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Sub-prime probes focus on disclosure, valuation

(WASHINGTON) The Securities and Exchange Commission (SEC) is investigating how banks, creditrating firms and lenders valued and disclosed complex mortgage-backed securities that ultimately led to the sub-prime crisis, a top agency enforcer said on Saturday.

‘The big question is, who knew what when, and what did they disclose to the marketplace?’ said Cheryl Scarboro, an associate director in the SEC’s enforcement division in charge of the sub-prime working group.

The SEC has opened about three dozen investigations into firms and individuals involved in the sub-prime mortgage market.

The investor protection agency has not named any names. But Morgan Stanley and Merrill Lynch are some of the firms in the financial services industry that have disclosed that government investigators are seeking information about their sub-prime activities.

Ms Scarboro said the cases can be broken down into three main areas: the securitisation process, the origination process and the retail area. Insider trading is also a key area.

‘Our investigations into potential misconduct is clearly a priority at the division,’ Ms Scarboro said at a Practising Law Institute conference in Washington.

Banks, due diligence firms and credit-rating agencies are being examined for their role in the securitisation process, or how mortgages were sold, repackaged and bundled into special financial products. The SEC is looking at the valuations and accounting treatments of mortgage-backed securities.

It is looking at whether the securities were valued correctly in the first place, what was the level of risk and if that was adequately disclosed to shareholders.

The methodology and models that companies used to value the complex financial products are being examined as well.

The agency also is looking at write-downs that financial firms have been forced to take and whether the assets should have been taken down and disclosed earlier.

 

Source: Reuters (Business Times 11 Feb 08)

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