FBI investigates sub-prime crisis

The Federal Bureau of Investigation has initiated criminal inquiries into 14 companies for possible accounting fraud, Insider trading and violations in connection with loans made to borrowers with weak credit history.

Subprime companies are already under scrutiny by the Securities & Exchange Commission as well as several state attorneys general; however the prospect of criminal charges raises the stakes.

The agency did not identify the companies under investigation, but Bear Stearns Cos., Goldman Sachs Group Inc. and Morgan Stanley separately acknowledged in their 10-K that government investigators were asking for information about their subprime lending practices.

The investigation goes through entire process from where the loans were created, whether there was fraud in their creation, or misrepresentation as to the quality of the loans in the sales process - as they moved through the value chain.

There are two key questions here:
1) What information (loan originators or securitizers) had about the quality of the loans.
2) Whether that was consistent with statements they made to others.

Investigators are also examining whether mortgage-backed securities are being properly valued, including the assumptions being used in the banks.

Prosecutors and regulators are also looking closely at whether any executives involved in the securitization chain may have used inside information to sell shares before the extent of the problems became clear

The F.B.I. has been warning for years that mortgage fraud is a significant and growing problem.

F.B.I. is cooperating with the SEC, which is conducting about three dozen civil investigations into how subprime loans were made and packaged, and how securities backed by them were valued.

In Dec-07 Cuomo has subpoenaed several big Wall Street banks, including Merrill Lynch & Co., Bear Stearns Co. and Deutsche Bank, to look into how Wall Street bought and re-packaged these mortgages to sell to other investors, and whether they properly disclosed the risk that many of the underlying mortgages could suffer high default rates.