May 13, 2010 -- New York State Attorney General Andrew Cuomo has launched an investigation into eight banks to determine if they influenced the ratings agencies that were supposed to give independent advice and protect investors from bad products.
A source close to the investigation today called it a "troubling relationship," a clear case of "hear no evil, see no evil" between and the agencies that are supposed to rate them.
Now, New York Attorney General Andrew Cuomo wants to know: Did the banks provide false information to the agencies, or where those banks and rating agencies, in some ways, in on it together?
The investigation takes aim at eight major banks, including Goldman Sachs, Morgan Stanley, UBS and Citigroup. Also under investigation are ratings agencies Standard & Poor's, Moody's Investors Service and Fitch Ratings.
Selling Bundled Mortgages With High Ratings
All of the banks sold bundled mortgages to investors back when the mortgage market was red hot. The bundles that had the highest ratings fetched the highest price.
ABC News has learned the attorney general is now investigating whether some of those banks tried to manipulate the ratings by hiring people away from the ratings agencies to come over to the bank. They offered the employees huge salaries, reportedly up to $1 million.
Gaming the System?
Did that practice help the banks get higher ratings?
"The best way to game that system is to hire someone who used to work there, who knows the software and how the models work," said Duff McDonald a journalist who covers Wall Street.
"It's not necessarily criminal," McDonald continued, "but it's just another example of Wall Street doing whatever it takes to get it done."
Investment banks already pay the agencies to rate them, a relationship that has come under criticism.
ABC News has learned that the New York attorney general will go even further.
Cuomo's office is trying learn if these agencies were, in some cases, paid reported huge amounts to rate some of these deals. But the ratings agencies would apparently only get that amount if the banks got the ratings they wanted.
ABC News reached out to all eight banks under investigation, as well as the three ratings agencies. Most offered no comment in reply, but those who did offer a statement said they are cooperating. None suggested any wrongdoing.