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New York Attorney General
Goes for the Jugular

June 1, 2011 (EIRNS)— As the momentum for a new Glass-Steagall Act—Rep. Marcy Kaptur's H.R. 1489—is reflected in Congress, the Wall Street banks which such a law would break up and cease to protect, are coming under growing pressure from state attorneys-general, including potential criminal prosecutions.

The central target is the issuance by those banks—led by Goldman Sachs, Bank of America, and a group of European-based banks—of mortgage-backed securities (MBS), and synthetic debt derivatives based on them, over the 2005-09 period. The former totalled about $7 trillion, while the latter were in the tens of trillions. When the financial bubbles began bursting in 2007, governments rushed in to bail out the banks with public funds, instead of letting them fail. The prosecutorial investigation of this fraud, two years overdue, will now cross-feed the growing focus on the necessity of enacting Glass-Steagall immediately.

As of early May, Federal Reserve head Ben Bernanke and Treasury Secretary Tim Geithner thought they had made secured an overall agreement with the Wall Street banks under which the attorneys general in all 50 states would drop charges for fraudulent foreclosures, in exchange for the banks paying a trivial $5 billion collective fine and promising more moderate foreclosure procedures. However, over the course of the month, while the turn associated with the fate of Dominique Strauss-Kahn has occurred, a half-dozen state attorneys-general have abruptly broken out of White House control and gone after the banks and their MBS frauds.

The main thrust is in New York, where Attorney General Eric Schneiderman has an expanding, potentially criminal investigation of issuance of both fraudulent mortgage products and fraudulent securities by all the biggest MBS issuing and trading banks: first Goldman Sachs, Morgan Stanley, and Bank of America, to which were added UBS, Royal Bank of Scotland, JPMorgan Chase, and Deutsche Bank Morgan Grenfell. Schneiderman's subpoenas make clear he is investigating not just MBS, but the OTC debt- and credit-derivatives "markets" built on top of them.

Additional investigations of potential criminal fraud are ongoing in California, Illinois, Utah, and Connecticut.