Wall Street sees first arrests after US housing crisis

Washington: The US housing crisis produced its first high-profile Wall Street arrests on Thursday.

Two former managers for Bear Stearns, 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, 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 US Justice Department said it charged more than 400 people in a three-and-a-half-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.

"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 Centre for American Progress, a think tank in Washington.

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

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

Securities and Exchange Commission Chairman Christopher Cox wrote in The Wall Street Journal on Thursday that decisions must be made on whether and how long to maintain the emergency lending programme, scheduled to expire this autumn.