FBI investigating companies at heart of meltdown

The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned.

Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation.

The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official said.

The law enforcement officials spoke on condition of anonymity because the investigations are ongoing and are in the very early stages.

Officials said the new inquiries bring to 26 the number of corporate lenders under investigation over the past year.

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.

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 was looking at whether any of them have misrepresented their assets.

Over the past year as the housing market cratered, the FBI has opened a wide-ranging probe of companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors. Mueller has previously said the FBI's hunt for culprits in the nation's subprime mortgage crisis focused on accounting fraud, insider trading, and failure to disclose the value of mortgage-related securities and other investments.

The investigations revealed Tuesday come as lawmakers began considering whether to approve emergency legislation that would give the government broad power to buy up devalued assets from troubled financial firms.

The bailout proposed by the Bush administration is aimed at helping unlock credit and stabilize badly shaken markets in the United States and around the globe.

In the past two weeks, the government has taken over Fannie Mae and Freddie Mac, the country's two biggest mortgage companies, with a bailout plan that 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.

Last week, the Federal Reserve provided an emergency $85 billion loan to AIG, which teetered on the brink of bankruptcy. Lehman Brothers was forced to file for bankruptcy after attempts to engineer a private rescue fell apart. All the companies were laid low from bad bets on complex mortgage-related securities.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke made the joint decision last week that the only way to stop the carnage was to deal with the root cause of all the troubles, billions of dollars of bad mortgage debt sitting on the books of major financial companies. This debt has triggered the worst credit crisis in decades, causing credit markets to essentially freeze up despite the fact that the Fed joined with major central banks around the world to pump billions of dollars of reserves into the financial system.

Additionally, the FBI is investigating failed bank IndyMac Bancorp Inc. for possible fraud. Countrywide Financial Corp., formerly the nation's largest mortgage lender and now owned by Bank of America Corp., is also under scrutiny.

Could the Fannie and Freddie collapse help borrowers?

The government's takeover of mortgage finance companies Fannie Mae and Freddie Mac should provide an opportunity to modify more home loans for troubled borrowers, a top government official said Wednesday.

The takeover, announced earlier this month, will allow regulators to ``take a look at the loans and see what can be modified,'' said Sheila Bair, chairman of the Federal Deposit Insurance Corp., in testimony before a House committee.

With 1.5 million foreclosures last year and 1.2 million already in the first six months of this year, the foreclosure crisis is accelerating, she said.

``There are still a lot of mortgages out there that need to be restructured and families that can still be helped,'' Bair told the House Financial Services Committee.

Under her stewardship, the FDIC has rolled out a plan to help refinance delinquent homeowners into 30-year mortgages with interest rates currently capped at 5.9 percent. The FDIC introduced the program about a month ago after it seized IndyMac Bank.

Some lawmakers want to see if the program can be replicated among loans held by Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac bought loans from IndyMac, Washington Mutual and many other banks as part of their official role in supporting the housing market. But the government-sponsored companies ran into trouble when those loans started defaulting at an alarming pace, scaring off investors and putting upward pressure on interest rates.

Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency ``actively looking'' at expanding loan modifications among the more than $5 trillion in loans that Fannie and Freddie own or guarantee, Bair said.

Her efforts have the backing of the committee's chairman, Rep. Barney Frank, D-Mass.

``We will be urging others to follow your model,'' Frank told Bair. ``I think you are setting a very good example here.''

More than 1,200 homeowners with mortgages from failed IndyMac Bank are participating in the agency's effort to refinance the loans and stem the tide of foreclosures _ a number is expected to rise dramatically.

So far, the FDIC has mailed out more than 7,400 offers to modify loans, and participating borrowers have saved an average of $430 on their monthly payments. The agency estimates that about 40,000 of IndyMac's 60,000 delinquent mortgages are eligible for the program.

The agency has been operating the Pasadena, Calif.-based bank, now called IndyMac Federal Bank, under a conservatorship since July 11.

And there are concerns on the FDIC might get saddled with an even bigger problem: Washington Mutual Inc., the nation's largest savings and loan.

To avoid that, the government has been reaching out to large banks in an effort to organize a buyout of the beleaguered lender, according to a person briefed on the talks between regulators and banks.

Shares of Washington Mutual have plummeted in recent weeks amid continued concerns about mounting losses in the bank's lending portfolios. The lender lost $3.33 billion, or $6.58 a share, in the second quarter and set aside more than $8 billion to cover souring loans.

Earlier this summer President Bush signed a bill that aims to prevent foreclosures by allowing an estimated 400,000 homeowners to swap their mortgages for more affordable loans, but only if their lender agrees to take a loss on the initial loan. That program starts Oct. 1, but some lawmakers are questioning whether that program will do enough to stem the foreclosure crisis.

``Voluntary may just not be good enough'' said Rep. Jackie Spier, D.-Calif.

Executives from Citigroup, JPMorgan Chase and Bank of America and Wells Fargo, all told lawmakers they are boosting their staff and making preparations to put the new program in place. Bank of America and Wells Fargo officials said they are postponing foreclosure sales for customers who may qualify for the government-backed refinancing effort.

Freddie Mac and Fannie Mae taken over by US Government Sunday

The US government today announced the biggest financial bailout in the country's history as it took troubled mortgage giants Freddie Mac and Fannie Mae into temporary public ownership to save them from collapse.

The US treasury secretary, Henry Paulson, said the Federal Housing Finance Agency, hitherto the two companies' regulator, would henceforth run the companies in a state of "conservatorship" and the two chief executives would be replaced by new men.

Paulson had briefed presidential candidates Barack Obama and John McCain over the weekend about the plan. McCain gave it his immediate backing but Obama said he would reserve judgment until he saw further details, adding that determining the future of the companies would be a top priority if he won the White House.

"We have to protect taxpayers and not bail out the shareholders and management," he said.

The plan received the full backing of the Federal Reserve chairman, Ben Bernanke, and financial markets appeared likely to be cheered by the news. The move helped put a prop under one part of the financial system that had been looking particularly shaky for several months.

Rumours of the move on Friday were sufficient to push shares up on Wall Street after the London stock markets had ended a bad week by shedding another 2.25% to close at 5,240.7.

The US government was forced to announce a plan to prop up the finances of the troubled mortgage giants in July. Paulson said then that Washington would buy up shares in the two companies and underwrite their ballooning debt, which has risen to around $800bn each. Congress at the time approved lending unlimited amounts to the two companies or taking a stake in them if they ran into real trouble.

The two companies have lent or underwritten about $5.3 trillion of the total $12tn of outstanding mortgage debt in the United States. Freddie and Fannie have long been considered as being too big to be allowed to fail.

The collapse in the housing market and surge in mortgage defaults meant the two groups racked up a combined $14bn of losses over the past year.

Although there are increasing signs from the US that house prices are stabilising after falling for two to three years, many analysts say the housing market's problems are far from over.

"Mortgage delinquencies continue to set new records, promising more losses and future write-offs for banks and other mortgage lenders," said economists at investment bank Dresdner Kleinwort.

"The problems are spreading from the subprime sector to prime loans, particularly to mortgages with adjustable rates and optional payment features. With unemployment rising faster, cyclical problems will now compound the damage caused by falling house prices."