FBI Opens Probe of Finance Giants
Wednesday, September 24, 2008
The FBI is investigating whether fraud played a role in the troubles at Fannie Mae, Freddie Mac, Lehman Brothers and American International Group, bringing to 26 the number of bureau investigations of institutions tied to the mortgage debacle, according to two sources familiar with the developments.
At the same time, the Securities and Exchange Commission has opened more than 50 investigations into disclosure and valuation of housing-related investments at banks, insurers and credit-rating agencies, Chairman Christopher Cox told the Senate Banking Committee yesterday.
The wide-ranging probes are operating at different stages of development and no charges are imminent, according to sources, who spoke on condition of anonymity because they were not authorized to discuss the issue.
A half-dozen current and former government lawyers cautioned that mortgage-related cases presented significant challenges for investigators because of their complexity, which they said surpassed even the five-year-long probe into wrongdoing at Enron.
"The reason is they involve securities . . . that are all but incomprehensible even to sophisticated investors," said Timothy J. Coleman, a former Justice Department official who oversaw the government's corporate fraud task force. "The other problem is that there is no obvious crime that was committed here. It may be that people who invested in these mortgage securities misunderstood the risks. But it's not at all clear they were the result of a misrepresentation."
The news of fresh investigative interest comes as lawmakers fiercely debate the merits of a Bush administration bailout package that would help lenders unload more than $700 billion of underperforming assets on a taxpayer-funded entity.
Public outcry over the rescue plan is heightening calls for accountability in corporate suites. Lehman Brothers filed for bankruptcy protection earlier this month. Mortgage finance companies Fannie Mae and Freddie Mac are operating under the auspices of the federal government, and insurer AIG recently received a federal loan of up to $85 billion in return for government control of the company. The FBI investigations of those companies, reported last night by the Associated Press, are preliminary and may not uncover any evidence of wrongdoing, the sources said.
A Freddie Mac spokesman declined to comment. Representatives of the other three companies did not return calls seeking comment.
Richard Kolko, a spokesman for the FBI, said the bureau would not discuss the subject of an investigation. Authorities have been quiet in part because the number of cases fluctuates and because of the sensitivity of the stock market, which has fluctuated wildly in the past week.
To date, the highest profile criminal cases related to the housing crisis involve two former Bear Stearns managers indicted in June on fraud charges for allegedly misleading investors about their fund's financial health and two onetime Credit Suisse brokers accused this month of conspiring to win higher commissions by misrepresenting an investment's risk to clients. Both cases took many months for prosecutors to assemble.
One of the challenges for investigators is that companies themselves were among the biggest losers in the debacle, writing down billions of dollars in losses and sometimes plunging into bankruptcy protection.
"If there's anything you want to carefully examine and put together, it's a criminal case," said Andrew Weissmann, former director of the Justice Department's Enron Task Force.
Stephanie A. Martz, director of the white-collar crime project at the National Association of Criminal Defense Lawyers, said it would be a mistake for prosecutors to rush to indict entire companies and draft legislation raising criminal penalties as they did in Enron's collapse six years ago. Instead, she asserted that policymakers should focus on closing regulatory loopholes and figuring out why no one caught the problems sooner.