Study exonerates Federal Reserve's crisis-era bailouts

By Jonathan Spicer

(Reuters) - A study by economists at one of the regional Federal Reserve banks has found that the U.S. central bank didn't break any laws in its handling of the 2007-09 U.S. financial crisis, and that, in fact, it handled that crisis better than the savings and loan collapse of the 1980s.

The Federal Reserve had attracted scorn when it loaned hundreds of billions of dollars to troubled banks during the 2007-09 crisis, with some critics suggesting the bailout broke the law.

"The authors find no evidence that the Federal Reserve ever exceeded statutory limits during the recent financial crisis, recession, and recovery," said the study by the St. Louis Fed bank, which sought to find out whether the Fed had violated "the letter or spirit of the law" by lending to undercapitalized banks.

The financial crisis was, in part, brought on by aggressive securitization by financial institutions, lax regulations, and a bursting of the subprime mortgage-market bubble in 2007.

At the height of the crisis - which spread to international markets and sparked a brutal global recession - the Fed took unprecedented emergency actions well beyond its traditional use of interest rates to backstop both banks and the market.

It bought an array of financial securities to keep rates low and markets liquid, aggressively lent money to banks and brokers, facilitated Bear Stearns' fire sale to fellow bank JPMorgan, and rescued giant insurer AIG, among other steps that some criticized as excessive or illegal.

The central bank also established a new so-called Term Auction Facility (TAF) to make funds available to banks. Those outstanding loans peaked at $493 billion.

Chairman Ben Bernanke has said the Fed had such powers based on Great Depression-era laws, and needed to act to avoid another Depression. Today, U.S. unemployment remains high and the economy is still recovering from the recession, the worst since the 1930s, even as major banks have again become profitable.

Critics also argued the Fed in 2008 violated the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which limits Fed lending to undercapitalized banks.

But the study found "no instances in which the Fed provided credit to an undercapitalized or critically undercapitalized bank for more than the maximum number of days specified in FDICIA." It also concluded that few banks that failed between 2008-2010 borrowed from the Fed in their last year running.

"As a group, the banks that failed during the 2008-10 period relied less on the Federal Reserve as a source of credit during their last 52 weeks than did the banks that failed during 1985-90," said the study, which was published on the St. Louis Fed's website.

(Editing by Bernadette Baum)

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Women suing Wash. AG over federal health care law

SEATTLE (AP) -- Dozens of women on Thursday filed a lawsuit against Washington Attorney General Rob McKenna, alleging that his participation in legal action seeking to overturn the new federal health care law threatens access to comprehensive coverage for women.

The politically charged lawsuit is seeking a ruling that McKenna violated his ethical duties by asking the Supreme Court to invalidate protections for women's health care. It claims that his actions go against the wishes of his clients, the residents of Washington state.

As of Thursday morning, 90 women had signed on as plaintiffs in the case.

McKenna, a GOP candidate for governor, joined other GOP attorneys general in the federal health care lawsuit more than a year ago. He objected to a provision that required people to buy private health insurance or face a fine.

He said that mandate was unconstitutional, though he supported other parts of the federal overhaul. The new lawsuit targets his efforts to overturn the whole law — not just the part he disagrees with.

The women say they want to force McKenna to ask the U.S. Supreme Court to maintain women's health care requirements, no matter how justices rule on the individual mandate.

McKenna campaign spokesman Charles McCray called it a "frivolous lawsuit," and said it was a shame to have this kind of distraction.

The lawsuit, filed in King County Superior Court, noted that McKenna chose to follow the action of other states' rather than his own statements and the wishes of his clients. Lawyers for the plaintiffs from the public interest law firm of Smith & Lowney PLLC say McKenna's actions are not in the best interest of Washington state and its residents, which he is obligated by law to represent.

McKenna "has greater latitude than many attorneys to determine what he believes to be in the best interests of the State's citizens. However, that latitude does not include misinforming the citizens of the nature of his actions, arguments and litigation engages on their behalf. The duties of candor and avoiding conflicts of interest apply to all lawyers, including the Attorney General," the lawsuit said.

The lawyers from Smith & Lowney said at a news conference that their timing — in the middle of the campaign season and well into the health care debate in Washington, D.C. — is not politically motivated. Attorney Knoll Lowney said there's no way of knowing when the Supreme Court will rule and that his clients decided to pursue the case around the second anniversary of the health care law's passage as McKenna's actions became clearer.

"The governor's race is so insignificant compared to the stakes in the U.S. Supreme Court," Lowney said. Although many expect the Supreme Court to rule in the near future, Lowney said this case could still affect the justices' decision.

Two of the plaintiffs said McKenna's actions made them worried about their future and that the federal health care law has already helped them.

Melissa Mackey, 38, said she was diagnosed with an aggressive form of breast cancer nine months after being laid off from her job. If she hadn't been able to keep her insurance from her previous employer, if she hadn't been available for preventative care and if she had been affected by a cap on her insurance benefits, she may not have lived to speak at the news conference.

Mackey appeared offended by the suggestion that the timing of the lawsuit was politically motivated.

"I didn't get cancer for political reasons," said Mackey, who is still receiving treatment. "I just haven't done 20 months of treatment for a governor's race. I want to be treated fairly, and I want to be taken care of and that's what I deserve. I don't care who's governor."

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Follow Donna Blankinship at http://twitter.com/dgblankinship

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Online:

Lawsuit against McKenna: http://www.smithandlowney.com/mckenna_aca

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Conflicts at the Federal Reserve Emerge

The Federal Reserve's policy makers may look like a happy united family, but disagreements about future monetary maneuvers are surfacing.

William Dudley, president of the New York Fed and Vice Chairman Janet Yellen agree than keeping interest rates fixed near zero percent until 2014 is needed to give the economy more time to recover.

Others like Charles Plosser, the Philadelphia Fed president say future stimulus should be linked to how the economy performs, not to a calendar. Atlanta Fed president Dennis Lockhart and the St. Louis Fed president James Bullard don't think more easing is needed. 

From 2008 to 2011, the Fed gobbled up $2.3 trillion in bonds via two acrobatic rounds of something called "quantitative easing" or "QE." That was the easy part. How does the Fed exit the party without anyone noticing? 

Who are these People?

The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members, which consists of the seven members of the Board of Governors and five of the 12 Reserve Bank presidents.

This imperfect arrangement shows what a delicate balancing act the Fed truly has. Level headed financial opinions by Fed members with a disciplined fiscal sense are canceled out by the liberal free spending Keynesian members. Lockhart is a voting member on the FOMC this year and Bullard and Plosser are not.

The Fed's plan of redeploying $400 billion of short-term cash into long-term U.S. Treasuries (NYSEArca: TLT - News) won't be completed until June, yet financial markets are already begging for QE3. Will the Fed give the market another injection?

Unintended Beneficiaries

Although the broader economy has always been the Fed's intended target (that's what they tell us), financial markets, particularly high risk areas, have been the obvious beneficiaries. 

"Risk on" trades in emerging market stocks (NYSEArca: EEM - News), junk bonds (NYSEArca: HYG - News), and small company stocks (NYSEArca: IWM - News) have enjoyed big gains. The $1 billion sale of Instagram to Facebook has the entire venture capital circuit in a frenzied state. But it's a double edged sword and high risk areas are showing some fatigue.

Over in China (NYSEArca: FXI - News), gross domestic product (GDP) increased a disappointing 8.1% during the first quarter from a year ago and fell short from the 8.4% median estimate of economists surveyed by Bloomberg.

Distorted Markets

Whenever there's a sell-off, financial markets fret about the chances of more future monetary intervention by the Fed. And like an ill-mannered child, they throw a hissy fit if they think they're not going to get what they want. A psychologist would say financial markets have the same symptoms as the depressing state of a person addicted to drugs. Although the victim may feel well after their fix, the after effects are mortal.

The Fed's exit strategy from trillion dollar stimulus plans is becoming harder and harder because financial markets have become more and more addicted. The ETF Profit Strategy newsletter shows you how to navigate the treacherous waters of Fed manipulated markets along with simple income strategies used by large institutions.   

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Rothstein employee faces federal charges

MIAMI (AP) -- An attorney who worked in the firm of convicted Ponzi schemer Scott Rothstein faces federal charges, with authorities claiming he made illegal donations to John McCain's 2008 presidential campaign.

The U.S. Attorney's Office in Miami charged 49-year-old Steven Lippman on Monday with conspiracy to violate the Federal Election Campaign Act, to defraud the United States and to defraud a financial institution. He faces up to five years in prison.

Authorities say Rothstein enlisted Lippman and others to contribute to the McCain campaign after the now-defunct Fort Lauderdale law firm Rothstein Rosenfeldt Adler unlawfully provided the funds for the political contributions.

Rothstein is serving a 50-year prison sentence for operating the Ponzi scheme.

Lippman's attorney Bruce Zimet says he's has been negotiating with the government to reach a resolution.

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