NEW YORK | Federal prosecutors and New York’s attorney general said Monday they had taken the unusual step of joining forces to probe the multitrillion-dollar credit-default swap market, an unregulated area of finance blamed for helping to fuel the credit crisis.
The offices of U.S. Attorney Michael Garcia and New York Attorney General Andrew Cuomo acknowledged the unique arrangement in separate statements.
“The attorney general believes that these unprecedented times call for unprecedented levels of effort and cooperation to ensure that our markets are stable, free of fraud and purged of corruption,” said Alex Detrick, a spokesman for Mr. Cuomo.
He said the joint probe was “aimed at restoring and promoting confidence and stability in the market” and avoiding multiple competing investigations.
Yusill Scribner, a spokeswoman for Mr. Garcia, said prosecutors wanted to determine whether federal laws were violated.
The announcements came after the New York Times reported about the investigation in its Monday editions.
A credit-default swap is a contract that offers insurance for lenders worried about a borrower’s ability to repay loans. Banks have used credit-default swaps to cover the risk of default in mortgage and other debt securities. Many credit-default swaps collapsed in value along with the mortgage-backed securities they were meant to protect.
Fear of what would happen if the swaps fully unraveled prompted the government in September to lend $85 billion to insurer American International Group Inc.
As part of the arrangement, some investigators from Mr. Cuomo’s office will become special assistant U.S. attorneys, a designation that will allow them to present evidence to a grand jury should the investigation reach that stage.
The probe will focus in part on finding out whether the credit-default market, which is estimated to be worth tens of trillions of dollars, was manipulated, said an official in Mr. Cuomo’s office who asked not to be identified.
“Our concern is that areas of misconduct that we used to see in the major markets moved to the credit-default market because of that market’s opaqueness and lack of regulatory oversight,” the official said.
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