This story is part of an ongoing investigation with NPR's Planet Money. 

Almost three years since banks started taking losses that led to the worst financial crisis since the Great Depression, the Securities and Exchange Commission is still asking basic questions about what happened.

The SEC is conducting an information-gathering sweep of the key players in the market for collateralized debt obligations, the bundles of mortgage securities whose sudden collapse in price was at the center of the meltdown of the global banking system.

In a letter dated Oct. 22, the SEC sent what amounts to a questionnaire to a number of collateral managers, the middlemen between the investment banks that created the complex financial products and the investors who bought them.

Collateralized debt obligations are made up of dozens if not hundreds of securities, which in turn are backed by underlying loans, such as mortgages. Investment banks underwrite the structures and recruit their investors. Collateral managers, brought in by the investment banks but paid by fees from the assets, select the securities and manage the structures on behalf of the investors. CDO managers have a fiduciary duty to manage the investments fairly for investors.

Since 2005, $1.3 trillion worth of CDOs have been issued, with a record $521 billion in 2006, according to the securities industry lobbying group SIFMA. The collapse in value of mortgage CDOs triggered the 2008 financial collapse.

ProPublica and NPR have confirmed that the SEC letter was sent to several managers, although the distribution list was likely industrywide. At the height of the boom in 2006, only 28 managers controlled about half of all CDOs, according to Standard and Poor's.

Banks began disclosing the first big losses on CDOs in early 2007. The infamous Bear Stearns hedge funds ran into problems beginning that summer.  By that August, the credit markets began seizing up.  Merrill Lynch and Citigroup were among the hardest hit by losses on bad investments in mortgage-based securities and CDOs. 

The SEC’s letter focuses on information regarding “trading, allocation and valuations and advisers’ disclosure,” though it also asks for other details on how the managers ran their businesses. The letter requests information on CDOs issued since Jan. 1, 2006.

The letter asks collateral managers for information about what investments they made on their own behalf and how they valued these investments. Securities experts say the letter indicates that the agency is still gathering basic information about the CDO market, despite its centrality to the banking crisis.

 “One wonders why this letter, especially given the general nature of it, is just now being sent. And why wasn’t it sent several years ago, as the CDO market was exploding?” says Lynn Turner, who was the SEC’s chief accountant in the late 1990s. “It makes it look like the SEC is several years behind the markets.”

Even Wall Street executives and securities lawyers who were involved in the CDO business at its height have privately expressed surprise that the SEC was only now contacting them for such rudimentary information.

The SEC declined to comment on the letter. As a policy, a spokesman said, the agency doesn’t comment on its regulatory actions. The SEC has jurisdiction over CDO managers, and enforces rules against securities manipulation, among other violations. The letter does not use the words “inquiry” or “investigation.”

Interviews with market participants and former regulators point to several areas that the SEC might be investigating. Some managers had their own in-house investment funds and may have taken positions that were in conflict with those of the investors in the structures that they managed. In some cases, their hedge funds may have bet against the very slices of the securities they were managing on behalf of the investors in the structure.

Underwriting investment banks often had influence over the investment choices some CDO managers made, giving rise to another possible conflict of interest. The agency may be looking at whether that influence was proper or not.

“The possibility for conflicts and self-dealing is huge,” says Turner, the former SEC chief accountant.

To date, the agency has little to show for its probes into the causes of the crisis that engulfed global financial markets just over a year ago. In June 2007, Christopher Cox, then the SEC chairman, testified before Congress that the agency had “about 12 investigations” under way concerning CDOs and collateralized loan obligations and similar products. A little more than a year later, Cox told Congress that the number of investigations into the financial industry, including the subprime mortgage origination business, had ballooned to over 50 separate inquiries.

There could be multiple reasons why investigations are proceeding slowly. Such cases are complex and require enormous resources and expertise.  Regulators also face the hurdle of proving intent to defraud.

Under Cox’s stewardship, the SEC fell into disarray, and it was harshly criticized by Congress and its own inspector general, particularly for its failure to catch the Ponzi scheme of Bernie Madoff.  The turnover of the new administration, which ushered in new leadership at the much-criticized agency, has also likely slowed efforts. In recent months, under new Chairman Mary Schapiro, the SEC has made insider-trading inquiries a high priority.

So far, there have been few indictments or civil complaints. In a sign of how long these cases can take, the mortgage company New Century Financial Corporation disclosed in March 2007 that it was the subject of an SEC investigation into possible insider stock sales and accounting irregularities. It wasn’t until last week --  Dec. 7 -- that the SEC filed a formal complaint against former executives of the company. The government’s highest-profile prosecution involving the financial collapse – the case against two managers of the Bear Stearns hedge fund for alleged securities and wire fraud – failed to gain a conviction when a jury decided that the men were simply bad businessmen rather than criminals.

Were you involved in the CDO business in the latter stages of the boom? We want to talk to you. E-mail us at [email protected] or call us at (917) 512-0258.

Write to Jesse Eisinger at [email protected].