09.25.08
FBI probe into Wall St. meltdown
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WALL STREET IN CRISIS: BERNANKE WARNS OF ‘SIGNIFICANT
ADVERSE CONSEQUENCES FOR THE AVERAGE PERSON’
FBI launches probe into Wall St. meltdown
Fraud investigation comes as Federal Reserve chief urges Congress to
approve $700-billion bailout lest U.S. suffer Main Street ruin
Barrie McKenna
Washington — The U.S. Federal Bureau of Investigation is looking at
potential fraud at four failed financial institutions whose problems
helped prompt Washington’s controversial $700-billion (U.S.)
mortgage-bailout plan: mortgage lenders Fannie Mae and Freddie Mac,
insurer American International Group Inc. and investment bank Lehman
Brothers.
The FBI probe, still preliminary, targets the firms and their top
executives, a law enforcement official told The Associated Press. The
latest inquiries bring to more than two dozen the number of companies
under investigation in the wake of the meltdown.
Critics have complained that AIG and several other collapsed companies
hid the extent of their deepening financial problems from regulators
and investors by understating excessive debt and risky investments.
The FBI is already investigating three failed California banks:
Countrywide Financial Corp., IndyMac Bancorp Inc. and New Century
Financial Corp.
The investigation comes on the heels of U.S. Federal Reserve Board
chairman Ben Bernanke and Treasury Secretary Henry Paulson begging
skeptical senators to give the Treasury sweeping powers and a
$700-billion cheque to buy up bad mortgage debts.
Mr. Paulson and Mr. Bernanke, warning that the United States is facing
a total freeze-up of lending that would hurt all Americans, ratcheted
up pressure on Congress to quickly give the Treasury broad authority
to deal with the crisis.
“If this is not done, it will be of significant adverse consequences
for the average person in the United States,” Mr. Bernanke told a
packed Senate hearing yesterday.
The tough talk comes as Mr. Bernanke, Mr. Paulson and Securities and
Exchange Commission chairman Christopher Cox undergo a two-day barrage
of questioning about the proposed bailout from key committees in both
houses of Congress: the Senate yesterday, the House of Representatives
today.
In spite of the dire tone, key members of Congress apparently remain
unmoved, including Barney Frank, chairman of the House financial
services panel, and Senate banking committee chairman Christopher
Dodd. Mr. Dodd called the plan “unacceptable” in its current form.
They and others want the cash to be conditional on capping the
salaries of bank executives, and want better controls on how the money
is spent. Others want to cut the amount from $700-billion to an
interim infusion of $50-billion.
Congress is reflecting widespread public disgust that the bailout
would reward the reckless bankers who helped drag the economy into
crisis.
“This massive bailout is not a solution,” Republican Senator Jim
Bunning of Kentucky complained, echoing the frustration of many
members of Congress. “It is financial socialism and it’s un-American.”
The Bush administration has set a deadline of this weekend to get the
legislation passed. But both sides acknowledged the timetable could
slip a bit.
Uncertainty over the fate of the bailout and questions about whether
it would even work continue to weigh heavily on financial markets.
U.S. and Canadian stocks fell sharply yesterday, and the Fed was
forced to intervene again to inject billions of dollars of liquidity
into short-term credit markets.
Taking on critics who have complained the government is bailing out
Wall Street, Mr. Bernanke said the plan is actually a lifeline for the
entire economy.
And distancing himself a bit from the Mr. Paulson, who is a former
chief executive of investment bank Goldman Sachs, Mr. Bernanke pointed
out that he is a college professor and has never worked on Wall
Street.
“I don’t have those interests or those connections,” Mr. Bernanke
testified, Mr. Paulson at his side. “My interest is solely for the
strength and the recovery of the U.S. economy.”
Mr. Paulson spent his entire career on Wall Street, including seven
years as head of Goldman Sachs, one of the companies at the epicentre
of the financial turmoil. He has also surrounded himself with top
advisers from the financial services industry.
Mr. Bernanke pointed out that if credit markets are not working, jobs
will be lost, the economy will shrink and recovery will be long time
coming. “This is a precondition for a good, healthy recovery by our
economy,” he explained.
Mr. Paulson urged senators to defer their concerns about lax
regulation of Wall Street, excessive salaries and rewarding bad
corporate behaviour until market confidence is restored. He said
Congress likely will be working on those issues long after he has left
the administration of President George W. Bush, whose term ends in
January.
“I’m frustrated,” Mr. Paulson told senators. “The taxpayer’s already
on the hook. The taxpayer already is going to suffer the consequences
if things don’t work the way they should work. And so the best
protection for the taxpayer, and the first protection for the
taxpayer, is to have this work.”
Mr. Paulson and Mr. Bernanke also took on critics who worry that the
bailout would jeopardize the government’s gold-plated triple-A credit
rating, which allows it to finance its growing debt at relatively low
interest rates.
Mr. Bernanke, for example, said doing nothing could also affect the
credit rating.
Much of the uncertainty over the plan centres on concerns about how it
would work. The two men offered some suggestions, including so-called
reverse auctions in which banks would compete to offer their loans to
the Treasury.
Globe and Mail
September 24, 2008