Cuomo Probe Shakes Wall Street

The New York AG's widening mortgage investigation, along with GM's big writedown and a sinking dollar, sparked a stock rout Wednesday

New York State Attorney General Andrew Cuomo, center, announced his office had subpoenaed Fannie Mae and Freddie Mac for information on mortgages bought from Washington Mutual. Robert Caplin/Bloomberg News

New York Attorney General Andrew Cuomo may have been aiming his latest legal salvo squarely at big players in the mortgage biz, but it was the broader stock market that sustained collateral damage on Wednesday. Weakness in financial issues, sparked by sharp declines in mortgage-funding giants Fannie Mae (FNM), Freddie Mac (FRE), and major lender Washington Mutual (WM), led a big stock sell-off on Wall Street Wednesday, with the S&P 500 index falling nearly 3%.

On Wednesday, the Dow Jones industrial average dropped 360.92 points, or 2.64%, to 13,300.02. The broader S&P 500 index plunged 44.65 points, or 2.94%, to 1,475.62. The tech-heavy Nasdaq composite index fell 76.42 points, or 2.71%, to 2,748.76.

Activity in the broader market was markedly negative, with 30 shares declining in price for every 3 that advanced on the NYSE. Nasdaq breadth was 20-6 negative.

It wasn't as if the news that Cuomo's office had subpoenaed Fannie and Freddie as part of his office's ongoing investigation into the mortgage industry, which hit around midsession, spoiled a lovely day on the street. Financial issues were already down on worries about derivatives writedowns by major financial institutions. An enormous loss at General Motors (GM) also gave investors pause. Oil prices continued to hover just below the $100 per barrel mark.

Also on the laundry list of market misery: The U.S. dollar fell in value vs. other major currencies on indications China might diversify its $1.43 trillion foreign-currency reserves away from the greenback, though officials later backpedaled on the idea. The greenback recovered from record lows amid speculation the Fed might be forced to cut interest rates again to bolster the economy, according to Standard & Poor's MarketScope.

Given the barrage of bad news, stocks seemed to be holding their own, with modest losses for the major indexes. But a midday announcement from Cuomo's office seemed to unhinge the market Wednesday.

Cuomo announced that his office had subpoenaed Fannie and Freddie for information on all mortgages they had purchased from WaMu, as part of an ongoing probe into U.S. mortgage loans. At issue is whether possibly inflated home appraisals have overstated the value of mortgages purchased from WaMu by the two mortgage agencies.

Cuomo said he has concerns about mortgage loans that WaMu had sold to Fannie and Freddie. The two government-sponsored enterprises have agreed to a demand by Cuomo that they retain an independent examiner to conduct a review of all WaMu appraisals and mortgages purchased by the companies.

"In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," said Cuomo in a statement. Cuomo said the AG office's investigation into the mortgage industry has found that WaMu improperly pressured appraisers to provide inflated values on homes that best served the lender's interest.

"Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals." he said.

"In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," said Cuomo in a statement. Cuomo said the AG office's investigation into the mortgage industry has found that WaMu improperly pressured appraisers to provide inflated values on homes that best served the lender's interest.