Bernanke Denies Improperly Pressuring BofA Over Lynch Deal

June 25, 2009— -- Federal Reserve chairman Ben Bernanke today acknowledged that while he did have concerns about Bank of America's management, the Fed never threatened the jobs of the company's CEO Ken Lewis or the board members if they decided to back out of their merger with Merrill Lynch last winter.

"I never made any threat to Mr. Lewis regarding removing the board and the management," Bernanke said this morning before the House Oversight & Government Reform Committee.

But those claims were met with great skepticism from lawmakers on both sides of the aisle.

"With all due respect, I'm just not buying that," Rep. Jason Chaffetz, R-Utah, told the Fed chief.

At the outset of today's session, the panel's chairman Ed Towns said, "Much of what the Fed, the Treasury and other agencies did in these transactions remain shrouded in secrecy. It's time to yank the shroud off the Fed and shine some light on these events."

But despite a number of stand-offish exchanges, what really happened with the merger remained cloaked in darkness and bogged down in semantics after today's three-hour hearing.

Bernanke acknowledged that when it came to Bank of America's management, "I did have concerns, yes." Chaffetz pointed out that it would have been "reasonable" for Lewis to interpret Bernanke's concerns as a threat toward the bank's management.

Ranking member Darrell Issa, R-Calif., said the panel's investigation, including two subpoenas that helped obtain around 100 documents, including e-mails from Bernanke, Lewis and Treasury Secretary Tim Geithner, led to a similar conclusion.

"We have learned the federal government -- led by both Chairman Bernanke and then Secretary Paulson -- made certain threats against Ken Lewis," Issa said.

Bank of America officials reportedly indicated they considered citing a Material Adverse Charge, or MAC clause, which would allow the bank to possibly cancel the acquisition after the bank learned Merrill Lynch had lost billions of dollars at the end of last year.

But 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 its not credible. Also intends to make it even more clear that if they play that card and they need assistance, management is gone."

In a tense exchange, Rep. Dan Burton, R-Ind., asked Bernanke if Lacker was lying. The Fed chief responded that Lacker was just "summarizing a long conversation."

"You didn't say anything like that?" Burton pressed.

"I don't know or not," Bernanke said, and when pressed further he added, "I'm sure I can't remember."

Issa accused the Fed of orchestrating a "cover-up" by withholding information from other agencies, including the Securities & Exchange Commission.

"You hid the ball," said Rep. Jackie Speier, D-Calif.

Other lawmakers pointed the blame elsewhere.

Rep. Mike Quigley, D-Ill. said the Fed's concerns about Bank of America's management were warranted. Lewis, he argued, was "a wily CEO gaming the system."

Whatever happened during those mysterious days in December, Bernanke said he has no regrets about it right now.

"I have nothing I regret about the whole transaction," he said. "It was a very successful operation overall."

Lewis would agree. Despite their disastrous fourth quarter, Merrill bounced back last winter, accounting for 75 percent of Bank of America's profits during the first quarter of this year.

The CEO took his turn in the hot seat June 11. Now that Bernanke has made his case, former Treasury Secretary Henry Paulson is on deck. Paulson will come before the committee at a date yet to be determined.

Was Ken Lewis's Job Threatened?

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

In another e-mail obtained by the panel, written by Bernanke, 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 said. "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."