Wall Street banks face broader New York probe

WASHINGTON (CNNMoney) -- The New York Attorney General has broadened an investigation into banks that sold mortgages to investors, zeroing in on seven banks and four bond insurers, according to a source familiar with the matter.

Last month, New York Attorney General Eric Schneiderman requested meetings with bank staffers -- including those from Bank of America (BAC, Fortune 500), Morgan Stanley (MS, Fortune 500) and Goldman Sachs (GS, Fortune 500) -- seeking information on their roles in the mortgage crisis that led to the downfall of the economy.

However, Schneiderman's investigation has taken a new turn, targeting the assignment and bundling of those mortgages into securities, the source said.

The investigation is being led by Schneiderman's office in conjunction with the office of Delaware Attorney General Joseph R. Biden III, since Delaware also has jurisdiction over trusts.

The investigation has targeted seven investment banks, four bond insurers, and a Buffalo law firm and companies that own private equity firms that have an ownership stake of that law firm, the source said.

Wall Street banks have been blamed by lawmakers and the public for exacerbating the recession through their backing of risky home loans, and then bundling those loans into mortgage funds that were traded on the markets.

For example, during a congressional hearing in 2010, lawmakers lambasted Goldman CEO Lloyd Blankfein for his firm's practice of buying parts of risky mortgages and then placing bets against those same mortgages.

Blankfein labeled the practice a "market maker" and said that Goldman was selling products that investors wanted.

Prosecutors have ramped up pressure against Wall Street finance companies to bring them to task for the roles they allegedly played in causing the economy to implode through a series of risky investments and over-leveraging.

Spokesmen for the Delaware and New York attorney generals declined to comment.