Wall Street and Lenders Face Subprime Probe

Federal prosecutors from the Eastern District of New York have formed a task force of 15 investigators from federal, state, and local agencies that will investigate Wall Street firms and mortgage lenders involved in the subprime-mortgage crisis and look for potential crimes such as mortgage fraud by brokers, securities fraud, insider trading and accounting fraud. These are some of the questions prosecutors will focus on.

Did officials at mortgage lenders make misrepresentations in securities filings about a company's financial position, the quality of its mortgage loans and rising number of loan defaults? And were they engaged in questionable accounting to hide losses?

Did lenders alter borrower information, such as credit histories, before making loans and selling those loans to banks or Wall Street firms, which packaged them into securities and sold them to investors.

In what possible ways did lenders that originated loans defraud Wall Street banks that funded these lenders. For example, prosecutors are looking at whether some lenders, in violation of agreements they had with Wall Street firms, failed to pay back the firms after the lenders sold loans they originated directly to investors such as Fannie Mae and Freddie Mac, and then lied to the Wall Street firms about the status of the loans.

Did brokers at Wall Street firms lied to investors by telling them that their investments in collateralized-debt obligations were backed by, for example, corporate debt rather than risky assets such as subprime-mortgage loans.

In addition to this task force, other investigations are already under way. Prosecutors are trying to determine if UBS AG improperly valued its mortgage-securities holdings and if American Home Mortgage Investment, the tenth largest mortgage lender in the U.S., committed accounting fraud and false statements before it collapsed last year. Bear Stearns is also being scrutinized for the circumstances surrounding the failure of two of its hedge funds last summer due to losses tied to mortgage-backed securities.