December 3, 2023

Judge Rules Against JPMorgan in Suit Over Billionaire’s Losses

In a decision made public on Monday, Justice Melvin Schweitzer of the State Supreme Court in Manhattan ordered JPMorgan to pay $42.5 million on the breach of contract claim, plus 5 percent annual interest starting in May 2008.

The judge found JPMorgan was not liable for negligence. His decision was dated Aug. 21, about seven months after the three-week, nonjury trial.

Mr. Blavatnik sued JPMorgan in 2009 to recover more than $100 million that he said the bank lost on a roughly $1 billion investment by CMMF L.L.C., a fund created by his company, Access Industries.

Separately, JPMorgan faces other litigation and investigations involving its handling of mortgage-related businesses during the financial crisis.

According to Mr. Blavatnik, JPMorgan Investment Management promised that it would invest Access’s money conservatively after opening the account in 2006.

Instead, according to Mr. Blavatnik, the bank breached a 20 percent limit for mortgage-backed securities by misclassifying securities that were backed by a pool of subprime loans, known as ABS-home equity loans, as asset-backed rather than mortgage-backed securities.

Access also accused JPMorgan of continuing to hold the troubled securities despite knowing they were inappropriate for the portfolio. CMMF closed the account in May 2008.

In finding JPMorgan liable for exceeding the 20 percent cap, Justice Schweitzer rejected the bank’s argument that “industry practice” was to classify the home equity loans separately from mortgage securities because they carried different risks.

In ruling for JPMorgan on the negligence claim, Justice Schweitzer said that the mortgage securities were considered “relatively safe and desirable” when they were bought, and that JPMorgan acted reasonably in light of current conditions when it advised CMMF to “wait out the storm” rather than sell at depressed prices.

A JPMorgan spokesman, Doug Morris, said: “We are pleased that the court rejected CMMF’s negligence claims, and found that our investment professionals lived up to their responsibilities. We respectfully disagree with the court’s interpretation of our agreement with CMMF, and we are considering our options regarding that finding.”

David Elsberg, a partner at Quinn Emanuel Urquhart Sullivan representing Mr. Blavatnik, said: “Hopefully it signals that banks need to live up to their obligations to clients, and as the court makes clear, not hide behind what they often try to refer to as industry practice.”

Mr. Blavatnik also welcomed the decision. “There are a lot of people out there who, I understand, feel they have been wronged by JPMorgan but cannot afford to take on a huge bank. They shouldn’t have to,” he said in a statement. “JPMorgan should do the right thing because it is the right thing to do.”

Mr. Blavatnik is estimated to be worth about $16 billion, making him the world’s 44th richest person, according to Forbes magazine.

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At a Fed Conference, Views Differ Sharply on Stimulus’s Effect

Unconventional monetary policy “has been a significant success altogether,” Christine Lagarde, managing director of the International Monetary Fund, said in a lunchtime address. She said the efforts continued to yield benefits and should not be unwound too quickly.

Even for developing countries, which have sometimes criticized the efforts, the effects are “still positive,” she said. “Marginally, but still positive.”

But the conference, convened by the Federal Reserve Bank of Kansas City, underscored again the striking divide between academics, where skepticism is widespread about the benefits of the Fed’s asset purchases, and policy makers, where confidence is equally widespread.

The Fed has accumulated more than $3 trillion in Treasury securities and mortgage-backed securities, and since last December it has been expanding those holdings by $85 billion a month in an effort to drive down unemployment and promote growth.

The day began with a series of academic presentations criticizing the power of that approach. The most supportive said that the Fed’s purchases of Treasuries had little value, but that its purchases of mortgage-backed securities “likely have had beneficial macroeconomic effects.”

That study, by Arvind Krishnamurthy, an economist at Northwestern University, and Annette Vissing-Jorgensen, an economist at the University of California, Berkeley, still found little economic benefit in holding on to the mortgage bonds and Treasuries, a basic element of the Fed’s stimulus campaign. And it argued the Fed was undermining its own efforts by failing to articulate a clear plan for the purchases.

Policy makers tend to view these critiques as triumphs of theory over reality. They point to events in June as a kind of perverse evidence, noting that a wide range of interest rates jumped after the Fed’s chairman, Ben S. Bernanke, announced that the Fed intended to reduce its monthly asset purchases by the end of the year. The implication, they said, is that the purchases had been suppressing those rates.

“The paper doesn’t comport very well with the experience of the last couple of months,” said Donald L. Kohn, a fellow at the Brookings Institution and a former Fed vice chairman. “We’ve had a very broad set of asset price changes.”

Academic economists, in turn, say policy makers are claiming credit without presenting evidence.

While it seems clear, for example, that the Fed’s purchases of mortgage bonds have reduced interest rates on mortgage loans, some economists see evidence that current economic conditions have limited the benefits of lower mortgage rates. Banks have retained some of the benefit rather than passing it on to customers. Tighter qualification standards mean that many would-be borrowers cannot benefit from the lower rates. And those who are borrowing may not be inclined to spend more.

“Showing Fed affects interest rates doesn’t mean it automatically affects real activity,” one of those skeptics, Amir Sufi, an economist at the University of Chicago, said on Friday in an exchange of messages on Twitter. “Quantitative significance must be established.”

These debates, of course, are not merely academic. Fed officials are divided over when to begin cutting their monthly asset purchases — and when they do so, they must decide whether to buy fewer Treasuries, fewer mortgage bonds, or some combination.

Mr. Bernanke chose not to attend the conference as he prepares to step down in January, and no other Fed official spoke in his place.

Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said on Friday that he would support a cut when the Fed’s policy-making committee meets in September as long as there was no particularly bad news between now and then.

“I would be supportive in September as long as the data that comes in between now and then basically confirm the path we’re on,” he told CNBC.

Mr. Lockhart, however, does not hold a vote on the Federal Open Market Committee this year. One official who does, James Bullard, the Federal Reserve Bank of St. Louis president, told CNBC in a separate interview that he was undecided. “I don’t think we have to be in any hurry in this situation,” he said. “Inflation is running low, you’ve got mixed data on the economy, so I’d be cautious. I wouldn’t want to prejudge the meeting.”

Policy makers from developing countries urged the Fed to clarify its plans so they can prepare for potential disruptions. Low interest rates in the developed world have sent vast quantities of money sloshing into those countries. Ms. Lagarde said that net flows to those countries had risen by $1.1 trillion since 2008, about $470 billion above expectations based on long-term trends.

As rates rise, history suggests that some of the money may come sloshing back, with hugely disruptive consequences.

Investors already are selling foreign currencies and buying dollars in the expectation that the Fed will begin to decelerate its stimulus campaign, allowing the dollar to strengthen. The Indian rupee lost 4 percent of its exchange value in about a week, prompting the Reserve Bank of India to impose restrictions last week on the outflow of money.

Agustín Carstens, governor of the Bank of Mexico, said, “Advanced country central banks should mind the spillover effects of their actions.” He added, “Otherwise the crisis will be reactivated with new actors.”

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E.C.B. Cuts Key Interest Rate to 0.5%, a New Low

The central bank, meeting in Bratislava, cut its benchmark interest rate to 0.5 percent from 0.75 percent, which was already a record low. It was the first change in interest rates since July 2012 and the bank’s fourth cut since Mario Draghi took over as its president in November 2011.

The central bank will continue providing unlimited loans to banks at the benchmark interest rate “as long as needed” and at least until mid-2014, Mr. Draghi said at a news conference after the announcement.

Even at its new low of 0.5 percent, the European Central Bank’s benchmark rate remains higher than the 0.25 percent rate the Federal Reserve has had in place since late 2008. On Wednesday, the Fed said it would maintain its stimulus campaign, buying $85 billion a month in Treasury and mortgage-backed securities. The Fed added that it would consider adjusting its efforts to spur growth and reduce unemployment in the United States.

A cut by the European Central Bank was widely expected after a series of economic indicators in recent weeks foreshadowing an extended downturn in the euro zone, with recession even threatening the seemingly unstoppable German economy. On Thursday, two stalwarts of corporate Germany, BMW and Siemens, warned of lower profits for 2013 because of the downturn in European markets.

Many economists argued that the central bank was practically obliged to cut rates. Inflation in the euro zone was just 1.2 percent in April, well below the E.C.B. target of about 2 percent. The central bank is mandated to maintain price stability above all else, which includes heading off deflation — a downward spiral in prices that can be even more destructive than inflation.

But there is widespread skepticism about the likelihood that the rate cut will do much to restore the flow of credit in countries like Italy and Spain, which are in the midst of long-term slumps. The cut could have negative effects in Germany, where low interest rates have fueled steep rises in home prices in some cities.

“A rate cut will only have a small impact on the economy but it will signal an easier monetary policy stance,” Marie Diron, an economist who advises the consulting firm Ernst Young, wrote in an e-mail ahead of the decision.

Investor reaction to the rate cut was muted. European markets initially rose after the announcement, but then slumped lower.

Many banks in Europe, whose shyness to lend the E.C.B. is trying to address, may regard the cut with mixed feelings. While the new rate will lower the cost of raising money, the cut may also reduce the profit margin on mortgages or other forms of lending. Many banks in Europe are barely profitable and can ill afford any more problems.

Some economists argue that there is little the central bank can do to force-feed credit to small businesses in countries like Greece and Portugal that are suffering prolonged downturns. Banks’ reluctance to grant loans reflects the sad fact that many businesses and consumers are poor credit risks, Richard Barwell, an economist at Royal Bank of Scotland, wrote in a note to clients.

Mr. Barwell referred to a recent European Central Bank survey that found that the biggest problem for businesses in countries like Italy is finding customers, not credit. The central bank cannot help businesses with that problem, he wrote. Still, he said, “the E.C.B. has reached the point where it has to do something.”

A cut may, however, help some exporters by helping to reduce the value of the euro compared to the dollar and other major currencies. A lower official interest rate tends to make it less attractive to hold euros, and drive down the exchange rate, making European products cheaper in foreign markets.

A rate cut “would be a sign that policy makers understand it is time to find a way to compete,” Marco Tronchetti Provera, chief executive of the Italian tire maker Pirelli, said during an interview last week.

The central bank also cut the higher rate it charges for overnight loans, the so-called marginal lending facility, to 1 percent from 1.5 percent. The benchmark rate of 0.5 percent, known as the main refinancing rate, is what banks pay to borrow for a week or more and is the rate that normally has the most powerful effect on the economy.

The European Central Bank left the rate it charges banks to park money at the bank, the deposit rate, at zero. There has been speculation in the past that the E.C.B. would cut the deposit rate below zero, charging banks to park their money, in order to discourage lenders from hoarding cash rather than issuing loans. But there was fear that move could have unintended consequences.

And in another step to ease the credit crunch in southern Europe, Mr. Draghi said the central bank would also consult with European Union institutions on how to revive the market for asset-backed securities, in which outstanding loans are bundled and sold to investors. A more lively market for asset-backed securities could also help lending, although Mr. Draghi did not immediately explain what steps he had in mind.

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Fed Officials Discussed Early End of Easing

Federal Reserve policy makers, at their most recent meeting, discussed moving slightly earlier than expected to scale back their efforts to encourage growth if the economy continued to rebound, according to minutes released Wednesday.

Wall Street rallied after the release of the minutes, which came five hours ahead of schedule because a Fed official had mistakenly e-mailed them Tuesday afternoon to a host of legislative staff members and bank representatives. The disclosure raised eyebrows both in Washington and on Wall Street, but the Fed said there was no evidence that recipients had profited through the early release by trading on the information.

The e-mails went to lobbyists and government relations officials at the banks, rather than to traders, but the wide distribution underscored the magnitude of the Fed’s mistake.

While experts interpreted the debate within the Fed as pointing to the possibility of a somewhat less expansive monetary policy later this year, they were quick to note that the meeting took place before last Friday’s report on unemployment and job creation in March, which was much weaker than expected.

Since last year, the Fed has been expanding its holdings by $85 billion a month in Treasury bonds and mortgage-backed securities in an effort to keep long-term interest rates ultralow and spur economic growth.

The early release of the minutes, at 9 a.m. Eastern time, came after officials realized they had mistakenly been distributed to more than 100 Congressional staff members and trade association officials. It was especially embarrassing for the Fed because the e-mail also went to employees at a Who’s Who of Wall Street firms, including Goldman Sachs, Barclays, JPMorgan Chase, UBS, Citigroup, Wells Fargo, BNP Paribas, and HSBC.

Fed officials discovered the error at about 6:30 am Wednesday, and immediately briefed Ben S. Bernanke, the Fed chairman. An official for the Fed insisted the error was discovered internally, not because of trading anomalies or because one of the recipients had alerted regulators. The minutes are closely watched by traders and investors for any clue about Fed policy, making them among the most market-sensitive documents the government releases. Participants in the multitrillion-dollar bond market follow the zigs and zags of the Fed especially intently, since even a small move in rates can move bond prices sharply.

“The reason is they were inadvertently sent early to a list of individuals who normally receive the minutes by e-mail shortly after their usual release time,” the Federal Reserve said in a statement. The error was traced to the Fed’s Congressional liaison office and a mistake there by an employee, Brian Gross, who has worked at the Fed for a decade.

“This was human error,” said one Fed official who insisted on anonymity.

Still, the Federal Reserve’s inspector general was asked to review release procedures in light of the incident. The Fed also said it alerted the Securities and Exchange Commission as well as the Commodity Futures Trading Commission.

Until the most recent report on unemployment, there were signs the labor market was picking up steam, a crucial criterion in helping Fed policy makers decide when to scale back the bond purchases.

Since Friday’s report, however, worries have returned that slow levels of job creation will keep unemployment at elevated levels. The jobless rate was 7.6 percent in March, much higher than normal for this stage of a recovery. And the economy, according to the initial Labor Department report, created only 88,000 jobs in March, a far cry from the 268,000 jobs added in February.

“They were seeing a different world than they’re seeing today,” said Michael Hanson, senior United States economist at Bank of America Merrill Lynch. Besides the weak jobs figures, recent data for manufacturing has been soft, while consumer confidence remains mixed.

The meeting, held on March 19 and 20, came after a series of more positive indicators in January and February, Mr. Hanson said.

The Federal Reserve has said it plans to continue the stimulus efforts until there is “substantial improvement” in the labor market outlook.

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Fed Is Weighing a Reaction to Stirrings of Recovery

The economy added an average of 187,000 jobs a month from September to February, slightly faster than the average monthly pace from 2004 to 2006, the best years of the last economic upswing. The government plans to release a preliminary estimate Friday morning of March job creation.

Some Fed officials have suggested in recent weeks that if economic growth continues on its present trajectory, the central bank should begin to roll back its economic stimulus campaign by the middle of the year, ahead of expectations.

But the Fed’s chairman, Ben S. Bernanke, and his allies remain wary that another surprising spring will be followed by another disappointing summer. Janet L. Yellen, the Fed’s vice chairwoman, who is viewed as a potential successor to Mr. Bernanke, reflected that caution in a speech on Thursday.

“I am encouraged by recent signs that the economy is improving and healing from the trauma of the crisis, and I expect that, at some point, the F.O.M.C. will return to a more normal approach to monetary policy,” she said, referring to the Federal Open Market Committee, which sets policy for the central bank.

For now, she said, the Fed needs to remain focused on reducing unemployment.

Ms. Yellen also commented obliquely on her own future. Asked whether the economics profession, and central banks, needed more women in positions of power, she responded that such a need was “something we’re going to see increase over time, and it’s time for that to happen.”

The Fed announced last year that it intended to hold short-term interest rates near zero so long as the unemployment rate remained above 6.5 percent. It also said that it would buy $85 billion a month in Treasury and mortgage-backed securities to accelerate the decline. By expanding its asset holdings, the Fed continuously increases the scale of its effort to stimulate the economy.

Stronger data has raised hopes that the economy is once again growing fast enough to reduce the unemployment rate, which stood at 7.7 percent in February, little changed from 7.8 percent in September. But more than 20 million Americans are unable to find full-time jobs and it is not yet clear that the recent uptick in the economy is sustainable. The yield on the 10-year Treasury note fell to 1.77 percent on Thursday, indicating that some investors are pessimistic about the economy’s prospects.

In recent months, weekly claims for unemployment benefits have declined. But the Labor Department reported on Thursday that claims spiked in the latest week to the highest level in four months, although it cautioned that the estimate was unusually imprecise because the week included Easter.

“House prices are going up more than I would have expected six months ago,” Ms. Yellen said. “I think it’s making people feel a whole lot better.” She added: “I don’t have any doubt that our policies are contributing to the lowest interest rates, whether it’s borrowing for a car or borrowing for a mortgage. I believe that that is not only caused by our policy, but our policy is contributing.”

John C. Williams, the president of the Federal Reserve Bank of San Francisco, said on Wednesday in Los Angeles that he might support a reduction in the volume of the Fed’s asset purchases by summer and a suspension of the program before the end of the year.

“I’m hopeful that the economy has finally shifted into higher gear,” said Mr. Williams, who supported the purchases last year.

Esther L. George, president of the Federal Reserve Bank of Kansas City, reiterated on Thursday her view that the Fed should scale back immediately. Ms. George cast the sole dissenting vote at the last two meetings of the Fed’s policy-making committee. She told an audience in El Reno, Okla., on Thursday that she was more concerned than her colleagues that the Fed’s efforts to suppress borrowing costs could result in financial instability and faster inflation.

Ms. Yellen and other officials, however, seem inclined to postpone any decisions. The pace of economic growth has remained weak relative to the pace of job growth. The most recent round of federal spending cuts has only just begun to show results. And Fed officials have overestimated the strength of the recovery repeatedly in recent years, only to find the economy needed still more help. Caution may now dictate doing more rather than less.

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Fed to Maintain Stimulus Efforts Despite Jobs Growth

“We need to see sustained improvement,” the Fed’s chairman, Ben S. Bernanke, said at a news conference on Wednesday. “One or two months doesn’t cut it. So we’re just going to have to keep providing support for the economy and see how things evolve.”

The Fed’s policy-making committee said much the same thing in a stilted statement issued just before Mr. Bernanke took questions, announcing that it would continue to hold down short-term interest rates and buy $85 billion a month in Treasuries and mortgage-backed securities.

Mr. Bernanke’s remarks suggested that the Fed would reduce its asset purchases if job growth continued at the current pace, the first time he has said that the central bank is likely to reduce the amount of monthly purchases before it stops buying entirely.

But such a change remains at least a few months away, and quite possibly longer. The Fed is wary of pulling back too soon, a mistake it has already made several times in recent years. It is waiting to assess the impact of the federal spending cuts that began this month. And Mr. Bernanke said the members of the Federal Open Market Committee, which makes policy for the Fed, “have not been able to come to an agreement” about the goals of the asset purchases or, by extension, when they should end.

Mr. Bernanke, who has made job growth the Fed’s top priority for the first time in its 100-year history, spoke about the issue in personal terms. Asked when he last had spoken to an unemployed person, he said that one of his own relatives was out of work.

“I come from a small town in South Carolina that has taken a big hit from the recession,” Mr. Bernanke said. “The last time I was there, the unemployment rate was about 15 percent. The home I was raised in had just been foreclosed upon. I have a great concern for the unemployed, both for their own sake but also because the loss of skills and the loss of labor force attachment is bad for our whole economy.”

Mr. Bernanke also may have provided some insight into his own future. Asked repeatedly about his interest in a third term as Fed chairman, Mr. Bernanke demurred several times before telling one reporter, “I’ve spoken to the president a bit but I really don’t have any information for you at this juncture.”

The Fed said last year that it planned to hold short-term interest rates near zero at least as long as the unemployment rate remained above 6.5 percent. The rate stood at 7.7 percent in February and has barely budged in half a year. Most economic forecasters do not expect the threshold to be reached before 2015.

The asset purchases are intended as a short-term measure to catalyze faster job growth; the Fed has said it will slow increasing its collection of Treasuries and mortgage bonds, a policy known as “quantitative easing,” once it is convinced that employment is increasing at a sustainable pace.

The unusual rigidity of this basic course has diminished the importance of the Fed’s regular meetings, and it has to some extent created a problem of foreshortening. The next change in policy is necessarily the major subject of discussion among Fed officials, analysts and investors. But that may make the next change seem nearer than it really is. It is quite possible that the year could pass without any significant change.

“In one line: Sustainability, sustainability, sustainability,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, wrote in a note to clients. “Mr. Bernanke clearly does not want even to consider slowing Q.E. until he is convinced that any such run of strength now is a permanent shift.”

The decision, of course, does not rest with Mr. Bernanke alone. And he noted on Wednesday that there was no consensus on the policy-making committee about how much longer asset purchases should continue. “We’ve not been able to come to an agreement about what guidance we should give,” he said.

As is often the case, Fed officials are not just debating how to respond to economic circumstances. They are debating the nature of those circumstances.

The economy has grown more robustly in recent months — the committee hailed “a return to moderate economic growth following a pause late last year” — and job growth has increased since the Fed began its latest stimulus campaign in September.

But even as spending by consumers and businesses drives growth, the Fed noted that fiscal policy “has become somewhat more restrictive.”

“The committee continues to see downside risks to the economic outlook,” the statement said.

The Fed separately released economic forecasts by 19 of its senior officials showing that their expectations had actually soured slightly. They predicted growth of 2.3 percent to 2.8 percent this year, down from a forecast in December of 2.3 percent to 3 percent. The consensus forecast for 2014 also fell. Officials now expect growth of 2.9 percent to 3.4 percent in 2014, compared with a December forecast of growth from 3 percent to 3.5 percent.

Concerns about inflation remained in abeyance. Fed officials do not expect inflation above 2 percent over the next three years, well below their self-imposed ceiling of 2.5 percent inflation. At the same time, officials were modestly more optimistic about job growth. They predicted that the unemployment rate would rest between 6.7 and 7 percent at the end of 2014. In December, they predicted that the rate would sit between 6.8 and 7.3 percent at the end of 2014.

Against concerns that the pace of growth remains subpar, the Fed continues to weigh the possibility that its efforts will destabilize financial markets by encouraging excessive risk-taking.

So far, support on the committee for the stimulus remains strong. The decision to press forward was supported by 11 of the 12 voting members of the Federal Open Market Committee. Esther L. George, the president of the Federal Reserve Bank of Kansas City, recorded the only dissent, as she did in January, citing concerns about stability and future inflation.

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Federal Reserve, Expected to Continue Stimulus, Tries to Reassure Investors

When the Fed’s policy-making committee meets on Tuesday and Wednesday, its members are likely to spend a lot of time talking about the potential costs of the current stimulus campaign. Then the Fed’s chairman, Ben S. Bernanke, will probably seek to reassure investors that the Fed plans to press on.

The central bank is buying $85 billion a month in Treasury and mortgage-backed securities because it wants unemployment to fall more quickly. While recent economic data suggests that growth is quickening, Mr. Bernanke has said that the situation remains unacceptable and that the pace of progress is uncertain.

Mr. Bernanke and the Fed’s vice chairwoman, Janet L. Yellen, “have been abundantly clear in recent commentary that the improvement in the labor market to date falls far short of what they will need to see before reducing monetary policy accommodation,” Joseph LaVorgna, chief United States economist at Deutsche Bank, wrote last week in a note to clients.

Also, the federal government has just embarked on another round of spending cuts, known as sequestration, and the extent of the resulting drag on the economy may not be evident for several months.

“The Fed will not take overt steps to scale back its asset purchases any time soon,” Lou Crandall, chief economist at Wrightson ICAP, a New York-based financial research firm, wrote last week. “The Fed is not going to take any chances until it is sure that we have avoided another spring/summer swoon.”

The central bank has said that it plans to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. It was 7.7 percent in February. The asset purchases are intended to hasten the arrival of that moment by further reducing long-term borrowing costs for businesses and consumers.

Mr. Bernanke built a broad consensus among Fed officials last year in favor of taking both steps, and analysts say that supporters of the policy remain firmly in the majority of the Fed’s 12-member Federal Open Market Committee. Only one official dissented at the most recent meeting in January.

But Fed officials who disagree with the policy, including some who do not hold votes on the committee this year, have become increasingly vocal in their criticisms. And among officials who support the purchases, there is disagreement about how much longer the Fed should keep its foot on the gas.

The focus of those concerns has shifted from the remote threat of inflation to the possibility that low interest rates could destabilize financial markets, in part by encouraging investors to take outsize risks.

Such concerns can dilute the impact of the Fed’s efforts by causing investors to doubt how much longer rates will remain low. In response, Mr. Bernanke and other supporters of the current policies have tried in recent weeks to persuade markets that the purchases will continue because the benefits far outweigh the potential costs. Indeed, Mr. Bernanke argued recently that pulling back could pose even larger risks to stability by weakening the economy.

“In light of the moderate pace of the recovery and the continued high level of economic slack, dialing back accommodation with the goal of deterring excessive risk-taking in some areas poses its own risks to growth, price stability and, ultimately, financial stability,” he said this month. “Indeed, as I noted, a premature removal of accommodation could, by slowing the economy, perversely serve to extend the period of low long-term rates.”

In seeking to persuade markets that it plans to press forward, the Fed must also contend with evidence that the economy is gaining strength. Fed officials projected in December that the economy would expand 2.8 percent to 3.2 percent this year, the fastest growth since the recession. Analysts expect an updated forecast on Wednesday to be modestly more optimistic.

The Fed has said that it will continue to stimulate the economy for an unusually extended period, even as the recovery gains strength. Since the benefits of that policy depend on its credibility, it is searching for ways to communicate more clearly with investors so that expectations of its eventual retreat do not become a premature drag on growth.

“At this stage in the business cycle, central bankers obsess that market participants will expect policy tightening to come sooner and more sharply than is consistent with sustained economic expansion,” said Vincent R. Reinhart, chief United States economist at Morgan Stanley.

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Fed Meeting Shows Dissent on Measures to Lift Job Growth

WASHINGTON – There are widening divisions among Federal Reserve officials about the value of its efforts to reduce unemployment, but supporters of those efforts remain firmly in control, according to an official account of the Fed’s most recent meeting in January.

An increasingly vocal minority of Fed officials are concerned that buying about $85 billion of Treasury securities and mortgage-backed securities each month is doing more harm than good. They argue the purchases may need to end even before unemployment drops, because the Fed’s efforts are encouraging excessive risk-taking and may be difficult to reverse.

But the Fed’s policy-making committee reiterated its determination in January to hold course until there is “substantial improvement” in the outlook for job growth, and several officials cautioned at the January meeting that the greater risk to the economy was in stopping too soon, according to the account, which was published after a standard three-week delay.

“A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability,” it said. “They also stressed the importance of communicating the Committee’s commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions.”

Proponents of strong action to reduce unemployment raised for the first time the possibility that the Fed should maintain a portion of its asset holdings even as the economy recovers because doing so could magnify the benefits. Its holdings now total almost $3 trillion.

The meeting account shows Fed officials generally expected a slow improvement in economic conditions, and were not overly concerned that the economy did not expand, or expanded only modestly, in the final months of 2012. While they anticipated additional cuts in federal spending, the risk that the federal government would drag the economy back into recession also faded.

The high rate of unemployment remained the primary concern for most of the 19 Fed officials who participate in the regular meetings of the Federal Open Market Committee.

The Fed’s vice chairwoman, Janet Yellen, reiterated her strong support for asset purchases in a speech this month. Noting that inflation remained low and steady, while unemployment remained stubbornly high, Ms. Yellen said it was “entirely appropriate for progress in attaining maximum employment to take center stage in determining the Committee’s policy stance.”

Some Fed officials have expressed growing unease that, even if inflation remains under control, asset purchases may disrupt financial markets. One concern is that low interest rates will encourage excessive risk-taking, inflating new asset bubbles that will inevitably pop. The Fed’s purchases also may disrupt the normal operations of financial markets by constraining the supply of safe assets.

Jeremy Stein, a Fed governor, said this month that he saw “a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit,” referring to a rise in the sale of new junk bonds, or high-risk corporate debt.

Mr. Stein said he did not see any reason for an immediate change in Fed policy, but Esther George, president of the Federal Reserve Bank of Kansas City, cited similar concerns in opposing the current policy at the January meeting.

The Fed could be fortified in its current policies if Congress continues to cut spending. Another round of cuts is scheduled to take effect March 1. The Congressional Budget Office estimated that the cuts would reduce growth by 0.6 percentage points this year, and employment by about 750,000 jobs.

“I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past,” Ms. Yellen said in her recent speech.

Fed officials, however, have cautioned that they are not likely to respond to such cuts by increasing their efforts, because they are increasingly concerned that the potential costs of additional action would outweigh the benefits.

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DealBook: E-Mails Show Alarm at S.&P. as Mortgage Crisis Exploded

Attorney General Eric H. Holder Jr. announced the civil fraud charges against S.P. in Washington on Tuesday.Chip Somodevilla/Getty ImagesAttorney General Eric H. Holder Jr. announced the civil fraud charges against S.P. in Washington on Tuesday.

The executive at Standard Poor’s was clear: “This market is a wildly spinning top which is going to end badly.”

That sober assessment of certain mortgage-related investments, delivered to colleagues in a confidential memo in December 2006, is now part of a trove of internal e-mails and documents that have come to light in a federal suit against S. P., the nation’s largest credit ratings agency.

The correspondence, made public in court documents late Monday, provide a glimpse at the inner workings of an institution that the Justice Department says fraudulently inflated credit ratings, with dire consequences for the entire economy. In a series of e-mails, tensions appeared to be escalating inside the firm’s headquarters in Lower Manhattan as it publicly professed that its ratings were valid, even as the home loans bundled into mortgage-backed securities, or M.B.S., were failing at accelerating rates.

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One comes from an S. P. analyst in March 2007 borrowing from the Talking Heads song “Burning Down the House,” creating new lyrics: “Subprime is boi-ling o-ver. Bringing down the house.” S. P. said prosecutors cherry-picked e-mails and that it would vigorously defend itself from “these unwarranted claims.”

In another 2007 e-mail, an analyst responds to a question about his new job: “Job’s going great. Aside from the fact that the M.B.S. world is crashing, investors and the media hate us and we’re all running around to save face … no complaints.”

Together, the documents show a portrait of some executives pushing to water down the firm’s rating models in the hope of preserving market share and profits, while others expressed deep concerns about the poor performance of the securities and what they saw as a lowering of standards.

The United States attorney general, Eric H. Holder Jr., joined by attorneys general from 16 states, unveiled the case on Tuesday in Washington, accusing S. P. and its parent, the McGraw-Hill Companies, of intentionally propping up ratings of shaky mortgage investments and setting them up for a crash when the financial crisis struck.

The government is seeking $5 billion in penalties to cover losses to investors like state pension funds and federally insured banks and credit unions. The amount would be more than five times what S. P. made in 2011.

“The action we announce today marks an important step forward in the administration’s ongoing effort to investigate — and punish — the conduct that is believed to have continued to the worst economic crisis in recent history,” Mr. Holder said.

The government, by bringing the civil fraud charges under a 1989 law created after the savings and loan crisis, faces a lower burden of proof when the victims are federally insured banks. But prosecutors could still face a high bar in convincing a jury by a preponderance of evidence that S. P. knew that its ratings were faulty and that it intended to deceive investors.

“If the facts prove out, it certainly seems like Standard Poor’s intentionally cooked its models in order to make the ratings higher than they otherwise thought they should be, in violation of the firm’s own policies and standards,” said Neil Barofsky, a former federal prosecutor who served as the special inspector general for the United States Treasury’s Troubled Asset Relief Program from 2008 to 2011.

“What we don’t know yet is, what’s the other stuff that could be out there?” he added, noting that the vast body of internal documents might also contain exculpatory material for S. P.

The ratings agency said in a statement: “Claims that we deliberately kept ratings high when we knew they should be lower are simply not true.”

The company said that it had always been committed to “providing independent opinions on creditworthiness based on available information,” and that its actions reflected its best judgments about the investments at the heart of the suit — about 40 collateralized debt obligations, or C.D.O.’s, an exotic type of security made up of bundles of residential mortgage-backed securities, which in turn were composed of individual home loans. Those securities were packaged by banks, rated by S. P. and sold to investors in 2007.

“Unfortunately,” the company’s statement said, “S. P., like everyone else, did not predict the speed and severity of the coming crisis and how credit quality would ultimately be affected.”

Remarks that S. P. employees made in internal memos and electronic communications show that as early as spring 2004, certain executives wanted to change the firm’s rating methodology, but only after polling “an appropriate number of issuers and investment bankers” as to the “rating implications.”

The idea of asking bankers what they thought about a change in the firm’s methods shocked some S. P. analysts and executives, including one who fired back, “What does ‘rating implication’ have to do with the search for truth? Are you implying that we might actually reject or stifle ‘superior analytics’ for market considerations?”

In May 2004, an analyst warned that S.. P. had just lost to its competitor Moody’s Investors Service the chance to rate a very large deal by being too hard-nosed about the amount of collateral that would be required to get a good rating. More collateral would mean less profit for Mizuho, the bank putting that deal together.

“We must address this now,” she said — otherwise the firm would lose more deals.

The complaint describes a debate in 2004 and 2005 about whether S. P. should change its model for rating C.D.O.’s and what effect the proposed changes might have on its business. The change was scheduled for July 2005, but before it could happen, an analyst sent an e-mail saying that according to the investment bank Bear Stearns, the older model “had been the ‘best’ ” at rating weaker pools of mortgages, compared with Moody’s and Fitch.

As the housing market deteriorated in early 2007, the gallows humor in the e-mails intensified. Banks that had created mortgage-backed securities were unloading them quickly, to avoid being stuck with any duds.

“That means the market will crash,” one analyst told another in an instant message. “Deals will rush in before they take further loss.”

“Yes,” said the analyst’s colleague. “We should not push criteria,” continued the first, “but we give in anyway. Ahahhahaha.”

About a month later, another S. P. employee wrote in another instant message, reproduced in the complaint: “We rate every deal. It could be structured by cows and we would rate it.”

In its statement Tuesday, S. P. said that the cow e-mail “had nothing to do with R.M.B.S. or C.D.O. ratings or any S. P. model, and the analyst had her concerns addressed with the issuer before S. P. issued any rating.”

S. P. said that there was a robust internal debate about how a rapidly deteriorating housing market might affect the C.D.O.’s, “and we applied the collective judgment of our committee-based system in good faith,” adding, “The e-mail excerpts cherry-picked by D.O.J. have been taken out of context, are contradicted by other evidence, and do not reflect our culture, integrity or how we do business.”

It was unclear whether the Justice Department was looking at the other two major ratings agencies, Moody’s and Fitch. Tony West, the acting associate attorney general, said he would not discuss actions against other ratings agencies.

Settlement talks between S. P. and the Justice Department broke down in the last two weeks after prosecutors sought a penalty in excess of $1 billion and insisted that the company admit wrongdoing, several people with knowledge of the talks said. S. P. had proposed a settlement of about $100 million, while the government pressed for an admission of guilt to at least one count of fraud, said the people.

McGraw-Hill shares fell nearly 11 percent on Tuesday. Moody’s shares fell about 9 percent, to $45.09.

Andrew Ross Sorkin, Michael J. de la Merced and Floyd Norris contributed reporting.

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High & Low Finance: Court Case Offers a Peek Into Mortgage Security Pricing

The private mortgage-backed securities market grew to be a virtually inscrutable giant. Each securitization contained thousands of mortgages and as many as dozens of different securities, some of which could emerge unscathed even if others produced total losses for investors.

Five years after it began to blow up, that market can be seen as having failed twice — once before the housing crisis began and again when the crisis was at its peak. Investors put money into deals that never should have been financed, then they panicked when the credit crisis arrived and dumped securities that really were likely to pay off. A market that had been full of foolish buyers had no buyers. The banks loudly proclaimed that prices were irrationally low, but few if any of them were willing to buy.

It was the government that stepped in and saved the market, in a program — called PPIP, for Legacy Securities Public-Private Investment Program — that has turned out to be a success. The government put up most of the money to enable money managers to buy distressed merchandise. This week the Treasury Department reported that it had recovered all of the money it invested, with much more likely to come.

That report came a couple of days after the Justice Department and the Securities and Exchange Commission filed criminal and civil charges against a former securities salesman who was accused of defrauding the institutional investors who invested their own and the government’s money in the PPIP program. He did that, the government said, by lying to them.

Mortgage-backed securities “are generally illiquid and discovering a market price for them is difficult,” the S.E.C. said in its civil case against the broker, Jesse Litvak, who formerly worked for Jefferies Company. “Participants trading in the M.B.S. market must rely on informal sources, including their broker, for this information.”

How, I wondered, can that be? The corporate bond market used to be like that. But after Arthur Levitt, the S.E.C. chairman in the 1990s, complained, steps were taken to rectify the situation. Now you can learn from the Trace system operated by Finra, the Financial Industry Regulatory Authority, about trades in any bond.

But no one at Finra seems to have given the mortgage-backed securities market even a moment’s worth of attention until 2009, when the market crashed. Even then, it was not until 2011 that Finra began to require brokers to submit every trade. Now if the S.E.C. wants to see every trade in a particular security, it can do so.

But you and I cannot.

Starting in July, more information about trading in mortgage securities guaranteed by Fannie Mae and Freddie Mac will become available, which is good but not nearly as important. We already have a pretty good idea of how those securities trade. But private-label securities — backed only by the mortgages in each securitization — are different from one another, and it is not as easy to estimate the value of one based on trading in a different one.

Had trading data on such securities been public, institutional investors such as the ones that the government claims were defrauded would have been able to see the trades Jefferies made when it acquired the bonds it marked up and sold to them. Any lies, like those Mr. Litvak is accused of telling, would have been unmasked immediately.

The Dodd-Frank law, by the way, requires more disclosure of trades in all kinds of swaps, including swaps based on mortgage-backed securities, and those disclosures are starting to appear as the Commodity Futures Trading Commission writes rules. But that law completely ignored the mortgage-backed securities themselves, so trading in them remains secret.

Now that the S.E.C. and the Justice Department have officially asserted that investors in such securities are at the mercy of their brokers, perhaps they will press Finra to require release of the information.

Doing so would be almost costless, since the data is already being gathered.

But such a move would be fiercely resisted both by Wall Street and by some of the institutional investors that would be protected. The opposition from brokers is easy to understand: profit margins always fall when the customers have better information. The brokers have also persuaded some money managers to oppose release, on the ground that their strategies would be revealed if everyone could see that there was more activity in a particular type of security.

Floyd Norris comments on finance and the economy at

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