A securities industry regulator investigating abuses in mortgage-linked investments has focused on the activities of Morgan Stanley,
Barclays PLC and
Credit Suisse Group AG, a person with direct knowledge of the matter said.
The
Financial Industry Regulatory Authority has sought information on so-called synthetic collateralized debt obligations that the firms created, according to the person, who declined to be identified because the inquiry is confidential. Finra has concentrated on whether the banks became mired in a conflict of interest by betting that their own CDOs, which were tied to home loans, would lose value.
The regulator has also focused on the firms' sales practices and on how they picked the mortgage bonds that underpinned the investments, the person said.
Finra hasn't accused Morgan Stanley,
Credit Suisse or
Barclays of wrongdoing in connection with their CDOs.
Finra's inquiry mirrors efforts by the Securities and Exchange Commission to crack down on investment banks and collateral managers for their roles in selling and managing complex products that fueled losses during the financial crisis.
Goldman Sachs Group Inc. last week said it made a “mistake” and agreed to pay a record $550 million to settle SEC claims that it defrauded investors by not disclosing the role played by
hedge fund Paulson & Co. in devising and betting a mortgage- linked CDO known as Abacus.
Barclays Capital spokesman Brandon Ashcraft said the firm does not comment on its communication with regulators.
Credit Suisse spokesman Duncan King and Morgan Stanley spokesman Mark Lake declined to comment. Two telephone calls and an e-mail to Finra spokeswoman Nancy Condon were not returned.
SEC Filing
New York-based Morgan Stanley, the sixth-largest U.S. bank by assets, said in a Feb. 26 filing with the SEC that it is responding to subpoenas and requests for information from regulators concerning mortgage-linked products including CDOs.
Zurich-based
Credit Suisse is Switzerland's second-largest bank. London-based
Barclays is the U.K.'s third-largest bank.
Washington-based Finra, the brokerage industry's self- regulatory body, fined
Deutsche Bank AG's investment-bank unit $7.5 million this week, saying the bank misled investors by understating delinquency rates on subprime mortgage-backed securities it sold in 2006. Several firms are being investigated for similar violations, James Shorris, Finra's acting enforcement chief, said in an interview on July 21, declining to provide details of specific probes.
Baldwin CDOs
Bloomberg News reported in May that Morgan Stanley drew the SEC's attention for structuring and then betting against CDOs that were tied to home loans. In one deal, a cluster of CDOs known as Baldwin kept wagering on mortgage bonds as the underlying loans were paid down, rather than reducing their bets. That left investors facing losses on a modest rise in U.S. housing defaults, while Morgan Stanley was positioned to gain.
Morgan Stanley also designed other similar products, including one called ABSpoke and two groups of deals named after U.S. presidents.
Credit Suisse and
Barclays have also created synthetic CDOs linked to subprime loans, under series called Arlo and Magnolia, respectively.
The SEC, which is examining a range of firms and structured products, sued ICP Asset Management last month for its role overseeing CDOs known as Triaxx. The firm favored itself and certain clients by directing more than $1 billion of trades at artificially high prices on behalf of the CDOs.
That lawsuit emerged from a sweep of more than 50 investment advisers that manage structured financial products, probing the firms' possible conflicts of interest and whether they appropriately priced assets during times of market stress.
CDOs are
investment vehicles that repackage pools of assets such as home-loan bonds, buyout loans and bank capital notes into a series of new securities with varying risks. Finra's probe focuses on synthetic CDOs, which are only linked to the performance of certain assets rather than actually owning them.
