FBI investigates subprime debacle


The Federal Bureau of Investigation on Tuesday said it is investigating 14 companies for possible fraud or insider trading violations in connection with loans made to risky borrowers, and investments spun off of those loans.

Agency officials did not identify the companies under investigation but said the wide-ranging probe, which began in spring 2007, involves companies across the industry, from mortgage lenders to financial firms that bundle home loans into securities sold to investors.

The FBI is working in conjunction with the Securities and Exchange Commission, Neil Power, chief of the FBI's economic crimes unit in Washington, said during a briefing with reporters.

The development comes as authorities in New York and Connecticut investigate whether Wall Street banks hid crucial information about high-risk loans bundled into securities that were sold to investors.

Power said federal authorities are looking into the practices of so-called subprime lenders, as well as potential accounting fraud committed by financial firms that hold these loans on their books or securitize them and sell them to other investors.

Referring to certain unnamed bankrupt subprime lenders, Power said there are "some irregularities there that we're looking into," including the timing of stock sales by executives. Dozens of subprime lenders have filed for bankruptcy in the past year, most prominently New Century Financial Corp.

Power also said law enforcement officials are looking at whether homebuilders manipulated financial statements to inflate revenues.

There have been a substantial number of borrower fraud cases that should be included in the mix. You also have to consider whether some of these companies even comprehended the risk posed by the investment vehicles. Surely the major investment banking firms never intended to lose billions of dollars on purpose.

Previous posts on predatory borrowing here, here, and here. The evidence suggest an organized criminal enterprise in many of these cases.


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