US sub-prime crisis: Two hedge fund execs nabbed

US sub-prime crisis: Two hedge fund execs nabbed 

They are accused of defrauding investors; 400 others charged with mortgage fraud


WASHINGTON – THE United States’ housing crisis has produced its first high-profile Wall Street arrests, while the Bush administration made a call to broaden the Federal Reserve’s powers over investment banks.

The government said it had also charged hundreds of people in a mortgage fraud probe.


Two former managers of Bear Stearns, itself a recent victim of bad bets on mortgage securities, were arrested and indicted on securities fraud charges in New York in connection with the US$1.4 billion (S$1.9 billion) collapse of two hedge funds.


Ralph Cioffi, 52, and Matthew Tannin, 46, each pleaded not guilty. In a scene reminiscent of Enron-era scandals, the men surrendered to officials and were paraded in handcuffs in front of onlookers en route to their arraignment on Thursday.


The two were charged with defrauding investors by hiding problems that had led to the disintegration of the two hedge funds last year.


That event raised fears about risky US sub-prime mortgages and helped usher in a global credit crunch that governments around the world are still sorting out.


With falling home prices and rising foreclosures, the US Justice Department said it had charged more than 400 people in a 31/2-month national probe.


Dubbed ‘Operation Malicious Mortgage’, it involved US$1 billion in losses and 144 cases, mostly of lending fraud and foreclosure and bankruptcy scams.


The department’s get-tough display came amid rising fears that the housing slump is pushing the US into a recession – an issue playing a prominent role in the presidential race.


US Treasury Secretary Henry Paulson on Thursday urged that the Federal Reserve be given broad new powers over investment banks, following actions taken by the US central bank in March that changed its relationship with Wall Street.


In March, the Fed helped broker a takeover of Bear Stearns by JPMorgan Chase, and guaranteed a US$29 billion loan to facilitate the deal, out of concern that a Bear Stearns bankruptcy could trigger financial panic.


It was the first time since the Great Depression of the 1930s that the Fed, which regulates commercial banks, had stepped in to rescue a non-depository institution. The Fed also set up a special credit line to make emergency loans to major investment banks.


In an opinion piece in The Wall Street Journal on Thursday, Securities and Exchange Commission chairman Christopher Cox said decisions must be made on whether and how long to maintain the emergency lending programme, which is scheduled to expire in autumn.


But it looked unlikely that Congress would tackle such complex structural issues this year, given the difficulties it was having agreeing on legislation to help home owners.


Meanwhile, the White House issued a surprise veto threat against a Senate Bill aimed at preventing hundreds of thousands of foreclosures.


Proponents say the Bill could save 400,000 home owners from foreclosure. But the Bush administration objected to a provision that would give state and local governments money to buy and fix foreclosed properties.




Source: Straits Times

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