6   Completing the Moral of the Record

The Wall Street Journal (30/01, "FBI Probes 14 Companies Over Subprime Turmoil" by Even Perez and Kara Scarrell) informs us from Washington: "The Federal Bureau of Investigation has opened criminal inquiries into 14 companies as part of a wide-ranging investigation of the subprime mortgage crisis, FBI officials said. The probe is focusing on accounting fraud, securitization of loans and insider trading, among other areas.

"The FBI wouldn’t identify the companies under investigation, but said in general that the bureau is looking into allegations of fraud in various stages of the mortgage process, from companies that bundled the loans into securities. to the banks that ended up holding them.

"Federal prosecutors in Brooklyn, NY, and the Securities Exchange Commission have already been looking into the collapse of two Bear Stearns Cos. hedge funds. The two authorities are also investigating insider stock sales and accounting of New Century Financial Corp., a mortgage lender in bankruptcy proceedings. The New York state attorney, Andrew Cuomo, is looking into possible wrongdoing connected with mortgage-backed securities bought and sold by Wall St. firms.

"The FBI’s investigations represent an added dimension to the bureau’s decade-long focus on mortgage fraud which spiked during the housing boom. For years, the FBI has targeted fraud involving real-estate agents, appraisers and fake buyers. Now the FBI us taking a closer look at possible fraud in the secondary market for mortgages, which could implicate better-known financial firms. The faltering US housing-market and a rise in defaults and foreclosures, particularly among low-end borrowers, has whipsawed global stock and bond markets, led to the dismissal of Wall St. chiefs and resulted in losses by banks, hedge funds and securities firms.

"Neil Power, chief of the FBI’s economic crimes unit in Washington, said the bureau was going over the books of insider-trading or other wrongdoing. FBI officials say the Bureau is working with the SEC, which has opened more than three dozen investigations in the mortgage business, including the role of mortgage brokers, investment banks and due-diligence firms involved in the underwriting and securitization of credit-rating firms that rated mortgage-backed debt. In recent weeks, the SEC has sent subpoenas to some firms involved in the underwriting and securitization process, people familiar with the matter say.

"FBI officials say the bureau has 1,200 mortgage-fraud cases under investigation. They believe many more are in the offing, based on the number of suspicious activity reports filed by banks. The number of suspicious activity reports grew from 35,000 in 2000 and is projected to reach 60,000 in 2008, the bureau says."

– from Economic Reform, February 2008