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A Federal Probe of Fannie and Freddie
The mortgage giants have received grand-jury subpoenas on accounting and governance matters as the FBI widens its financial investigation
by Keith Epstein
There's nothing quite like a crisis to draw investigators looking for criminal action.
So it is now for the latest targets of various investigations: Fannie Mae (FNM) and Freddie Mac (FRE), the residential financing powerhouses whose accounting and disclosure records are being examined by a federal grand jury in New York. They join a corporate who's who of players swept up in the cascading economic crisis that also find themselves the subject of scrutiny by the FBI and others, from Lehman Brothers and insurer American International Group (AIG) to failed IndyMac Bancorp and mortgage lender Countrywide Financial.
In Freddie's case, the grand jury is focusing on "accounting, disclosure, and corporate governance matters" since January 2007, the McLean (Va.)-based company confirmed Sept. 30. Freddie said it received a subpoena on Sept. 26 from the U.S. Attorney's Office in Manhattan, as well as a notice from the Securities and Exchange Commission informing it of a separate inquiry. In both instances, the company was asked to preserve documents.
"Freddie Mac will cooperate fully," the company said in a statement. Fannie disclosed it had received a subpoena as well, in filings with the SEC.
Altogether, in the past year, some 26 companies with roles in the financial crisis have come under investigation, often because of suspected fraud. The SEC and Justice Dept. have declined to comment on the investigations. The FBI appears to have expanded its investigations not only to mortgage lenders but also investment banks, especially those that bundled home loans into securities. Among the current cases is one involving Bear Stearns; two former managers were arrested in June on securities fraud and other charges.
As long as 10 months ago, press reports suggested that Fannie masked potential losses on bad loans by using new accounting procedures. Both Fannie and Freddie have had to restate earnings in past years, following discoveries by federal regulators of irregularities on the companies' books.
POSSIBLE CRIMINAL CHARGES
A number of members of Congress, including several on the Senate Judiciary Committee, have urged the FBI to be more aggressive in pursuing possible criminal charges against major players in the crisis. "If people were cooking the books, manipulating, doing things they were not supposed to do, then I want people held responsible," said Senator Patrick Leahy (D-Vt.), the committee's chairman, at a Sept. 17 oversight hearing on the FBI. "And I suspect every American taxpayer—I don't care what their political background is—would like them held responsible."
Presidential candidate John McCain is doing his part to leverage what he considers Democrats' responsibility for the failure of Fannie and Freddie. In a new national TV ad, McCain blames Democratic rival Barack Obama for failing to take action as the companies floundered. "John McCain fought to rein in Fannie and Freddie," the ad states. "Obama was notably silent."
The ad makes no mention of the McCain campaign's own connections to Freddie and Fannie. The lobbying firm of McCain's campaign chairman, Rick Davis, received more than $2 million since 2000 from Freddie; starting in late 2005 or early 2006, Freddie paid $15,000 a month. Both Freddie and Fannie paid Davis some $30,000 monthly from 2000 to 2005 for running an organization promoting homeownership.