US: FBI decides sub-prime crisis must be someone's fault

The US sub prime crisis should have taken no one by surprise - after all, history repeats itself.

But now the FBI says that it is investigating 14 un-named companies - and has been for almost a year.

Using Securities and Exchange Commission data, the FBI is looking at the whole spectrum from brokers, lenders and those that funded or bought in securitised packages examining the possibility of fraudulent misstatement, accounting irregularities and insider dealing.

It's long been known that the FBI was looking into mortgage fraud - after all, the percentage of loans going bad has been increasing since mid 2006 and a big question was how many of those were obtained by fraudulent applicants. But the revelation that it is the industry side of the equation that is being examined is a surprise to many.

Amongst the issues are how sub-prime mortgage packages were valued. Earlier this month, Merrill Lynch admitted that the Securities and Exchange Commission was looking into how some of the securities were valued. And this week, Clayton Holdings - which provides due diligence information to many lenders and investment banks said that it would comply with a subpoena and provide details of its analysis to the New York Attorney General. Next in line, logic says, will be the ratings agencies - the Federal Reserve's Bernanke was questioned on their role by a Senate Committee several weeks ago but, in essence, said that their activities were a matter for them and nothing to do with him - that in the light of the question that asked how those agencies could value a fund as AAA when by definition their subprime assets were anything but.

Clayton's evidence will prove damning in a number of cases: the company has told prosecutors that from 2005 there was a notable deterioration in the quality of lending - and at the same time a notable increase in the number of loans made under a variety of exceptions to normal lending practices.

In plain English, that means that risk management principles were being thrown out of the window in order to increase the size of loan books, and the portfolios of loans available for securitisation.