Wall Street Banks Face New Probe Over Mortgage Bond Mispricing

Prominent Wall Street banks are facing another probe into alleged mispricing of a type of mortgage bond sold in the years following the financial crisis.

The Wall Street Journal citing "people close to the inquiry" reported that federal investigators are probing a number of banks for cheating clients in the years following the financial crisis by deliberately mispricing mortgage bonds.

It "is the first known wide-ranging examination of mortgage-bond sales" by banks in the years of financial crisis, the newspaper noted.

The banks under federal scanner include Barclays, Citigroup, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, Royal Bank of Scotland Group and UBS, one of the people close to the probe told WSJ.

However, the investigation that bean less than a year ago may not lead to enforcement action and is still in an early stage, according to the people.

"Regulators are investigating whether traders exploited the murky pricing around residential mortgage-backed securities from around 2009 through 2011 to buy or sell the investments at artificially depressed or inflated values," WSJ writes.

Investors in mortgage-backed securities generally rely on traders' pricing of the securities, and it is illegal for traders to misrepresent to investors the quality of the securities that affects the decision to buy.

The probe is being conducted by the Securities and Exchange Commission and the special inspector general for the Troubled Asset Relief Program, a watchdog set up in 2008 to root out fraud related to the crisis bailout, the people close to the probe said.

Banks Hit by Fines and Settlements

The new probe is a potential blow to the banks, who are already facing several lawsuits over their roles in the crisis.

In connection with their conduct leading to the financial crisis in 2008, several banks had to pay heavy fines to various regulators. The banks are still booking billions of dollars in possible legal expenses.

Earlier in December, BofA stumped up $131m (£80m, €96m) in settlement payments after the US SEC found that Merrill Lynch misled investors about its mortgage securities.

In November, JPMorgan agreed to pay $4.5bn to 21 institutional investors in 330 residential mortgage-backed securities (RMBS) trusts issued by JPM and Bear Stearns, which it acquired during the financial crisis.

In October, JPM agreed to pay one of the largest financial penalties in history after sealing a tentative $13bn deal with the US Justice Department to put an end to a raft of government mortgage product related probes.

Meanwhile, the US banking industry has argued that many of the alleged investor losses related mortgage-backed securities could be ascribed to the 2008 crisis. The industry has said that it should not be held liable for selling a variety of mortgage securities that ultimately went bad.