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Fed not involved in Watergate, watchdog says

By Dave Clarke and Margaret Chadbourn

WASHINGTON (Reuters) - The Federal Reserve did not help the Watergate burglars get cash, stonewall congressional inquiries into the 1970s political scandal or help former Iraqi leader Saddam Hussein get a $5.5 billion loan to buy weapons in the 1980s, the agency's inspector general said in a report posted on the Fed's website on Tuesday.

The report is the result of a political tiff in 2010 that touched off a sizeable government investigation on topics seldom associated with the U.S. central bank.

The Federal Reserve has become a punching bag in the Republican presidential race because of its easy-money policies after the recent financial crisis.

Fed Chairman Ben Bernanke's aggressive efforts to support the economy have further enraged long-time Fed critics such as Representative Ron Paul, who is seeking the Republican presidential nomination.

The watchdog report is based on charges Paul made at a congressional hearing in February 2010, in which he questioned whether the Fed has been used to funnel money to illicit causes, including the Watergate scandal that brought down the presidency of Richard Nixon and weapons purchases by Saddam Hussein.

Following the hearing, then-House Financial Services Committee Chairman Barney Frank asked the Fed to investigate what, if any, inappropriate role the central bank played in those areas.

The result was a roughly 16-month government investigation that involved extensive fieldwork.

"We did not find any evidence of undue political interference with Federal Reserve officials related to the 1972 Watergate burglary or Iraq weapons purchases during the 1980s," the Fed's inspector general told Fed Chairman Ben Bernanke in a letter dated March 30.

"Specifically, regarding the first Watergate allegation, we did not find any evidence of undue political interference with or improper actions by Federal Reserve officials related to the cash found on the Watergate burglars."

The inspector general's office operates independently of the Fed. It said in its report that the Fed's general counsel reviewed the findings and "stated that our report confirmed past statements by Federal Reserve officials."

EVIDENCE, INTERVIEWS

The federal watchdog reviewed more than 3,000 pages of transcribed testimony of congressional hearings that included accounts from 37 witnesses on the break-in at the Democratic National Committee's offices located in Washington's Watergate complex in 1972.

Boxes of Watergate-related documents, including memos, photographs, and summaries of the investigation were examined during the inspector general's inquiry.

The staff involved in the report also visited the Gerald R. Ford Presidential Library and Museum in Ann Arbor, Michigan, to review the collection of then-Fed Chairman Arthur Burns.

The inspector general's office wanted to show whether or not Burns tried to block investigations on the source of cash found on the burglars.

Employee interviews were also conducted at regional Federal Reserve Banks to better understand cash processing in the 1970s and to gather more information about the money found on the Watergate burglars.

To obtain more evidence regarding the Iraq allegation, the watchdog searched the Federal Reserve archives. While attempting to find any evidence of loans connecting the Fed and Hussein or Iraq during the 1980s, the inspector general consulted legal staff and reviewed supervision of foreign banks.

They also looked for evidence that would connect the central bank with any foreign institutions dealing in unauthorized loans that benefited Iraq, and obtained records to look for any unusual lending practices.

To address the allegations that Fed bank examiners in Atlanta failed to note $5.5 billion being funneled to Iraq from a local branch of an Italian bank, the inspector general's office conducted numerous interviews among Fed officials and bank examiners.

The report "did not find any evidence of undue political interference with Federal Reserve officials" to indicate that the Fed help secure a $5.5 billion loan to Iraq for weapons.

(Editing by Xavier Briand)

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