The head of the Securities and Exchange Commission (SEC), Mary Schapiro, admitted today that it is investigating the sales practices of Collateralized Debt Obligations (CDOs) of Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), and Goldman Sachs (NYSE:GS). The admission came before the Federal Crisis Inquiry Commission on Thursday and was the most direct indication to date that the regulators are investigating the sales practices of investment bankers that lead up the meltdown in the credit market and the collapse of the financial markets.
The admission by the SEC came as Ms. Schapiro was testifying in front of the Federal Crisis Inquiry Commission on Thursday and was asked what the SEC was doing to investigate the CDOs sold by banks in 2006 and 2007. The SEC will be investigating how investment banks purchased pools of subprime mortgages, repackaged and “securitized” them, and then sold these instruments to other investment banks, pension funds, insurance companies, and other entities. The collapse of the value of the underlying subprime mortgages in these CDOs is widely understood to be one of the major factors that lead to the trouble in the credit markets.
In sharing some rare insight into the SEC’s active investigation, Ms. Shapiro noted “we are looking at the resecuritised CDO market with a focus on products structured and marketed in late 2006 and early 2007 as the US housing market was beginning to show signs of distress. In particular, we are seeking to determine whether investors were provided accurate, relevant and necessary information, or misled in some manner.”
The SEC is under tremendous pressure to root out the causes of the economic collapse and bring high profile cases to light. After numerous past instances of failing to find corporate wrongdoing and endemic frauds (Bernie Madoff is still the poster child of SEC bungling), this is viewed by many a grand opportunity for the SEC to have a very public victory.
Which banks will be impacted by the SEC investigation? Though too early to definitively tell, the top sellers of CDOs in 2006 and 2007 included Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), and Goldman Sachs (NYSE:GS). Though none of the investment banks have been accused of malfeasance, it’s likely that the SEC investigation will bring further scrutiny to these banks in particular, and the banking industry as a whole in the coming months.
