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

As Congress opens hearings this morning on who is to blame for the financial crisis, an ABC News investigation has found that the FBI and other federal agencies failed to spot the warning signs of massive fraud in the home mortgage business that led directly to Wall Street.

"The failure to connect the dots," Connecticut Attorney General Richard Blumenthal told ABC News, "is completely reprehensible and should now lead to strong and effective indictments and prosecutions for fraud."

Evidence of widespread fraud and deception in the home mortgage business was presented to the FBI, the SEC and the Federal Reserve Board chairmen, Alan Greenspan and Ben Bernanke, over the last five years but resulted in no comprehensive or coordinated federal reaction, according to Blumenthal, other officials, business leaders, class action lawyers and civil rights activists.

A picture of a mansion from aboave.

In July, 2007 a coalition of civil rights groups met with Federal Reserve chairman Ben Bernanke in Washington, D.C., to present concerns that minority homeowners were being particularly hard hit by predatory lenders whose tele-marketing schemes resulted in hundreds of thousands being tricked into mortgages they could not afford, and ultimately were forced into foreclosure.

"I'm disappointed more could not, or was not done in the aftermath of that meeting," said Wade Henderson, president of the Leadership Conference on Civil Rights, who arranged the meeting with Bernanke.

Henderson said he credits Bernanke for at least showing some concern, unlike his predecessor as Federal Reserve Chairman, Alan Greenspan, who Henderson said completely ignored the problem.

"Alan Greenspan, of course, had denied the existence of the problem and certainly resisted any government intervention during his tenure," said Henderson.

A spokesman for the Federal Reserve Board responded by noting studies show "slightly more than half" of sub-prime mortgage loans were made by state licensed "lenders" not subject to regulation by federal authorities. And as evidence of the Fed's awareness and concern about the problem point to Chairman Bernanke's appearance on Capitol Hill last September when he warned lawmakers of a "dramatic" increase in foreclosures and outlined steps the Fed was taking to "help consumers defend against improper lending".

Mortgage Lending Fraud

Evidence of widespread fraud also emerged during a series of civil law suits brought against mortgage brokers affiliated with Lehman Brothers, the New York investment banking firm that was forced to declare bankruptcy.

Lawyers involved in the cases say despite damning jury verdicts, there was no follow up interest from the FBI or the federal prosecutors in pursuing criminal cases, as often results from large civil suits.

The FBI has now announced it will begin criminal investigations involving allegations of fraud involving Lehman Brothers and other major Wall Street financial institutions.

"The verdict should have been the canary in the coal mine," said Don Barrett, a lawyer who won a class action lawsuit in 2003 brought against Lehman Brothers and a now-defunct mortgage broker, First Alliance.

Barrett says not only did the FBI ignore the findings in the case, but so too did Lehman Brothers which continued to do business with suspect mortgage brokers, repackaging the bad loans and selling them as high-interest paying investments to banks around the world.

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