"Operation Malicious Mortgage"

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. (BSC_pf.N), 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.

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