From The Times Online UK
Shit, meet fan….
America’s Federal Bureau of Investigation is investigating senior banking executives for insider dealing and fraud as part of a criminal inquiry into the sub-prime crisis, the agent leading the inquiry said yesterday.
Neil Power, the head of the FBI’s economic crimes unit, is heading the most far-reaching criminal investigation into the practices of the mortgage industry since it began to melt down last year, after years of increasingly lax lending finally fed through into an increase in defaults on home loans.
The FBI is investigating every level of the conspiracy that it believes perpetuated the housing boom and ultimately resulted in millions of Americans losing their houses, investment banks losing billions of dollars and the chief executives of Citigroup, Merrill Lynch, Bear Stearns and UBS resigning.
Mr Power said: “We’re looking at the accounting fraud that goes through the securitisation of these loans. We’re dealing with the people who securitise them and then the people who hold them, such as the investment banks.”
He said he was also concerned that some banking executives might be guilty of insider trading, offloading collatoralised debt obligations (CDOs), pools of bonds and other securities backed by mortgages, before their true valuations came to light in the wake of the home loan meltdown.
The FBI suspects that the house price boom, once seemingly endless, encouraged mortgage lenders to take increasingly large risks, making loans to people with weaker and weaker credit histories as they sought new customers. These lenders, and the brokers that arranged the mortgages, often encouraged borrowers to lie about their income. They told borrowers that if they could not meet their repayments they could always refinance their property and use the proceeds.
The FBI also suspects that the Wall Street banks may have been complicit in the process, ignoring the risks posed by these home loans because they were making huge fees from packaging them into bonds and other securities and selling them on to investors.
Finally, the FBI is investigating whether the Wall Street firms, which kept many of the mortgage bonds they packaged on their own balance sheets, may have failed to warn their investors of the risks they posed.
The FBI is the main investigative arm of the US Department of Justice, working with the US Attorney General and sometimes state attorneys general to bring criminal cases to the courts. The Bureau will also share some of the information it uncovers during the course of its investigation with the Securities and Exchange Commission, which brings civil cases against alleged corporate criminals.
Adam Compton, an analyst at RCM Global Investors in San Francisco, said: “The fact that the FBI is conducting such a wide-ranging investigation shows just how seriously the is being taken. There are so many angles to pursue.”
Robert Mintz, a former federal prosecutor specialising in white collar crime, added: “Given the level of the losses associated with the sub-prime mortgage crisis, this investigation could turn out to be very significant.”
The FBI launched a mortgage task force in December as it sought to step up its investigation into the home loan industry.
In addition to the sub-prime inquiry covering 14 companies, the Bureau is investigating 1,200 separate cases of mortgage fraud. Many of these involve the sale of a house by one person, for an inflated price, to a “straw” buyer, who disappears from the scene, leaving the bank with a house worth less than the mortgage. The two people then split the proceeds.
In 2003, the FBI investigated 436 mortgage fraud cases, rising to 818 in 2006. Meanwhile, the number of so-called suspicious-activity reports the FBI receives from the banks grew from 35,000 in 2006 to 48,000 last year. The FBI expects the number to rise to about 60,000 this year.
The FBI investigation may be the most significant but it is only the latest in dozens of civil and criminal cases being prepared by the SEC, the attorneys general of various states, and class action law firms such as Coughlin Stoia Geller Rudman & Robbins and Brower Piven.
Many of these cover the same ground as the FBI investigation. Others are investigating the role played by the credit ratings agencies, which frequently granted the top AAA rating to CDOs.
Bond insurers are among the other targets of litigation. These firms, which guarantee the payment of interest and principal of the bonds they underwrite in the event of a default, stand accused of failing to inform their investors of the true extent of the dangers posed by the sub-prime securities they insured.
— The City of Cleveland is suing 21 Wall Street firms, including Goldman Sachs and
Morgan Stanley, claiming they encouraged mortgage lenders to keep making loans to people who could not afford them by buying even the most suspect and packaging them into bonds. As a result, the number of foreclosures in the city jumped from 120 in 2002 to 7,500 last year
— Andrew Cuomo, New York’s Attorney-General, has issued subpoenas to big banks as he seeks to determine whether they knew more than they let on about the risks posed by the mortgage bonds they underwrote