WASHINGTON Jan 14 A U.S. government watchdog is
involved in an investigation of whether bank traders manipulated
markets and engaged in front running of orders from Fannie Mae
and Freddie Mac in the interest-rate swaps market, according to
an FBI intelligence bulletin reviewed by Reuters.
Reuters reported on Monday that the FBI had warned
regulators and security officers at financial services firms
about potential abuse by traders with advance knowledge of large
orders submitted by the U.S. government-owned mortgage giants.
The bulletin, which did not provide the names of the banks
or traders under suspicion, warned of "unsophisticated
tradecraft" such as hand signals or special ring tones that
traders were using to deliver information about impending
The FBI attributes some of the information to its own
interviews with former and current employees at a U.S. bank and
a Canadian bank, but also cites information from the inspector
general's office of the Federal Housing Finance Agency.
According to a footnote to the bulletin, the source for some
of the information was an employee at the U.S. bank in an
interview conducted by a special agent with the FHFA, the
regulator of Fannie and Freddie.
The memo does not make clear how active or advanced the FHFA
involvement is. Officials at the inspector general's office were
not available to comment. Representatives for FHFA, Fannie Mae
and Freddie Mac declined to comment.
Fannie and Freddie, which are government-sponsored
enterprises, often do large swap trades to hedge their huge
holdings of home mortgages against swings in the bond market.
The size of the orders makes the GSEs lucrative targets for
front running and market manipulation, the FBI bulletin said.
Front running occurs when someone with advance knowledge of
another market participant's plan to make a sizable transaction
puts an order in first, often profiting from a market move that
can occur once the big trade has gone through.
One former high-level employee at the U.S. bank estimated
that the front running had resulted in profits of $50 million to
$100 million for the bank, the FBI said.
The FBI said it had "medium confidence" in the information.
However, it also described the challenge of prosecuting such
"The FBI assumes law enforcement will have difficulty
detecting and proving illegal activity perpetrated through the
use of the identified tradecraft because the resulting trades
appear completely legitimate," the bulletin said.
The FHFA inspector general's office has authority to
investigate crimes affecting the regulator's programs, including
those that have an impact on Fannie and Freddie.
Between April and September of last year, the office's
investigations led to the indictment of 75 individuals, the
conviction of 55 individuals and $104 million in criminal fines
and restitution orders, according to a report to Congress on its