FBI investigates Countrywide for securities fraud

Countrywide is one of 15 sub-prime lenders under investigation for potential securities fraud related to statements about its financial position and the quality of loans in its portfolio. From a Wall Street Journal article:

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...

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 relationships within the industry, and the practices used to package mortgage-backed securities for sale to investors...

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 documents.

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 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...

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 rushing to close the Countrywide acquisition as quickly as possible, perhaps in August.

• The News: The FBI is probing Countrywide for possible securities fraud, say law-enforcement officials and finance-industry executives.

• At Issue: The probe could raise questions about whether executives knew Countrywide's mortgage securities might suffer many more defaults than predicted in offering documents.

• Full Disclosure: People familiar with the matter said Countrywide's losses may be much greater than it has said.