Who's in the FBI's Crosshairs?

Despite being a card-carrying free marketer, I've thought for a while there had to be identifiable culprits in this mortgage mess. Now it's come to light that both the FBI and the SEC harbor the same suspicions.

As The Wall Street Journal detailed on Wednesday -- or as much as could be detailed -- the bureau has opened criminal inquiries into 14 companies involved in the subprime mortgage crisis. The trouble is, it will not identify the 14 companies or the parts of the mortgage process they occupy.

Oh, sure, the Journal notes that federal prosecutors and the SEC are interested in the blowup of two Bear Stearns (NYSE: BSC  ) hedge funds and the accounting and bankruptcy filings at New Century Financial, once the nation's second-largest subprime mortgage lender. And it appears that, with Bear Stearns, Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) are cooperating with unnamed government regulatory authorities' requests for information.

You have to believe the rating agencies will get at least a look-see from the Feds. And it wouldn't appear as libel to anyone to say that Countrywide (NYSE: CFC  ) , the biggest of the lenders, must be getting some attention.

But beyond that, I was intrigued Monday evening by a comment from a reader:

I am uncertain if [the FBI's] probe includes the homebuilders. Many were astonishingly providing all, of various key parts, or a transaction during the real estate bubble. Some were land owners, developers, sales agents, appraisers, mortgage brokers/bankers and even title insurance [providers] all in the same deal.

I agree with that assessment, and also trust that the investigation will pay close attention to the origination and lending stages of the process. Those involved in securitizations will get plenty of attention. It also goes without saying that mortgage-backed securities are less likely to rot if they're stocked with solid loans.

The key to all this, however, is to get to the source of the problem. Until the FBI, the SEC, or another group does so, you'll have difficulty finding a cyclical bottom for the likes of Centex (NYSE: CTX  ) , Lennar (NYSE: LEN  ) , or Toll Brothers (NYSE: TOL  ) .

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