John Fund of WSJ - FBI Investigation of LEH, AIG, FNM, FRE Will Lead To Mass Arrests

Discussion in 'Wall St. News' started by ByLoSellHi, Sep 24, 2008.

  1. Breaking news...
  2. awesome.
  3. Wonder if Paulson is on list.
  4. is there an article?
  5. FBI Launches Fraud Investigation Into Fannie, Freddie, Lehman, AIG

    By Jason Leopold
    The Public Record
    Tuesday, September 23, 2008

    Published in : Nation/World

    The FBI has launched a fraud investigation into the financial firms whose meltdown led to an unprecedented $700 billion plan to rescue Wall Street from further collapse, the Associated Press reported.

    “Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE), and insurer American International Group Inc. (AIG) Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. (LEH) also is under investigation,” the AP reported.

    The probe will focus on senior individuals who ran the firms and the financial firms accounting methods, according to FBI sources.

    The FBI has been investigating mortgage lenders and investment banks for more than a year. Tuesday's wide-ranging probe came as lawmakers from both parties pushed back against the Bush administration's proposed $700 billion bailout that would give the government broad power to buy up devalued assets from troubled financial firms.

    The collapse of Fannie, Freddie, Lehman, Bear Stearns, and others like them, represents the failure of federal regulators to enact reforms in the $6.5 trillion mortgage securities market, an industry far bigger than the United States treasury market.

    In July, FBI Director Robert S. Mueller III, said the agency had 21 active investigations into financial corporations involved in the subprime mortgage business. On Tuesday, that number increased to 26. However, the FBI would not identify the corporations.

    Mueller told members of the Senate Judiciary Committee at a hearing in July that the probes are aimed at companies that “may have engaged in misstatements in the course of what transpired during this financial crisis.”

    “The FBI will pursue these cases as far up the corporate chain as is necessary to ensure that those responsible receive the justice they deserve,” he said.

    But Attorney General Michael Mukasey has resisted pressure to create a Justice Department task force similar to the one created in 2002 when Enron Corp. collapsed in a wave of accounting scandals. In June, Mukasey said the mortgage crisis was tantamount to “white-collar street crime.”

    Still, there is abundant evidence of Bear Stearns' controversial trading practices in the subprime mortgage industry while investigations continue into Fannie, Freddie, and Lehman's trades.

    Last March, Scott Coren and Michael Nannizzi, analysts at Bear Stearns, issued a report upgrading the stock of New Century Financial, a company that provides sub-prime mortgages to low-income homebuyers, from "underperform" to "peer-perform."

    California-based New Century's stock rallied on Coren and Nannizzi's research note to investors, rising 3% in afternoon trading on Thursday March 1, 2007, to close at $15.78.

    In April 2007, a month after the analysts issued their somewhat upbeat report, New Century filed for bankruptcy protection due in large part to the massive number of borrowers who were defaulting on their loans.

    The move by Coren and Nannizzi, as well as an analyst at UBS who, in February 2007, also upgraded the mortgage company's stock, to lead investors into believing that New Century was undervalued and on solid footing underscores how little Wall Street has learned since Enron imploded in a wave of accounting scandals in 2001.

    “The regulators are trying to figure out how to work around it, but the Hill is going to be in for one big surprise,” said Josh Rosner, a managing director at Graham-Fisher & Company, an independent investment research firm in New York, and an expert on mortgage securities, in an interview with The New York Times in November. “This is far more dramatic than what led to Sarbanes-Oxley,” he added, referring to the legislation that followed the WorldCom and Enron scandals, “both in conflicts and in terms of absolute economic impact.”

    Federal regulators have been slow to act, despite the obvious warning signs (an increase in foreclosures and loan defaults), because the housing market drove the economy over the past five years and Bear Stearns led the pack as one of Wall Street's top underwriters of mortgage backed securities. That meant that Bear's financial stability--as well as other banks--was tied directly to the repayment of loans at the mortgage firms it was underwriting.

    Indeed, what Coren and Nannizzi's research note on New Century didn't say was that Bear Stearns was one of the Wall Street banks that financed New Century's mortgage operation. Their positive report on the company seemed to be about protecting Bear's investment and the bank's bottom line than it was about providing investors with sound financial advice.

    As with Enron and WorldCom, sell-side firms such as Bear Stearns issued biased stock recommendations during the housing boom in the hopes that they would win investment-banking business. And when the bubble burst the banks continued to reassure investors until dozens of mortgage companies such as New Century closed their doors or ceased making loans available, which lead to a massive sell-off of banking stocks.

    William Galvin, Massachusetts' secretary of the commonwealth, subpoenaed Bear Stearns and UBS just two weeks after Coren and Nannizzi issued their report on New Century in March 2007, demanding the firms turn over their research documents into New Century. Galvin alleged that Bear and UBS violated a 2003 global research settlement following the Nasdaq crash of 2000 in which Wall Street firms paid hefty fines and promised to keep their sell-side away from the investment banking side after regulators accused analysts of writing biased research reports in order to win lucrative investment deals from the companies the analysts covered.

    "Recent revelations that research analysts issued positive reports on mortgage lenders...even as those companies faced more and more defaults suggests that the commitment of 2003 has not been met," Galvin said in a prepared statement at the time. Glavin had worked closely with then New York Attorney General Eliot Spitzer on the settlement. Spitzer resigned as governor of New York last week after he was alleged to have been a customer of an escort service.

    Still, at least one savvy trader saw through Coren and Nannizzi's overly optimistic report on New Century and acted accordingly. Last March, the trader commented on a popular financial message board last year that Bear Stearns was "trying to cover its own behind with that upgrade."

    "The question on everyone's mind should be, "How much are they on the hook for?" the commenter asked, before signaling that he intended to short Bear's stock. No doubt that the savvy trader is a very rich person today. Bear was sold to JPMorgan Chase for $2 a share earlier this year in a deal brokered by the Bush administration.

    In November, Glavin reemerged accusing Bear Stearns of an inherent conflict-of-interest when it engaged in trading with two hedge funds the firm managed that specialized in mortgage securities that suffered $1.6 billion in losses and eventually filed for bankruptcy.

    Glavin filed a civil complaint against the bank saying it violated securities laws and its own internal regulations by failing to inform the hedge funds' independent directors that it had traded mortgage securities from its own accounts with hedge funds that it also advised. Glavin claims Bear Stearns violated the US Investment Advisers Act of 1940, which bars such transactions unless hedge fund clients receive prior notification in writing about self-dealing and agree to the transaction. That case is still pending.

    “This begins to explain how the subprime genie got out of the bottle,” Galvin told the Associated Press in an interview. The meltdown in the mortgage industry “happened in part because there was a seemingly limitless amount of capital put in the hands of people who had conflicts of interest that weren't disclosed,” he said.

    The hedge funds--Cayman Islands-based Bear Stearns' High Grade Structured Credit Strategies Fund and the Enhanced Leverage Fund – bet wrongly on securities that were backed by subprime loans for home buyers with poor credit ratings. When homeowners defaulted, losses at the hedge funds mounted. Bear Stearns then informed its investors that their investments were worthless..

    In December, investors filed a new round of legal claims against Bear Stearns claiming the bank mismanaged the hedge funds and concealed the condition of the funds until it was too late.

    "Officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at both of these hedge funds for an extended period of time before they imploded," attorney Steve Caruso of Maddox, Hargett & Caruso in New York, one of four firms representing plaintiffs, said in December.

    Another plaintiffs' attorney, Ryan Bakhtiari of Beverly Hills, said Bear Stearns used the hedge funds "as a dumping ground."

    "Given Bear Stearns' dominance in the mortgage-backed securities underwriting market, they knew or should have known how much subprime exposure both of these hedge funds faced," Bakhitari said in December. "We're finding, in our investigation of these funds, that many investors in these funds simply were unaware of what was being held in their portfolios because it was not adequately disclosed."
  6. Shouldn't there be a list of a hundred or more institutions and people to look at?
    I'll bet they pin the tail on some donkey and cut his nutz off in public as a sacrifice to the ones that get away to pillage and rob another day.
  7. It is confirmed that the FBI is investigating 68 firms and companies, mostly financial institutions, and the investigation is certain to broaden over the coming weeks and months.
  8. BigGun


    My question is, were is the Interpol investigation on all this? having an independent, none US bias’ org investigating this, makes sense to me. this very well could be the biggest scam, diversion, extortion ever! Simply leaving the current intertwined SEC, FED, BANKS and Treasury under Bush’s Ragime work this out would be a travesty.

    come on now! congress is set to decide between giving them 700billion or face Financial Crisis in 72 hours !!! wow, somethings wrong here.