Federal prosecutors and New York's attorney general said Monday they had taken the unusual step of joining forces to probe the multi-trillion-dollar credit-default swap market, an unregulated area of finance blamed for helping to fuel the credit crisis.
"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," Cuomo spokesman Alex Detrick said.
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 Garcia spokeswoman, said prosecutors wanted to determine if federal laws were violated.
The announcements came after The New York Times reported on 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.
An official in Cuomo's office who spoke on condition of anonymity because he was not authorized to speak about the matter on the record said the joint investigation began about three weeks ago after a meeting between Garcia and Cuomo.
As part of the arrangement, some investigators from 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.
"We're not at that stage yet," the official said, acknowledging that criminal charges may never result. "At this point, we have been receiving documents and we are sharing them with the U.S. attorney's office and are meeting on a regular basis."
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, the official said.
"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.
The investigation will focus on all of the large financial firms including banks and hedge funds that made use of the credit-default swaps.
Although the default-swap market operated primarily in New York and London, banks in Switzerland and elsewhere were also likely to be part of the probe, the official said.