis.

Wall Street is now under siege as the suspicions mainly against Goldman Sachs have spread to most major investment banks. If the investigations are successful, it could alter the way the industry does business. Would institutional clients that generate huge fees for investment banks lose confidence in the entire trading and securities system? Where they might turn for these service is hard to tell, but they're likely to turn away from Wall Street's giants.