FBI Investigation Widens Subprime Probe

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Lehman was in cahoots with `em...

Lehman Had Long Relationship With Suspect Mortgage Brokers
Sept. 15, 2008 - Memo From Lehman Executive Questioned Mortgage Firm's Ethics

Lehman Brothers was identified eight years ago by ABC News and the New York Times as doing business with a company suspected of writing fraudulent mortgages and cheating consumers, but Lehman Brothers company defended its ongoing relationship as appropriate. Lehman Brothers' collapse today is blamed, in large part, on its heavy involvement in sub-prime mortgage investments dating back to that time.

In a joint investigation in March 2000, 20/20 and the New York Times revealed how Lehman Brothers helped to "bundle" or package millions of dollars worth of mortgages arranged by California-based First Alliance Mortgage, accused by the Federal Trade Commission and several state attorneys general of defrauding homeowners through "predatory lending." The company continued to do business with the broker even after a Lehman Brother executive wrote a memo in which he expressed misgivings about the firm's lack of ethics.

On the 20/20 broadcast, New York Times reporter Diana Henriques said Lehman Brothers became, in effect, First Alliance's Wall Street enabler giving them "cachet on Wall Street" and "making hundreds of millions of dollars available to this country to continue to make loans." Lehman Brothers helped invent the financing of sub-prime mortgages from companies like First Alliance by taking over the individual mortgage loans and packaging them as high-interest paying investment vehicles for Wall Street, known as "securitization."

When huge numbers of those sub-prime loans went into default, it triggered the financial crisis that continues to shake the country. In March 2002, the Federal Trade Commission announced a $60 million settlement with First Alliance charging that "First Alliance and its chief executive officer violated federal and state laws in making home mortgage loans to customers."

More ABC News: Lehman Had Long Relationship With Suspect Mortgage Brokers

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Heads rollin' at Fannie Mae...

Fannie Mae lets executives go
Saturday 20th September, 2008 - In the US, Fannie Mae has released a statement to announce the resignations of several senior managers.

Leaving the company are Chief Business Officer Peter Niculescu; Executive Vice President and General Counsel Beth A. Wilkinson; Executive Vice President and Chief Information Officer Rahul Merchant; and Senior Vice President for Government and Industry Relations Duane Duncan.

In the statement, Herbert M. Allison, Fannie Mae president and chief executive officer, simply said: 'Peter, Beth, Rahul, and Duane have provided dedicated service to our company and made significant contributions, and I wish them the best as they pursue their futures.'

Fannie Mae lets executives go

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4 Fannie Mae senior execs resign
WASHINGTON (AP) -- September 20, 2008: The troubled mortgage finance giant announces restructuring of organization with more direct reports to CEO.

Mortgage finance giant Fannie Mae, taken over by the government earlier this month, announced Friday the resignations of four senior executives and said it was restructuring its organization. The company, the biggest buyer and guarantor of home loans in the country, and its sibling Freddie Mac (FRE, Fortune 500) were taken over on Sept. 7 in a rescue plan that eventually could require the Treasury Department to put up as much as $100 billion for each of them over time if needed to keep them afloat as mortgage losses mount.

The executives and boards of both companies are being replaced. Herbert Allison, the former head of the TIAA-CREF retirement investment fund, was immediately selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was chosen to head Freddie Mac. The Fannie Mae executives whose resignations were announced Friday are Chief Business Officer Peter Niculescu, Executive Vice President and General Counsel Beth Wilkinson, Executive Vice President and Chief Information Officer Rahul Merchant, and Senior Vice President for Government and Industry Relations Duane Duncan.

In addition, Fannie Mae said its three lines of business - single-family mortgage guaranty, capital markets, and housing and community development - and their top managers will report directly to Allison, who is president and CEO. The technology and operations division will report to Chief Operating Officer Michael Willliams, while the structure of the government and industry relations division is under review, the company said. "Fannie Mae is building a new organizational structure as we take the company in a new direction to serve a dramatically changing market," Allison said in a statement.

http://money.cnn.com/2008/09/20/real...s.ap/index.htm

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G-men after their butts now...

FBI probing bailout firms
WASHINGTON (AP) -- September 23, 2008: Investigators start search for fraud at Fannie Mae, Freddie Mac, Lehman Brothers and AIG, sources say.

The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration. Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc., and insurer American International Group Inc.

The inquiries, still in preliminary stages, will focus on the financial institutions and the individuals that ran them, a senior law enforcement official said. Officials said the new inquiries brings the number of corporate lenders under investigation over the last year to 26. Spokesmen for AIG, Fannie Mae and Freddie Mac did not immediately return calls for comment Tuesday evening. A Lehman spokesman did not have an immediate comment.

The law enforcement officials spoke on condition of anonymity because the investigations are ongoing and are in the very early stages. Just last week, FBI Director Robert Mueller put the number of large financial firms under investigation at 24. He did not name any of the companies under investigation but said the FBI also is looking at whether any of them have misrepresented their assets.

Source

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SEC tightenin' bank rules...

SEC scraps bank oversight program
WASHINGTON (AP) -- September 27, 2008: SEC ends 'fundamentally flawed' program of voluntary oversight for Wall Street banks.

The Securities and Exchange Commission said Friday it was ending a program of voluntary oversight for Wall Street investment banks that its chairman said clearly has not worked. It was the latest shift in the regulatory landscape stemming from the financial crisis that has gripped the markets and thrown Washington into fevered negotiations over a $700 billion bailout plan. SEC Chairman Christopher Cox announced the agency's decision to end the program under which SEC examiners inspected the five biggest Wall Street banks: Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley and Bear Stearns Cos.

The financial upheaval of the last six months has "made it absolutely clear that voluntary regulation does not work" for the bank supervision program, Cox said in a statement. The program "was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily," he said. The SEC inspector general, meanwhile, found that the agency's oversight of Bear Stearns - which nearly collapsed into bankruptcy in March and was purchased by rival JPMorgan Chase with a $29 billion federal backstop - and the other four banks was lacking. The SEC's oversight of the firms "should be improved" and the guidelines covering their capital and liquidity requirements should be reevaluated, according to the report by Inspector General H. David Kotz made public Friday.

Cox said the report "validates and echoes" the concerns he has expressed to Congress. The weakness of the supervision program stems from the lack of specific legal authority for the SEC or other agencies to act as regulator of big investment-bank holding companies, he said. In recent days, Lehman Brothers buckled under bad mortgage debt and filed the biggest bankruptcy in U.S. history, and Merrill Lynch agreed to sell itself to Bank of America Corp. That left only two independent investment banks standing on Wall Street - Goldman Sachs and Morgan Stanley - and they won approval from the Federal Reserve last week to change their status to bank holding companies in order to stay in business.

The seismic regulatory shift allows the two firms to create commercial banks that can take deposits, thereby bolstering their resources. It also puts them squarely under the regulatory jurisdiction of the Fed. Earlier in the year, Cox told Congress he wanted the SEC to supervise big investment banks at the level of their parent holding companies. Fed officials said the prevailing system, in which the central bank is the primary overseer of those firms, generally works well. The Bush administration has proposed giving new powers to the Fed to oversee financial institutions and supplanting the SEC as primary supervisor of Wall Street investment firms. That change could only come through legislation - something that will have to wait until after the presidential election and the installation of a new Congress next year.

SEC ends voluntary oversight plan for Wall Street banks - Sep. 27, 2008

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Backlash to bailout...

Main Street turns against Wall Street
September 28, 2008: A populist backlash is changing America's political climate. Inflamed by the financial crisis and bailouts, a form of class warfare could haunt business leaders for years to come.

In one frenzied month Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke remade Wall Street. Along the way they may also have recast American politics. A month of historic government interventions shows signs of triggering a political version of climate change - unleashing a new era of class fury that could hurt U.S. companies, business leaders, and wealthy investors for years.

"A potential calamity," predicts Democratic pollster Doug Schoen. "If the reactions we're seeing hold, we could have real spasmodic anger directed at businesses and corporations." And the timing will have consequences, says financier and onetime GOP presidential candidate Mitt Romney: "Unfortunately, politicians have seized on the politics of envy," he told Fortune, "and they are stoking it this election year like I've never seen in my lifetime."

Compared to this, Enron was a warm-up exercise. For all the public outrage over accounting scandals seven years ago, the result in Washington was limited to a financial reporting rule that most Americans have never heard of (though many in the business community still consider Sarbanes-Oxley a destructive overreaction).

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Bailout: What's in it for homeowners
September 28, 2008: Sunday's revised plan calls for the Treasury to work with loan servicers to stem the tide of foreclosures, but how that will happen remains unclear.

The revised $700 billion bailout legislation unveiled Sunday calls for the Treasury Secretary to implement a plan to stem foreclosures and to work with servicers to modify loans. But some community advocates say the bill offers little help for struggling homeowners. They argue that the financial system, as well as the economy, cannot recover until the tide of foreclosures stops. In particular, critics chastised lawmakers for not including a more powerful provision, which would allow bankruptcy judges to modify loans.

Since the bailout was announced a week ago, lawmakers and the Bush administration have tussled over how much to help borrowers who have fallen behind in their mortgage payments. In Sunday's version of the bill, federal agencies holding mortgages and mortgage securities would be required to identify loans that could be modified without causing big losses for taxpayers. However, exactly how that would be done isn't totally clear.

In addition to the Treasury Department, these agencies would include the Federal Reserve, Federal Deposit Insurance Corp., and the Federal Housing Finance Agency, which controls mortgage insurers Fannie Mae and Freddie Mac. It also allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures, though on a press call Treasury officials declined to elaborate on these provisions.

Avoiding 'preventable foreclosures'

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Congress gonna put the lid on the Wall St. shenanigans...

Battered financial industry faces more oversight
Sun Oct 5, `08 WASHINGTON - With the passage of the $700 billion rescue package, the financial industry will face greater congressional scrutiny in coming weeks and months.

Further-reaching regulation is almost certain. Previously obscure corners of the industry now subject to few rules, such as complex derivatives and hedge funds, could face federal supervision for the first time. Meanwhile, heavily regulated sectors, such as banking and insurance, are likely to face greater oversight. Even some financial industry groups support federal oversight for the insurance industry, which is now regulated only at the state level.

"Clearly, next year we will have more regulation," said Scott Talbott, a lobbyist for the Financial Services Roundtable, a group of the 100 biggest companies in the industry. Having passed the bailout bill, Congress is now shifting its attention to its next steps. "Passing this legislation is only the beginning of our work," said House Speaker Nancy Pelosi, D-Calif., just before the House approved the package.

Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, said next year Congress will seek to overhaul housing policy and financial regulation in a legislative effort he likened to the New Deal. "We were the EMTs rushing to the rescue of an economy that suddenly found itself choking, but now we have to perform more serious reform," Frank said.

The bailout bill, approved by the Senate Wednesday, provides $700 billion to buy bad assets from banks and other institutions to shore up the financial industry. Hearings that begin Monday will examine the failures of current regulations. The House Oversight and Government Reform Committee, chaired by Rep. Henry Waxman, D-Calif., will hold two hearings on the causes and effects of Lehman Brothers' bankruptcy and on the $85 billion bailout of the giant insurer American International Group Inc.

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Bank blamed for Lehman collapse
October 05, 2008 - US bank JPMorgan Chase stands accused of precipitating the collapse of American investment bank Lehman Brothers by freezing Lehman assets days before it filed for bankruptcy protection.

Citing documents filed with a New York bankruptcy court late last week, the , the Sunday Times reported that Lehman creditors have accused JPMorgan of freezing $US17 billion ($22 billion) in cash and securities on Friday, September 12. Lehman filed for bankruptcy the following Monday.

"The creditors' committee understands that LBHI (Lehman Brothers Holding Inc) had at least $US17 billion in excess assets which were held at JPMC (JPMorgan Chase) on the Friday going into the weekend before its bankruptcy filing,'' the court documents reportedly allege. The creditors' committee further understands that, on September 12, 2008, JPMC refused to allow LBHI access to its excess assets and instead 'froze' LBHI's account.

"In freezing LBHI's assets, JPMC was purportedly holding all of LBHI's assets as a potential offset against any claims JPMC may have had against LBHI.'' The documents continued to say that "as a result of JPMC's actions, LBHI suffered an immediate liquidity crisis, that could have been averted by any number of events, none of which transpired''.

More http://www.news.com.au/business/stor...-31037,00.html

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This is what they should be investigating...

A Look At Wall Street's Shadow Market
Oct. 5, 2008 - 60 Minutes: How Some Arcane Wall Street Financial Instruments Magnified Economic Crisis

On Friday Congress finally passed - and President Bush signed into law - a financial rescue package in which the taxpayers will buy up Wall Street's bad investments. The numbers are staggering, but they don't begin to explain the greed and incompetence that created this mess. It began with a terrible bet that was magnified by reckless borrowing, complex securities, and a vast, unregulated shadow market worth nearly $60 trillion that hid the risks until it was too late to do anything about them. And as correspondent Steve Kroft reports, it's far from being over.

It started out 16 months ago as a mortgage crisis, and then slowly evolved into a credit crisis. Now it's something entirely different and much more serious. What kind of crisis it is today?

"This is a full-blown financial storm and one that comes around perhaps once every 50 or 100 years. This is the real thing," says Jim Grant, the editor of "Grant's Interest Rate Observer." Grant is one of the country’s foremost experts on credit markets. He says it didn't have to happen, that this disaster was created entirely by Wall Street itself, during a time of relative prosperity. And they did it by placing a trillion dollar bet, with mostly borrowed money, that the riskiest mortgages in the country could be turned into gold-plated investments.

"If you look at how this started with the subprime crisis, it doesn't seem to be a good bet to put your money behind the idea that people with the lowest income and the poorest credit ratings are gonna be able to pay off their mortgages," Kroft points out. "The idea that you could lend money to someone who couldn't pay it back is not an inherently attractive idea to the layman, right. However, it seemed to fly with people who were making $10 million a year," Grant says.

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AIG's financial shenanigans...

AIG execs hid risks from auditors, panel finds
Tues., Oct. 7, 2008 WASHINGTON - Congressional panel examines events that forced government bailout

Former top executives of insurance giant American International Group Inc. were on the receiving end of a verbal smackdown Tuesday as a congressional panel probed the chain of events that forced the government to bail out the conglomerate. Maurice “Hank” Greenberg, who ran AIG for 38 years until 2005, again blamed the company’s financial woes on his successors, former CEOs Martin Sullivan and Robert Willumstad. They, in turn, cast much of the blame on accounting rules that forced AIG to take tens of billions of dollars in losses stemming from exposure to toxic mortgage-related securities.

AIG, crippled by huge losses linked to mortgage defaults, was forced last month to accept an $85 billion government loan that gives the U.S. an 80 percent stake in the company. Last week, AIG said it has drawn down $61 billion of the loan, and planned to sell off some of its business units to pay off the loan. “Both of you seem to be saying that those events had nothing to do with your management, it had to do with a tsunami of activities over which you had no control,” said a House Oversight Committee Chairman Henry Waxman, D-Calif.

“You have cost my constituents and the taxpayers of this country $85 billion and run into the ground one of the most respected insurance companies in the history of our country,” said Rep. Carolyn Maloney, D-N.Y. “You were just gambling billions, possibly trillions of dollars.” Lawmakers also upbraided Sullivan, who ran the firm from 2005 until June of this year, for urging AIG’s board of directors to waive pay guidelines to win a $5 million bonus for 2007 — even as the company lost $5 billion in the 4th quarter of that year. Sullivan countered that he was mainly concerned with helping other senior executives.

More AIG hid financial risks from auditors - Economy in Turmoil - MSNBC.com

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SEC panders to Morgan Stanley...

Report: SEC Gave "Preferential Treatment" to Wall Street CEO
October 6, 2008 - Attempts to Question Morgan Stanley's John Mack "Connected" to Firing of SEC Lawyer

The SEC gave "preferential treatment" to Wall Street executive John Mack during an insider trading investigation three years ago because Mack was about to become CEO of the Morgan Stanley investment banking firm, the SEC's inspector general concluded in a report obtained by ABC News. The report recommended disciplinary action against the SEC's chief of enforcement, Linda Thomson, and said the firing of an SEC lawyer was "connected" to his persistent attempts to take Mack's testimony. "There's a culture at the SEC that they're not willing to take on the big boys, whether big economically or big politically," said Sen. Charles Grassley (R-IA) who requested the inspector general's investigation. It is a damning indictment of the SEC at a time when it is being asked to step up its enforcement action against Wall Street.

"They ought to be able to challenge anybody regardless of their economic might or regardless of their political might," said Sen. Grassley. Grassley asked for the investigation after a SEC lawyer who sought to take Mack's testimony, Gary Aguirre, was fired. "I was told that it would be very difficult to get approval to take his testimony because of his powerful political connections," Aguirre told ABC News in an interview for Good Morning America. When he says he persisted, he was told to go on vacation and then notified he had been fired.

"We were trying to immediately sit the people down and nail them down to a story, this was the sole exception," Aguirre said. Aguirre said the inspector general's findings are "about as close to the truth as you can expect from an agency whose mission has been so deeply compromised." The report concluded, "there was a connection between the decision to terminate Aguirre and his seeking to take Mack's testimony." "Wall Street has long tentacles," said Aguirre, "and those tentacles reached into the SEC and cost me my job."

More ABC News: Report: SEC Gave "Preferential Treatment" to Wall Street CEO

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Their day will come...

White-collar ex-con: Jail looms for mortgage execs
Wed., Oct. 8, 2008 - Former MCI manager who concealed improprieties now lectures on ethics

Average Americans want to know how the lords of investment banking could keep telling investors everything was just peachy while the nation’s financial structure was crashing down around them. But not Walt Pavlo. He knows all too well how easily it can happen. Pavlo knows because he’s been there. He’s a convicted felon, a one-time senior manager at MCI who set out to do his job and ended up in prison. The 46-year-old Tampa resident told his story — which he also recounts in a book, “Stolen Without a Gun” — as part of TODAY’s series on cheating.

Bad decisions

Pavlo has no doubt that when federal investigators get done sorting out the mess that began with the subprime mortgage market, some of the people responsible will be going to prison, just as he did in 2001. They’ll go for the same reason: not because they are bad people, but because when things started to go wrong, they started to make bad decisions that eventually became criminal ones. “People are going to go to jail for covering up stuff as it started to go south,” Pavlo told TODAY. “It’s going to take a while. It’s going to be a year or two years from now.”

Pavlo has been out of prison since 2003. He earns his modest keep these days by traveling the country, telling students in business schools how he went from a kid raised to know right from wrong to part of a conspiracy that stole $6 million from MCI customers in a mere six months. He never thought himself capable of the things he did. He grew up in a devoutly religious family and went to Catholic schools. Even today he retains the clean-cut look of the high school quarterback he once was.

“People are lulled into believing they are that special to deserve that kind of money,” Pavlo said. But there comes a time when the goals set by supervisors become harder – if not impossible — to meet. And that’s when trouble can start. “Once that tide starts turning, how do I react? You find people covering up the bad news: ‘I can’t be failing.’ When faced with the tragedy, that’s when their character’s tested the most. A lot of people are going to fail that test, and they’re going to be going to prison.” For Pavlo, the path to prison started long before he turned to embezzlement and fraud.

More Does prison loom for mortgage execs? - TODAY: People - MSNBC.com