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Subprime crisis draws FBI scrutiny

Washington, January 30, 2008

The shadow of an FBI investigation spread across the subprime mortgage crisis, while the US Congress moved closer to emergency relief for millions of distressed homeowners.

With the Federal Reserve kicking off a two-day meeting where it might cut interest rates further, the stock market rebounded after whipsawing investors for days on fears that the subprime slump could lead to a recession.

But while the market's bears pulled in their claws for the time being, a new potential danger emerged for bankers and brokers involved in the housing price bubble that burst months ago, triggering the present credit crunch.

The FBI said it is investigating 14 corporations over possible accounting fraud and insider trading violations in a crackdown on subprime lending. The companies were not named.

The agency said they include developers, lenders and financiers that securitized ordinary home loans into exotic investment instruments, as well as banks that held them.

The FBI said it is cooperating with the Securities and Exchange Commission, which has confirmed opening at least three dozen investigations related to the subprime mortgage market.

Goldman Sachs, Morgan Stanley and Bear Stearns -- among Wall Street's largest banks -- each said on Tuesday that government investigators are seeking information from them about their subprime activities.

Years in the making, the subprime crisis is playing a major role in shifting the U.S. presidential campaign debate toward the economy, while Congress seeks an urgent policy response.

The House of Representatives overwhelmingly passed a $146 billion economic stimulus package on Tuesday. Parts of the package would allow the Federal Housing Administration and housing finance giants Fannie Mae and Freddie Mac to help prop up the mortgage market.

These measures 'will enable homeowners with larger mortgages to refinance, lower their monthly payments, and avoid foreclosure,' said Rep. George Miller, a California Democrat, after passage of the package.

Sen. Christopher Dodd, chairman of the Senate Banking Committee, urged the Senate to take similar action swiftly and spend billions of dollars more to help distressed homeowners.

'Unlike past recessions and slowdowns, the epicenter of this economic crisis is the housing crisis,' the Connecticut Democrat said on the Senate floor.

'Reckless, careless, and sometimes unscrupulous actors in the mortgage lending industry essentially allowed loans to be made that they knew hard-working, law-abiding borrowers would not be able to repay,' said the former presidential candidate.

He accused the Federal Reserve and the Bush administration of doing 'absolutely nothing' to stop these practices.

The subprime crisis began after the housing price bubble burst months ago and left millions of US homeowners with bad credit holding high-interest rate mortgages they could no longer afford. Many are now losing their homes. Sales of new homes have plummeted and builders are slashing home prices.

Switzerland's banking regulator said last month it would probe major subprime losses at Swiss bank UBS AG, while Merrill Lynch disclosed in November that the SEC was investigating matters related to its subprime business.

Morgan Stanley said on Tuesday it is a defendant in lawsuits related to its links with mortgage lenders Countrywide Financial and New Century Financial.

At the same time, Countrywide posted a larger-than-expected quarterly loss on Tuesday as homeowners fell behind on payments. The largest US mortgage lender is being acquired by Bank of America. In an example of the subprime crisis's scope, New York Governor Eliot Spitzer said he is trying to help bond insurers facing potentially damaging credit rating downgrades because they stood behind mortgage-backed securities that have soured. - Reuters  


Tags: subprime | FBI |

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