A Federal Reserve Board study released yesterday found no violations of banking laws or "any illegal, unsafe or unsound banking practices" by Cleveland Trust Co. in controversial transactions involving the Ohio city's default on short-term notes last December.
But the staff study uncovered new information about the bank's decisions to deny an extension of maturities for the notes it held and large purchases late in December of shares in a private electric utility company that competes with a city-owned power firm.
Because of new questions raised by these disclosures -- which were not answered or interpreted in the 38-page report -- a sharp conflict between Cleveland Mayor Dennis J. Kucinich and Cleveland Trust over the bank's role in the city's financial affairs was not resolved by the central bank report.
Two members of Congress -- Rep. Benjamin S. Rosenthal (D-N.Y.) and Rep. Fernand J. St Germain (D-R.I.) -- vowed to continue separate Capitol Hill probes into whether Cleveland Trust sought to force the city to sell its Municipal Electric Light Plant (Muny Power). St Germain, chairman of the financial institutions subcommittee, said the Federal Reserve report will be reviewed but that staff research and interviews are continuing on a report to be released before the end of this month.
Rosenthal, who asked for the Federal Reserve review, said yesterday's report "provides support for many of the allegations made by Mayor Kucinich against Cleveland Trust" and said he would seek additional scrutiny of the situation by the central bank.
A major issue in the controversy is the allegation by Kucinich that Cleveland Trust preconditioned an extension of notes due Dec. 15, as well as future extensions of credit, on the sale of Muny Light to the Cleveland Electric Illuminating Co. (CEI), and not on true credit worthiness of Cleveland.
Kucinich charged that the bank maintained close business community ties to CEI and that the bank actions were designed to enhance those ties. After studying these specific allegations, the Federal Reserve staff said that on the bassis of documents and interviews, "the actions and decisions of (the bank) with respect to the city's financial problems can be supported as having been made on factors related to the city's credit worthiness."
Although business relationships exist that could "give rise to a potential for conflict of interest" -- such as three common directors at the bank and electric utility -- "no evidence was found to suggest that (the bank) has attempted to exploit its relationship with the city to the benefit of CEI..."
At the same time, the report disclosed:
Minutes of an executive committee meeting of Cleveland Trust's holding company board on Dec. 15 -- the day of default -- show that a City Council resolution calling for a local income tax increase and the sale of Muny Light, "If signed by the mayor, would provide a basis for temporary renewal of the notes."
At a meeting with the mayor that morning, where there was an attempt to convince Kucinich that Muny Light should be sold, Cleveland Trust Chairman M. Brock Weir "made a comment to the effect that if agreement between council and the administration could be reached, he would volunteer to help raise $50 million for the city."
At a Dec. 14 meeting of bankers and city officials, five banks were willing to extend maturities on notes due the following day but Weir declined to express his bank's position and said he resented "peer pressure" tactics. Later, the bank rejected the plan that had been discussed.
After a period from March 1977 to December 1978 in which the bank's trust department holdings of CEI remained relatively constant, purchases of stock in the firm jumped from 691,568 shares on Dec. 26 to 782,798 on Feb. 7 -- a rise of 13 percent. The City Council had put the Muny Light issue before the city voters in a Dec. 22 decision; voters recently defeated the proposed sale.
In an interview yesterday, and at a Cleveland news conference, Mayor Kucinich asserted that the bank and CEI had "not been exhonerated" by the Federal Reserve report. Referring to the CEI stock purchases, Kuchinich said: "This is all very peculiar and while the Federal Reserve Board did not go into any details regarding this stock transaction, I am certain... federal agencies will find the timing of the transaction most intriguing if not highly questionable."