The Wall Street Journal
FBI Investigates Countrywide
U.S. Scrutinizes Filings On Financial Strength, Loan Quality for Fraud
By GLENN R. SIMPSON and EVAN PEREZ
March 8, 2008; Page A3
WA****NGTON -- The Federal Bureau of Investigation is probing subprime
lender
Countrywide Financial Corp. for possible securities fraud, according to
law-enforcement officials and finance-industry executives.
The inquiry involves whether company officials made misrepresentations
about
the company's financial position and the quality of its mortgage loans in
securities filings, four people with knowledge of the matter said. It is
at
an early stage, they emphasized.
"We are not aware of an investigation being conducted by the FBI,"
Countrywide spokeswoman Jumana Bauwens said in an e-mail. A spokesman for
Bank of America Corp., which is in the midst of acquiring Countrywide,
declined to comment.
Fifteen other subprime companies also are under scrutiny by federal agents
and prosecutors in a broad look at the subprime industry sparked by huge
losses on residential mortgages and the securities used to fund them. The
investigations are examining mortgage-origination fraud, conflicts of
interest and undisclosed relation****ps within the industry, and the
practices used to package mortgage-backed securities for sale to
investors.
Countrywide issued more than $100 billion in mortgage-backed securities
between 2004 and 2007, according to the newsletter Asset Backed Alert.
More
than two dozen Wall Street firms helped construct those deals, making it
possible that some of them will also face law-enforcement scrutiny.
While Countrywide is based in Calabasas, Calif., near Los Angeles, the
inquiry is being handled in New York and overseen in Wa****ngton, people
familiar with the matter said. Federal prosecutors in New York have
primary
jurisdiction over securities-fraud cases, while FBI and Justice Department
officials are coordinating the subprime probes here.
Federal investigators are looking at evidence that may indicate widespread
fraud in the origination of Countrywide mortgages, said one person with
knowledge of the inquiry. If borne out, that could raise questions about
whether company executives knew about the prospect that Countrywide's
mortgage securities would suffer many more defaults than predicted in
offering do***ents.
Another potential issue facing the company is whether it has been candid
in
its accounting for losses. People familiar with the matter said that
Countrywide's losses may be several times greater than it has disclosed.
Countrywide, which agreed in January to be acquired by Bank of America for
$4 billion, already is under investigation by the Securities and Exchange
Commission for possibly improper accounting. SEC investigators are working
closely with FBI agents on several subprime investigations, officials
said.
The attorneys general of Florida and Illinois have launched probes too.
Countrywide also is the subject of a class-action, securities-fraud civil
lawsuit by various government pension funds and their managers, including
the city and state of New York. The lawsuit identifies more than 25 firms
that helped Countrywide package and sell mortgage-backed securities,
including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Lehman
Brothers Holdings Inc. The firms have denied any wrongdoing.
Countrywide "misled investors by falsely representing that Countrywide had
strict and selective underwriting and loan origination practices, ample
liquidity that would not be jeopardized by negative changes in the credit
and housing markets, and a conservative approach that set it apart from
other mortgage lenders," the suit alleges.
At its peak, Countrywide was the nation's biggest home lender, originating
more than $450 million in mortgages annually, or about one-fifth of all
home
loans. Its "servicing ****tfolio" of mortgage loans exceeds $1 trillion.
Last
month, Countrywide disclosed that its losses for the fourth quarter of
2007
were $422 million, more than double the estimate of analysts.
There is no indication that Bank of America, now conducting due diligence
at
Countrywide, is having second thoughts about completing the acquisition.
In
fact, people familiar with the matter said Bank of America is ru****ng to
close the Countrywide acquisition as quickly as possible, perhaps in
August.
--John R. Wilke and Kara Scannell contributed to this article.
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