Published September 25, 2008

FBI probes 4 firms at heart of crisis

Investigators looking for possible accounting misstatements by AIG, Lehman, Fannie, Freddie

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(WASHINGTON) US authorities are investigating Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc and American International Group Inc as part of a probe into the collapse of the sub-prime-mortgage market, a senior law-enforcement official said.

The four companies are among 26 that the Federal Bureau of Investigation is reviewing for possible accounting misstatements. The official, who asked to remain unidentified, said the investigations are preliminary.

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

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.'

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 US$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 US$10.3 billion in losses from 2002 through 2004 and maximise bonuses.

Freddie paid US$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 of some US$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. -- Bloomberg