FBI, SEC, Federal Reserve 'Failed to Connect the Dots' to Wall Street

Toxic Loans Led to Credit Crisis

Blumenthal says those mortgages, while initially highly profitable, set the foundation for hundreds of billions of dollars of "toxic loans" that have now led to the credit crisis.

"There was clear reason to investigate, probably to prosecute some of the practices that were ongoing," Blumenthal told ABC News. "There was failure to disclose material information that could have, and probably should have led to investigation and prosecution."

The Securities Exchange Commission, the SEC, should bear the largest share of the blames, says Blumenthal, because it has direct jurisdiction over such investments.

"The signs were there, there were clear red flag warnings, but they failed to take action to stop the sales of these flawed investment instruments to public in general," said Blumenthal. "They were asleep at the switch."

A spokesman for the SEC declined to respond directly to Blumenthal's criticism, referring reporters to last week's statements by Chairman Christopher Cox calling for an end to the SEC's "voluntary regulatory program" which Cox himself acknowledged had serious failures. But the spokesman also said it was important to understand the underlying real estate transactions at issue were "done entirely outside the regulatory authority of the SEC."

Blumenthal said it is almost certain now that a number of Wall Street's once top CEOs will face criminal prosecution.

"Without singling out any one of them, my strong prediction would be that prosecutions are well justified."

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