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

Oct. 6, 2008— -- 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.

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".