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Federal Reserve officials are discussing ways to revise their guidance about the likely future path of interest rates, but it takes some detective work to pin down how they might do it, The Wall Street Journal reported yesterday. The Fed has said in its recent policy statements that it will not start raising short-term interest rates from near zero until well past the time the unemployment rate falls below 6.5 percent, but with joblessness at 6.7 percent in February, several officials have indicated that they might want to scrap the threshold entirely or revamp their message in other ways. Fed policymakers will debate the matter at their meeting Tuesday and Wednesday, although reaching agreement on a new approach could be a challenge. The options that some officials have mentioned include offering broad assurances for considering when to raise rates. Stanley Fischer, a former Bank of Israel governor who has been nominated to become Fed vice chairman, said at a Senate hearing, "achievement of both maximum employment and price stability requires the continuation of an expansionary monetary policy." (Subscription required.)

Bipartisan Senate legislation would wind down Fannie Mae and Freddie Mac in five years and in the interim would maintain the current arrangement in which the mortgage financiers pay all of their profits to the Treasury, Bloomberg reported today. A draft of the measure, released yesterday by Senate Banking Committee Chairman Tim Johnson and Republican Mike Crapo, would ensure that the U.S. maximizes its return on the 2008 taxpayer bailout of the two companies before junior preferred and common shareholders receive any proceeds. The bill would sell off the companies’ assets and replace them with government bond insurance that would kick in only after private capital suffered significant losses. The two senators announced key provisions of the bill on March 11. The five-year wind down of the two companies would be extended if necessary to prevent market disruptions or spikes in borrowing costs. Johnson and Crapo said that they took the “rare action” of releasing bill language on a weekend “to balance the committee members’ interests in having adequate time to review the legislation while advancing housing finance reform in a timely manner.” Meanwhile, investors are suing the U.S. to challenge the arrangement in which all the companies’ profits go to the Treasury.

Economist Stanley Fischer opened his confirmation hearing Thursday to become vice chairman of the Federal Reserve by advocating for the central bank to pay close attention to financial stability, The Washington Post reported yesterday. The Fed has long had a congressional mandate to foster maximum employment and guard against inflation, but after the financial crisis, lawmakers and economists alike felt that the Fed should broaden its scope. Lawmakers peppered Fischer, along with two other Fed nominees — former Treasury official Lael Brainard and renominated Fed governor Jerome Powell — with questions on the effectiveness of reforms to the banking system since the crisis and whether the Fed will be able to unwind its massive stimulus efforts without disrupting the markets. There is broad agreement that the Fed, in conjunction with other regulatory agencies, bears responsibility for preventing dramatic economic swings. Fischer, who until last summer ran the Bank of Israel, acknowledged that volatility could increase as the Fed scales back the amount of money that it is pumping into the economy and moves closer to raising short-term interest rates.

Standard & Poor’s Financial Services LLC and its parent, McGraw Hill Financial Inc. (MHFI), were sued by New Jersey for allegedly failing to give objective ratings to mortgage-backed securities, the state’s attorney general said, Bloomberg News reported yesterday. The suit alleges that Standard & Poor’s harmed New Jersey consumers with claims that its ratings of the securities were independent when they were in fact driven by the company’s sales goals. “Standard & Poor’s was not providing independent investor information, but instead acting in its own business interests, and in the interests of favored clients whose fees provided the company with a significant revenue stream,” Acting Attorney General John J. Hoffman said. The deceptive ratings for mortgage-backed securities and other structured financial products were assigned from at least 2001 to 2008, according to the complaint. The case is Hoffman v. McGraw Hill Financial Inc., Superior Court of New Jersey, Chancery Division (Newark, New Jersey).

President Barack Obama announced that he will nominate Janet Yellen as chairman of the Federal Reserve, which would put the world’s most powerful central bank in the hands of a key architect of its unprecedented stimulus program and the first female leader in its 100-year history, Bloomberg News reported yesterday. Obama turned to Yellen, vice chairman of the Fed since 2010, after the other leading candidate, former Treasury secretary and White House economic adviser Lawrence Summers, withdrew from consideration amid mounting opposition from Democrats on the Senate Banking Committee. As a top deputy to Bernanke, Yellen supported the central bank’s unprecedented bond buying programs and was a driving force behind a new strategy adopted in 2012 to commit the central bank to goals on inflation and unemployment. As the Fed’s No. 2 official, she has articulated the case for maintaining highly accommodative monetary policy. In a series of 2012 speeches, she outlined why interest rates could remain near zero into late 2015, and in a 2011 speech she justified the Fed’s first two rounds of large-scale asset purchases with an estimate that the programs would create 3 million jobs. Yellen, 67, would succeed Ben S. Bernanke, whose term expires on Jan. 31.

Federal officials are expected to announce incentives to boost Puerto Rico's economy in the next few months, a top legislator from the commonwealth said this week, responding to investor concerns about the island's rising debt costs and bleak growth, Reuters reported yesterday. The help is unlikely to include direct financial aid, Puerto Rico Senate President Eduardo Bhatia said at an investor gathering in New York. The assistance would come in response to the last four years of recession in the Caribbean territory, Bhatia said. It has been given added urgency due to a spike in Puerto Rico's debt yields in the recent months, he said. The selloff in Puerto Rico's bonds has been driven by worries about the territory's shrinking economy, its high jobless rate and its per capita debt. The U.S. commonwealth's unemployment rate is nearly 14 percent, higher than any U.S. state. Puerto Rico has about $70 billion of outstanding debt, or nearly 2 percent of the overall $3.7 trillion municipal bond market. That dwarfs the $18 billion held by Detroit. Puerto Rico's debt is held widely by mutual funds, increasing the systemic risk. The island will not be entitled to file for chapter 9 municipal bankruptcy.

American Roads, which operates the mile-long Detroit Windsor Tunnel linking the U.S. to Canada, has won court approval of a turnaround plan to shed $830 million in debt from swaps and bonds issued after a private-equity buyout, Bloomberg News reported yesterday. U.S. Bankruptcy Judge Burton R. Lifland confirmed the plan in Manhattan. The deal transfers ownership of American Roads from Greenwich, Conn.-based investment company Alinda Capital Partners, which holds stakes in London's Heathrow Airport and other infrastructure projects, to financial insurer Syncora Guarantee in exchange for a $334 million swap liability. Under the plan, holders of $496 million in bonds due in 2026 will receive nothing, although their rights to insurance claims will remain intact. Judge Lifland had ruled Aug. 28 that an ad-hoc group of the bondholders didn't have legal standing in the case and couldn't object to the reorganization. The ruling was issued about a month after Detroit-based American Roads sought court protection from creditors, blaming the city's falling population, reduced traffic, natural disasters, increased federal regulations and lower-than-forecast revenue from four toll roads in Alabama.

In a courtroom packed with dozens of lawyers yesterday, the judge presiding over the Montreal, Maine & Atlantic Railway’s bankruptcy proceedings expressed concern that attorneys’ fees will suck the company dry of funds before victims of last month’s deadly train derailment in Quebec can be compensated, the Morning Sentinel reported yesterday. “What’s concerning me is a run-up of administrative expenses that would make operation of the railroad impossible,” said Hon. Louis Kornreich. “There’s not a lot of extra revenue.” If legal fees drain the company of its cash, nothing will be left to compensate victims of the accident on July 6, in which an unmanned train loaded with crude oil rolled downhill into the town of Lac-Megantic, Quebec, derailed and exploded, killing 47 people and destroying 40 buildings in the heart of town. The court-appointed trustee is Robert J. Keach, who also serves as co-chair of ABI’s Commission to Study the Reform of Chapter 11 and is a former ABI president. He has assumed all responsibility for managing the company’s finances, and his firm, Bernstein Shur, will represent the railroad in court. “It’s certainly conceivable that this case is administratively insolvent as we stand here,” Keach said. The bankruptcy case is complex because it spans two countries and is connected to a human tragedy with numerous victims. In addition, it involves a railroad, which by federal law cannot be shut down.

Ally Financial Inc. is taking new steps to repay the U.S. government for its financial crisis-era bailout and free itself from federal control, The Wall Street Journal reported yesterday. The Detroit-based auto-loan maker said that it has reached agreements to sell about $1 billion of common stock to investors. The sales would boost Ally's capital levels enough to allow it to buy back $5.9 billion in preferred shares owned by the U.S. Treasury if regulators approve the transaction. All told, the U.S. government pumped $17.2 billion into Ally during the financial crisis through the Troubled Asset Relief Program. To date, Ally has repaid about $6.2 billion. Ally, which began as General Motors Co.'s financing arm, will remain under federal control even after the sales. Assuming the transactions go according to plan, the government's stake in Ally would be reduced to about 65 percent from 74 percent.

Three senior executives at Steven Cohen’s SAC Capital Advisors LP received subpoenas as part of the U.S. multi-year probe into insider trading at the hedge fund, Bloomberg News reported yesterday. Subpoenas were sent to Tom Conheeney, president of SAC; Steve Kessler, head of compliance; and Phillipp Villhauer, head trader. Cohen, SAC’s billionaire founder, was sent a subpoena last week to appear before a federal grand jury. After Cohen was summoned, SAC Capital told clients in a May 17 letter that it was no longer cooperating unconditionally with the government and it would no longer be updating clients on the matter.