Goldman Sachs and Morgan Stanley, two of America’s largest investment banks, are facing legal action on the sale and management of sub-prime mortgage debt and have been requested to submit information to US authorities.

Both banks are part of a group of 21 institutions being sued the city of Cleveland, which is claiming the banks created the sub-prime crisis by offering loans to people who could not afford them.

In addition, Morgan Stanley admitted today that it has also been named “as a defendant in various civil litigation matters related to the sub-prime and non-sub-prime residential mortgage business”.

These include its role as an underwriter to stock offerings by New Century Financial, and Countrywide Financial “and certain offerings of mortgage pass-through certificates for a subsidiary of Countrywide Financial and other related matters".

Goldman Sachs revealed in its annual report today that it had “received requests for information from various governmental agencies and self-regulatory organisations” on a number of complex financial assets backed by sub-prime mortgages.

The bank appears to be the only Wall Street institution to have escaped making large writedowns on sub-prime mortgages and, in fact, has gained after two of its traders made a $4 billion profit on a bet that the sub-prime market would collapse.

In contrast, Morgan Stanley was forced to seek a $5 billion cash injection from The Beijing Government's China Investment Corporation (CIC) in exchange for a 9.9 per cent stake. The bank recently reported its first quarterly loss, of $3.56 billion, in its 73-year history after writing off $9.4 billion on mortgage-related assets.

Morgan Stanley said in its annual report that it is “responding to subpoenas and requests for information from certain regulatory and Governmental entities concerning the origination, purchase, securitisation and servicing of subprime and non-subprime residential mortgages and related issues".

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