Grilled on Merrill, Bernanke defends Fed 'integrity'

AFP/Getty Images – Federal Reserve Chairman Ben Bernanke
listens to opening statements during a House Oversight and Government …

by Rob Lever Rob Lever – Thu Jun 25, 3:23 pm ET

WASHINGTON (AFP) – Federal Reserve chief Ben Bernanke faced a grilling in Congress Wednesday over the rescue of investment giant Merrill Lynch but argued that the Fed acted "with the highest integrity" on the matter.

Bernanke was summoned to a House of Representatives hearing to explain the Fed's actions in the Bank of America purchase of the Wall Street group, a deal that nearly collapsed when the extent of Merrill's losses were revealed.

Some lawmakers have said the Fed kept other regulators in the dark about key issues, while others said the central bank and Treasury pressured Bank of America to finalize the deal after it wanted to walk away.

Bernanke told the panel that the Federal Reserve "acted with the highest integrity throughout its discussions with Bank of America regarding that company's acquisition of Merrill Lynch."

Bernanke acknowledged that the deal, announced last September, ran into trouble on December 17, when Bank of America learned of "significant losses" at Merrill Lynch for the fourth quarter and threatened to walk away, citing a "material adverse" clause or MAC.

Bernanke said he expressed concern that scrapping the deal could lead to "significant risks, not only for the financial system as a whole but also for Bank of America itself."

In the face of a barrage of questions from lawmakers, Bernanke denied that he had threatened to oust Bank of America chief executive Kenneth Lewis or pressured the banking giant along with then-Treasury secretary Henry Paulson as some reports said.

Representative Jim Jordan asked: "Do you see how a reasonable person could reach ... the conclusion that there, in fact, was this pattern of pressure from the government?"

Bernanke replied: "No, not if you're sufficiently informed. As I said, I did not tell Mr. Paulson to convey any threats."

Asked later about the Fed's aid of 20 billion dollars for the deal, Bernanke said, "I did not promise any specific amount of money."

He added that the amount of funds pledged "was the commitment of the government to work in good faith with Bank of America to develop a contingency plan that would assure the viability of the company in case of financial crisis."

As part of another exchange, Representative Dan Burton asked: "Why did you keep the SEC (Securities and Exchange Commission) in the dark?" on the Merrill problems.

The Fed "did not keep the SEC in the dark," Bernanke replied. "We were working carefully and closely with our other regulatory agencies."

But some lawmakers expressed concern about the way the matter way handled, particularly the last-minute deal for 20 billion dollars from the US government to help Bank of America absorb Merrill Lynch.

"In short, Bank of America's acquisition of Merrill Lynch began in September 2008 as a private business deal, and was completed in January 2009 with a 20 billion dollar taxpayer bailout," said House Oversight Committee chairman Edolphus Towns in his opening statement.

Representative Dennis Kucinich lamented that "the Fed's leadership orchestrated an aid package that attached no meaningful conditions to the money."

Kucinich said the case is important in view of the proposal by the Obama administration to boost the power of the Fed in helping avert failures of companies that pose a "systemic risk" to the financial system.

"We can't afford to make the Fed a super-regulator, as some have proposed, without also increasing its transparency."

Congress opened the inquiry after documents released by New York state Attorney General Andrew Cuomo indicated that top US Treasury and Federal Reserve officials threatened to push out bank management and board members if the takeover were not completed.

Robert Brusca at FAO Economics called the hearing a "witch hunt" and said the Fed acted appropriately.

"It seems that everyone has forgotten how weak and troubled the economy was at the time Bernanke was active in this BofA-Merrill Lynch deal," Brusca said.