Wednesday 24 September 2008

FBI Probing Fannie, Freddie, AIG, Lehman in Subprime Collapse

The FBI is investigating Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc. and American International Group Inc. in its probe of the collapse of the subprime-mortgage market, according to a senior law-enforcement official.
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FBI Probing Fannie, Freddie, AIG, Lehman in Subprime Collapse

By Robert Schmidt

Sept. 24 (Bloomberg) -- The FBI is investigating Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc. and American International Group Inc. in its probe of the collapse of the subprime-mortgage market, according to a senior law-enforcement official.

Those companies are among 26 being reviewed by the Federal Bureau of Investigation for possible accounting misstatements, said the official, who asked to remain unidentified. The investigations are preliminary, the official said late yesterday.

The FBI has come under pressure to hold companies responsible as the loan crisis rocked Wall Street and led to the biggest housing slump since the Depression. Financial companies worldwide have reported more than $500 billion in losses and writedowns stemming from the subprime collapse.

Housing lenders Freddie Mac and Fannie Mae, as well as insurer AIG, were all taken over by the government earlier this month. Lehman filed for bankruptcy. The crisis has led the Bush administration to ask Congress to approve a $700 billion bailout for the financial industry.

James Lockhart, the director of the Federal Housing Finance Agency, tossed out both Fannie Mae’s and Freddie Mac’s boards and top management, including former Fannie Chief Daniel Mudd and Richard Syron at Freddie, as part of the restructuring.

Freddie Mac spokesman Doug Duvall declined to comment on the FBI investigation. Fannie Mae spokesman Brian Faith wasn’t immediately available for comment. AIG spokesman Nick Ashooh declined to comment as did Mark Lane, a spokesman for Lehman.

SEC Involved

The investigations of Fannie Mae and Freddie Mac were recently opened, said the official. The agency had already been looking into allegations concerning Lehman and AIG.

The Securities and Exchange Commission is also investigating the companies for civil violations.

People familiar with the matter have said earlier that other companies under FBI investigation include IndyMac Bancorp Inc. and Countrywide Financial Corp., which has since been bought by Bank of America Corp.

FBI Director Robert Mueller, testifying in Congress last week, pledged to “pursue these cases as far up the corporate chain as necessary to ensure those responsible receive the justice they deserve.”

Record Fine

Fannie and Freddie, as well as AIG, already restated their books earlier this decade and corrected billions of dollars in accounting errors.

Fannie Mae paid a record $400 million fine to the SEC and its regulator in 2006 to settle charges that executives fraudulently used “cookie jar” reserves and other accounting gimmicks to hide $10.3 billion in losses from 2002 through 2004 and maximize bonuses.

Freddie paid $125 million in fines in 2003 and restated earnings from 2000 through 2002 after it replaced long-time auditor Arthur Andersen and discovered errors related to derivatives. Regulators accused the company of manipulating its accounting to push some $5 billion in earnings to future quarters.

Freddie ousted Chief Executive Leland Brendsel in June 2003 and Fannie’s Franklin Raines left in December 2004. The Federal Housing Finance Agency, which regulates the government-sponsored mortgage companies, seized control of both companies earlier this month after outside examiners found more accounting problems and said their capital cushion was low.