Banks investigated via subpoenas include Citigroup, Goldman Sachs, Merrill Lynch and Morgan Stanley over inflated mortgage grades and misleading ratings agencies

The New York attorney general is investigating whether eight Wall Street banks misled ratings agencies to inflate the grades of certain mortgage securities.

The attorney general of New York, Andrew Cuomo, sent subpoenas to eight banks last night, according to the New York Times. The paper named Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch – now owned by Bank of America – Morgan Stanley and UBS as the banks under scrutiny.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. The agencies have come under fire for overstating the quality of mortgage securities that later slumped in the wake of the housing collapse, helping to trigger the financial crisis.

The attorney general’s inquiry suggests that he thinks the agencies may have been duped by one or more of the banks under investigation. He is scrutinising the rating agencies’ fees arrangements, which allowed banks to shop their deals among the agencies to secure the best rating.

Cuomo is also looking into the practice of bank mortgage desks hiring rating agencies’ employees to help create mortgage deals that may have secured better ratings than they deserved.

His probe comes as federal authorities investigate the business practices of a range of financial firms whose clients bought mortgage securities in the years before the collapse of the housing market in 2008.

Cuomo’s office and the Securities and Exchange Commission (SEC) were “working hand in hand” in the preliminary criminal probe, the Wall Street Journal reported.

Lawmakers have urged prosecutors to step up their investigation of the financial crisis, with only a single criminal case stemming directly from the meltdown. This case was brought against two Bear Stearns traders, Ralph Cioffi and Matthew Tannin, who were both acquitted last November.

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