Wall Street ... also may have duped borrowers and investors who supplied cash to fuel a housing boom that's turned bust ...

Wall Street Faces Fury Over Subprimes | MARK JEWELL | February 18, 2008 07:35 PM EST

BOSTON — Regulators are trying to punish Wall Street for mortgage finance practices that expanded home ownership and spread risk among a host of new players _ but also may have duped borrowers and investors who supplied cash to fuel a housing boom that's turned bust.

A handful of state securities regulators and a couple foreclosure-blighted cities have fired the opening shots with lawsuits trying to prove that investment banks and big lenders are guilty of more than just bad business decisions and failing to foresee looming mortgage troubles. Some regulators say greed and fraud underlie much of the subprime mortgage mess that has spread across the broader housing market, triggering a spike in foreclosures.

Aside from the civil cases, the FBI is looking at possible criminal action, focusing on what Wall Street firms knew about the risks of mortgage securities backed by subprime loans, and whether they hid risks from investors.
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Attorneys general in New York and Ohio are targeting alleged systematic inflation of home appraisals by major lenders and appraisal firms. Litigation in Massachusetts and other states seeks to demonstrate that investment banks failed to disclose risks to investors who bought mortgage-related securities and weren't up front about conflicts of interest across their far-flung financial operations, including trading of subprime investments.
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Criminal action also could be looming. The FBI said last month it was investigating 14 companies for possible accounting fraud, insider trading or other violations that could result in criminal charges. The FBI didn't identify companies but said the probe involves firms across the financial services industry. ...