Investigate

New York and Connecticut are investigating whether Wall Street banks failed to disclose sufficient information about risks involved in investments linked to subprime loans, Connecticut's attorney general said.

The new focus in existing probes of the mortgage industry is whether banks left out material details in their disclosures about the risks posed by extremely high-risk loans, deceiving credit-rating agencies and investors, Connecticut Attorney General Richard Blumenthal said today in a interview. The states are also investigating lax underwriting standards, he said.

``The point is whether the banks knowingly withheld information so the disclosures may have been deceptive or misleading,'' Blumenthal said. ``These questions are front and center in an ongoing investigation that has reached no conclusions.''

Defaults on subprime loans have led to bankruptcies of lenders of such mortgages, such as New Century Financial Corp., roiling stock markets. Banks that packaged subprime loans as investments, such as Citigroup Inc. and Bank of America Corp., may have to write down billions of dollars when they report their next earnings, analysts said. New York and Connecticut are among at least a handful of states investigating the mortgage industry as foreclosures have risen nationwide. Blumenthal said his office was cooperating with New York Attorney General Andrew Cuomo ``as we always do when our investigations have similar interests.''

The New York Times reported earlier that that Cuomo's and Blumenthal's new focus is on the disclosure of high-risk loans known as exceptions. The U.S. Securities and Exchange Commission is also investigating the matter, the newspaper said.

Cuomo Comment

Jeffrey Lerner, a spokesman for Cuomo, would not comment on the investigation. Cuomo previously said he is investigating the subprime industry, including investment banks, and was probing the secondary market for loans.

In November, Cuomo sued First American Corp., the largest U.S. title insurer, claiming its eAppraiseIT LLC unit inflated home values under pressure from Washington Mutual.

False appraisals can mislead investors about the risk of defaults in mortgage-backed securities by overstating the ability of troubled borrowers to sell their property or refinance to settle the debt.

Cuomo also subpoenaed Fannie Mae and Freddie Mac, the two largest sources of U.S. home loan financing, for information on whether loans they purchased were based on tainted property valuations as part of ``widespread'' industry collusion.

30 Subpoenas

Blumenthal said he had sent out an estimated 30 subpoenas to investment banks, ratings agencies and diligence companies. He said the boilerplate disclaimers banks used may have been ``overbroad or useless to many investors'' about the real risks posed by bundled, mortgage-backed loans that involved the high risk loans known as exceptions. He also said underwriting guidelines may have been compromised.

An SEC task force, which began meeting in May, is examining a growing list of issues relating to Wall Street's handling of subprime home loans, the agency's deputy enforcement director, Walter Ricciardi, said today, declining to comment on specific cases.

``While the working group currently has about three dozen active investigations underway, we have not yet concluded whether the securities laws have been broken,'' he said.

The investigations look at underwriters and other firms involved in the process of bringing securities to the market, as well as firms that perform due diligence, he said.

Other Regulators

Other regulators are also looking for misconduct. Last month, the Financial Industry Regulatory Authority, which oversees almost 5,100 brokerages, sent letters to more than a dozen firms, seeking information on how they marketed collateralized mortgage obligations, a type of security linked to home-loan payments, a person familiar with that probe said on Jan. 4.

The Washington-based watchdog is concerned brokerages may have inappropriately sold the complex securities to individuals, particularly retirees, who later lost their savings, the person said.