New York Attorney General Eric Schneiderman, U.S. Attorney General Eric H. Holder, Housing and Urban Development (HUD) Secretary Shaun Donovan, and the Securities and Exchange Commission (SEC) Director of Enforcement Robert Khuzami today detailed the core mission of the new Residential Mortgage-Backed Securities Working Group announced by President Obama in the State of the Union address.

The working group has sent subpoenas to the 11 largest financial institutions in the past few days as part of its investigation into possible RMBS fraud.

Schneiderman said in a press conference on Friday that he will be joined by Delaware AG Beau Biden, Massachusetts AG Martha Coakley, Nevada AG Catherine Cortez Masto, California AG Kamala Harris and Illinois AG Lisa Madigan.  

Schneiderman also said 15 lawyers and investigators are working with the group. The FBI will add 10 agents, and another 30 lawyers and staff will join the group.

Schneiderman said during the conference that the task force had jurisdiction to go after every aspect of the mortgage bubble and the crash of the financial market and had jurisdiction over every MBS issued over the last decade with Delaware and New York joining the group.

According to Manal Mehta, a hedge fund manager at Branch Hill Capital, the mortgage task force, in light of the news today, might identify a number of securities that should never have been created and what the ultimate losses to the system has been from those securities, that would never have been borne in the absence of fraud.   

"[This will be] potentially devastating for the banks," said Mehta, a hedge fund manager at Branch Hill Capital in an emailed statement. "Unpeeling the layers of the onion will reveal one thing: that mortgage backed securities were riddled with fraudulent mortgages that should never have been originated and never have been packaged. So if the building blocks of these securities never existed, the crisis would have played out in a very different way  would AIG have required a federal bailout?  CDOs wouldn't have experienced the losses that they did, CDO2's wouldn't have either, etc. [Hank] Paulson and Magnetar wouldn’t have profited so handsomely. So there's a multiplier effect on the system  this is a HUGE can of worms."

It is unclear what the advantage over the prosecution Schneiderman gains in his new role. As New York AG he already has access to the state's Martin Act, which is widely considered the most potent securities law in the country, that gave the attorney general the right to subpoena information at will and provides defendants with far fewer legal protections than they would have in normal securities law cases.

"You can get pretty cynical about this and think that at the Federal level they are trying to get Schneiderman to play ball and not be an independent as he was saying he was going to be," said one industry source. "The scariest guy in the world  to these big banks was Schneiderman, he didn't need any more power or authority because he had the Martin Act with which he didn't even have prove intent, he just had to say a bad thing happened. And the subpoena powers under the act meant he could make people talk. He didn't need anything from the Fed to be powerful."

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