U.S. regulators and legislators are investigating whether Wall Street investment banks deliberately sold risky structured securities to clients, and then bet on the securities failing, the New York Times reported on Wednesday.
Investigators in Congress, the Securities and Exchange Commission, and the Financial Industry Regulatory Authority are looking at banks' sales of complicated instruments known as collateralized debt obligations, according to the paper.
It said banks that created these securities, and then bet on their failing, include Goldman Sachs, Morgan Stanley, and Deutsche Bank.
The paper said any probes are in early stages, but investigators seem to be focusing on whether banks violated fair dealing laws, or securities laws, in selling CDOs to investors and then betting against their clients using credit derivatives.
In some cases, the securities appear to have been deliberately stuffed with particularly risky mortgages, in order to perform poorly if the housing market tanked, according to the paper.
FINRA and the SEC did not immediately reply to Reuters emails seeking comment that were sent outside of regular U.S. business hours. Officials from Deutsche Bank and Morgan Stanley in Asia were not immediately available for comment.
Goldman Sachs said in a statement: "It is fully disclosed and well known to investors that banks that arranged synthetic CDOs took the initial short position and that these positions could either have been applied as hedges against other risk positions or covered via trades with other investors."
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