Housing crisis brings Wall St arrests, veto threat

WASHINGTON (Reuters) - The U.S. housing crisis produced its first high-profile Wall Street arrests on Thursday, while the Bush administration called for broadening the Federal Reserve’s powers over investment banks and said it has charged hundreds of people in a mortgage fraud probe.

At the same time, the White House issued a surprise veto threat against a Senate bill aimed at preventing hundreds of thousands of foreclosures. The threat signaled more partisan warfare on Capitol Hill as homeowners struggle.

Two former managers for Bear Stearns Cos Inc., itself a recent victim of bad bets on mortgage securities, were arrested and indicted on securities fraud charges in New York in connection with the $1.4 billion collapse of two hedge funds.

Ralph Cioffi, 52, and Matthew Tannin, 46, each pleaded not guilty. In a scene reminiscent of Enron-era scandals, the men surrendered to officials and were paraded in handcuffs in front of onlookers en route to their arraignment on Thursday.

The two were charged with defrauding investors by concealing problems that led last year to the disintegration of the two hedge funds. That event raised fears about risky subprime mortgages and helped usher in a global credit crunch that governments around the world are still sorting out.

With falling home prices and rising foreclosures, the U.S. Justice Department said it charged more than 400 people in a 3-1/2-month, national probe. Dubbed “Operation Malicious Mortgage,” it involved $1 billion in losses and 144 cases, mostly of lending fraud and foreclosure and bankruptcy scams.

The department’s get-tough display came amid rising fears the housing slump is pushing the economy into recession -- an issue playing a prominent role in the presidential race.

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Both contenders -- Illinois Democratic Sen. Barack Obama and Arizona Republican Sen. John McCain -- are making economic recovery central to their campaigns.

“No one can predict when the fiscal chaos in housing will end, but it doesn’t look like we will be done any time soon,” said David Abromowitz, a senior fellow at the Center for American Progress, a think tank in Washington.

“Trillions of dollars in lost family home equity ... has been wiped out for many families in just a short time. We would expect this to impact lives and put a drag on the economy well past the day when foreclosures slow and prices stop falling.”


U.S. Treasury Secretary Henry Paulson on Thursday urged broad new powers for the Federal Reserve over investment banks, following actions taken by the U.S. central bank in March that changed its relationship with Wall Street.

In March, the Fed helped broker a takeover of Bear Stearns by JPMorgan Chase & Co and guaranteed a $29 billion loan to facilitate the deal out of concern a Bear Stearns bankruptcy could trigger a financial panic.

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It was the first time since the Great Depression of the 1930s that the Fed, which regulates commercial banks, had stepped in to rescue a nondepository institution. The Fed also set up a special credit line to make emergency loans to major investment banks in an effort to ease credit market strains.

In an opinion piece in The Wall Street Journal on Thursday, Securities and Exchange Commission Chairman Christopher Cox said decisions must be made on whether and how long to maintain the emergency lending program, scheduled to expire this fall.

Another SEC official told a congressional panel on Thursday that the investor protection agency and the Fed have nearly completed a formal agreement to oversee investment banks until Congress can set up a permanent system through legislation.

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It looked unlikely that Congress would tackle such complex structural issues this year, given the difficulties it was having agreeing on legislation to help homeowners.

The White House issued a surprise veto threat against a Senate bill that would, like a similar bill already passed by the House of Representatives, create a new fund to underwrite up to $300 billion of failing home loans. It would also offer billions of dollars in emergency housing relief.

Proponents say the bill could save 400,000 homeowners from foreclosure. But the Bush administration House objected to a provision that would give state and local governments money to buy and fix foreclosed properties.

Congressional leaders were trying to hammer out a final bill and send it to President George W. Bush before lawmakers leave town at the end of next week for the July 4 holiday.

Some House Republicans also threatened to stall a final version of the housing bill, demanding more information about preferential mortgage terms given to two Democratic senators by Countrywide Financial Corp.

“Given the questions around Countrywide, preferential loans need to be investigated,” House Republican leader John Boehner told reporters. “To think that we’re going to move a housing bill with these questions looming I think is irresponsible.”

Writing by Kevin Drawbaugh and Randall Mikkelsen. Additional reporting by Patrick Rucker, Rachelle Younglai, Karey Wutkowski, Glenn Somerville, Chelsea Emery, Diane Bartz, Ellen Wulfhorst, Joseph A. Giannone, Chip East and Emily Chasan; Editing by Andre Grenon