That’s what George Soros warned against, and he was right. Now the subprime mortage chickens are coming home to roost:

As with the flexible morality that accompanied the Internet bubble, questions are now being raised whether these banks’ business relationships with stock-brokerage houses clouded the advice produced by the brokerages for average investors.

Massachusetts Secretary of State William Galvin has issued subpoenas to investigate Bear Stearns’ March 1 ratings upgrade (in essence, a “buy this stock” recommendation) of New Century. In the eight days after the upgrade, the stock declined 94%.

The pure subprime mortgage lenders are most likely soon destined for the dustbins of history, but the real potential problems lie in the extent to which the large, powerful institutions of Wall Street were exposed to subprimes.

In retrospect, one might argue that they should have known better. But the questions remain: Did they extend credit or short-term loans to subprime lenders? Did they buy collateralized mortgage securities to hold in their own portfolios? Did they, through the clever camouflage afforded by a supposedly arm’s-length subsidiary, actually write their own subprime mortgages?

No one really knows, but Wall Street fears that the answer is yes.
H&R Block has reported that its otherwise profitable tax unit was dragged down by losses at its Option One Mortgage Division and its stock is down 18% from February 5. Countrywide Financial is the market leader in the US mortgage business, and its stock is down 24%. Washington Mutual, meanwhile, the biggest US bank-mortgage originator, is down 12%.