Mumbai: US regulators are examining the books of some top Wall Street brokers and investment banks for subprime-mortgage losses, a report in the online version of the Wall Street Journal said.

The US Securities and Exchange Commission (SEC) is looking into whether the firms are calculating the value of subprime-mortgage assets, as well as customer assets such as those held for hedge funds, in a consistent way, the report said.

The SEC is examining major Wall Street banks to determine their vulnerability to home-loan defaults, the report quoted sources familiar with the accounting inquiry as saying.
The Wall Street Journal, which first reported the inquiry said Goldman Sachs Group Inc. and Merrill Lynch & Co are among the first companies to be examined.

The SEC has undertaken about a dozen investigations related to complex aggregations of mortgage debt known as collateralised debt obligations, which investors around the world purchased in recent years.

Regulators have also been examining the collapse of two Bear Stearns Cos. hedge funds that folded after making bad bets on the market for borrowers with subprime credit.

Bear Stearns, which kicked off the mortgage bond crisis, plunged 5.7 per cent overnight and opened at $114.14 in New York. The bank has lost more than $10 billion of market capitalisation since the beginning of the year.

Other major banking firms, including Lehman Brothers (down 4.8 per cent), Goldman Sachs (down 3.6 per cent); JPMorgan Chase (down 3.1 per cent), and Citigroup (down 3.3 per cent), lost heavily in market capitalisation.

The drift comes after a minor recovery earlier this week from last week's near panic over the state of the US financial system.

Banks and funds reduced holdings of mortgage-backed securities amid market turbulence, prompting redemptions and margin calls that have had bankers and fund managers scrambling.

Bear Stearns was forced to liquidate two of its hedge funds in June and halt withdrawals in a third. The firm is one of the biggest buyers and arrangers of mortgage securities, and as such has one of the biggest exposures to the problems.

French bank BNP Paribas suspended three securities funds valued at $2.75 billion on August 9, because of valuation problems in the US mortgage market.

Part of the problem lies in the derivatives business, which has expanded briskly in recent years as bankers tried to slice up risks and sell them in pieces to eager investors.

Collateralised debt obligations, some of which are under scrutiny, take bundles of subprime loans and repackage them into groupings, the best of which can obtain investment-grade ratings even though the underlying collateral is rated far lower.

When the subprime sector started melting down, that trickled over into the debt instruments and other derivatives, and their investors got caught with holdings that were worth far less.

(See: BNP freezes funds worth $2.2 billion on liquidity crunch)

(Also see: European Central Bank pumps an additional $84 billion to boost liquidity in banking system)