Congressman: Bernanke Tried to 'Cover Up' BofA Threats

June 24, 2009— -- Federal Reserve Chairman Ben Bernanke tried to "cover up" government pressure on Bank of America's CEO Ken Lewis to finalize its acquisition of Merrill Lynch, according to the ranking Republican member of the House Oversight and Government Reform Committee a day before the Fed chief testifies before that panel about this year's merger.

"The committee has already learned that Ben Bernanke and the Federal Reserve made inappropriate threats to fire Bank of America management unless they went ahead with the 'shotgun wedding' that was the Merrill Lynch acquisition," Rep. Darrell Issa, R-Calif., said today. "The Federal Reserve also engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies."

Legislators want to know if federal regulators threatened to fire Lewis and the entire board of directors of Bank of America if the bank decided to back out of the deal with Merrill Lynch. Bank of America officials reportedly indicated they considered citing a "Material Adverse Charge," or "MAC clause," which would allow it to possibly cancel the acquisition after the bank learned Merrill Lynch had lost billions of dollars at the end of last year.

In recent weeks, the panel has served two subpoenas to the Fed to obtain approximately 100 documents about the merger, including e-mails from Bernanke, Lewis and Treasury Secretary Tim Geithner.

Bernanke, former Treasury Secretary Henry Paulson and Lewis have denied that the government pressured either bank not to disclose key information during the merger process.

In one e-mail obtained by the committee, the president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, wrote, "Just had a long talk with Ben. Says that they think the MAC threat is irrelevant because it's not credible. Also intends to make it even more clear that if they play that card and they need assistance, management is gone."

In another e-mail obtained by the panel, written by Bernanke himself, the Fed chief said, "I think the threat to use the MAC is a bargaining chip, and we do not see it as a very likely scenario so that we can explain to [Bank of America] with some confidence why we think it would be a foolish move and why the regulators will not condone it."

According to sources familiar with the documents, committee Republicans believe that "these threats amounted to a gun placed to the head of Bank of America to go through with the merger and an abuse of government power."

Rep. Edolphus Towns, D-N.Y., chairman of the House panel that will hold Thursday's hearing, took a wait-and-see approach.

"I am not going to prejudge these issues," he said. "We are not even close to finishing the Bank of America-Merrill Lynch investigation at this point.

"We need to get all the facts out on the table before we are in a position to say what happened and when," he added. "But be assured of this: We will follow the investigation wherever it leads, and we will do our best to make sure the facts get out on the table where everyone can see them, by subpoena, if necessary."

Bernanke has denied the charges. In an April 30 letter to Rep. Dennis Kucinich, D-Ohio, he wrote, "Let me be clear: At no time during these discussions did I or any member of the Federal Reserve direct, instruct or advise anyone at Bank of America to withhold from public disclosure information about Merrill Lynch, its anticipated or actual losses, its compensation packages or bonuses, or any other related matter.

"Neither the Federal Reserve nor I threatened to terminate, fine or take supervisory action against anyone at Bank of America if they disclosed any of the firm's or Merrill Lynch's information related to these matters."

Testifying before the Congressional Joint Economic Committee in May, Bernanke reiterated this point. "In no way did I ever ask Mr. Lewis to fail to disclose any necessary information," he said.

But sources familiar with documents obtained by the panel said these internal e-mails show an intent by the Federal Reserve to influence Bank of America's decision about how much information concerning Merrill Lynch's worsening financial situation would be disclosed.

With the Obama administration proposing to increase the power of the Fed by appointing it the new systemic-risk regulator, members of the House panel may use their concerns about purported past actions such as this as a reason for not expanding the Fed's oversight of the financial sector.

The highly-anticipated hearing does not even start until Thursday morning, but already the back-and-forth has begun.

Kucinich, who spearheaded the panel's investigation, issued a statement this evening saying that what is "remarkable" about the Bank of America-Merrill deal is not that the Fed pressured Lewis, but rather that the Fed let Lewis stay on at all and, on top of that, then gave Lewis' bank more money than they had first requested.

"Contrary to a popularly held belief that the government went too far in the Bank of America-Merrill deal, our investigation reveals that it is what the government did NOT do that is remarkable," he said.

"In spite of the doubts felt about Ken Lewis' management of Bank of America, the Fed's leadership orchestrated an aid package that attached no meaningful conditions to the money," he added. "The Fed required no changes whatsoever in Bank of America's deficient corporate leadership. The Fed even gave Bank of America more money than Ken Lewis had originally asked for."