WASHINGTON -- The U.S. Federal Bureau of Investigation is looking at potential fraud at four failed financial institutions whose problems helped prompt Washington's controversial $700-billion (U.S.) mortgage-bailout plan: mortgage lenders Fannie Mae and Freddie Mac, insurer American International Group Inc. and investment bank Lehman Brothers.
The FBI probe, still preliminary, targets the firms and their top executives, a law enforcement official told The Associated Press. The latest inquiries bring to more than two dozen the number of companies under investigation in the wake of the meltdown.
Critics have complained that AIG and several other collapsed companies hid the extent of their deepening financial problems from regulators and investors by understating excessive debt and risky investments.
The FBI is already investigating three failed California banks: Countrywide Financial Corp., IndyMac Bancorp Inc. and New Century Financial Corp.
The investigation comes on the heels of U.S. Federal Reserve Board chairman Ben Bernanke and Treasury Secretary Henry Paulson begging skeptical senators to give the Treasury sweeping powers and a $700-billion cheque to buy up bad mortgage debts.
Mr. Paulson and Mr. Bernanke, warning that the United States is facing a total freeze-up of lending that would hurt all Americans, ratcheted up pressure on Congress to quickly give the Treasury broad authority to deal with the crisis.
"If this is not done, it will be of significant adverse consequences for the average person in the United States," Mr. Bernanke told a packed Senate hearing yesterday.
The tough talk comes as Mr. Bernanke, Mr. Paulson and Securities and Exchange Commission chairman Christopher Cox undergo a two-day barrage of questioning about the proposed bailout from key committees in both houses of Congress: the Senate yesterday, the House of Representatives today.
In spite of the dire tone, key members of Congress apparently remain unmoved, including Barney Frank, chairman of the House financial services panel, and Senate banking committee chairman Christopher Dodd. Mr. Dodd called the plan "unacceptable" in its current form.
They and others want the cash to be conditional on capping the salaries of bank executives, and want better controls on how the money is spent. Others want to cut the amount from $700-billion to an interim infusion of $50-billion.
Congress is reflecting widespread public disgust that the bailout would reward the reckless bankers who helped drag the economy into crisis.
"This massive bailout is not a solution," Republican Senator Jim Bunning of Kentucky complained, echoing the frustration of many members of Congress. "It is financial socialism and it's un-American."
The Bush administration has set a deadline of this weekend to get the legislation passed. But both sides acknowledged the timetable could slip a bit.
Uncertainty over the fate of the bailout and questions about whether it would even work continue to weigh heavily on financial markets. U.S. and Canadian stocks fell sharply yesterday, and the Fed was forced to intervene again to inject billions of dollars of liquidity into short-term credit markets.
Taking on critics who have complained the government is bailing out Wall Street, Mr. Bernanke said the plan is actually a lifeline for the entire economy.
And distancing himself a bit from the Mr. Paulson, who is a former chief executive of investment bank Goldman Sachs, Mr. Bernanke pointed out that he is a college professor and has never worked on Wall Street.
"I don't have those interests or those connections," Mr. Bernanke testified, Mr. Paulson at his side. "My interest is solely for the strength and the recovery of the U.S. economy."
Mr. Paulson spent his entire career on Wall Street, including seven years as head of Goldman Sachs, one of the companies at the epicentre of the financial turmoil. He has also surrounded himself with top advisers from the financial services industry.
Mr. Bernanke pointed out that if credit markets are not working, jobs will be lost, the economy will shrink and recovery will be long time coming. "This is a precondition for a good, healthy recovery by our economy," he explained.
Mr. Paulson urged senators to defer their concerns about lax regulation of Wall Street, excessive salaries and rewarding bad corporate behaviour until market confidence is restored. He said Congress likely will be working on those issues long after he has left the administration of President George W. Bush, whose term ends in January.
"I'm frustrated," Mr. Paulson told senators. "The taxpayer's already on the hook. The taxpayer already is going to suffer the consequences if things don't work the way they should work. And so the best protection for the taxpayer, and the first protection for the taxpayer, is to have this work."
Mr. Paulson and Mr. Bernanke also took on critics who worry that the bailout would jeopardize the government's gold-plated triple-A credit rating, which allows it to finance its growing debt at relatively low interest rates.
Mr. Bernanke, for example, said doing nothing could also affect the credit rating.
Much of the uncertainty over the plan centres on concerns about how it would work. The two men offered some suggestions, including so-called reverse auctions in which banks would compete to offer their loans to the Treasury.
The FBI is investigating 26 firms and 1,400 individuals involved in the US financial crisis for fraud and "sub-prime lending practices". Freddie Mac, Lehman Brothers, Fannie Mae and AIG are among the firms being scrutinized after recently receiving federal bailouts. 

Investigators, who are cooperating with the IRS, Postal Office, and other federal offices to complete their investigation, are concerned that major corporations may have also forced or bribed ratings agencies to favor them.

The probe, which is in early stages, began eight months ago when the FBI began taking a close look at the mortgage industry and widespread irresponsible loaning practices. At least one corporation has been raided, but so far no evidence of fraud has been found.

The FBI has questioned executives of each of the firms closely, and arrested two in June. An anonymous source told The Times that the firms had been ordered to "hold all papers and e-mails under lock and key" as the FBI scours the finances of each firm. 

Many of the companies and individuals being investigated are at the center of the nationwide financial crisis and controversial bailout plans, and have been widely blamed for the country's financial crisis. The investigation has come at a time when the eyes of many in the US and around the world are turned towards the financial markets, as Congress and politicians scramble to fix the crisis while the election date looms closer. 

Officials told CNN that it would be a long time before the investigations were finished, adding a warning: "Don't expect indictments tomorrow or next week or next month".