Bernanke fights back, says he didn't bully BofA to buy Merrill

— -- Facing an unusual grilling from Congress, Federal Reserve Chairman Ben Bernanke on Thursday denied that he used heavy-handed tactics to push through Bank of America's deal to buy Merrill Lynch even while the investment bank's financial condition was deteriorating.

Lawmakers confronted Bernanke with a barrage of documents they said showed that the Fed chief threatened to fire BofA's top managers if they backed out of the merger and that Fed officials tried to conceal Merrill's mounting losses from regulators and shareholders.

Rep. Dan Burton, R-Ind., cited a letter in which New York Attorney General Andrew Cuomo said former Treasury secretary Henry Paulson admitted threatening to fire BofA's board of directors at Bernanke's request.

"I didn't tell him anything like that," Bernanke said.

Burton also pointed to a Dec. 20 e-mail in which Fed President Jeffrey Lacker said Bernanke told him "management is gone" if the company followed through with a threat to nix the deal. "How about Mr. Lacker?" Burton asked. "Is he lying?"

"He's summarizing a long conversation," Bernanke replied. "I don't recall exactly what was said."

In any case, the Fed chief added, he did not actually threaten BofA CEO Kenneth Lewis. Rather, he said, he voiced his concerns about the effect of a derailed deal "both on the financial system and on Bank of America itself," noting it might have triggered a broader economic crisis and undermined investor confidence in the bank. But, he said, "It was always his decision whether or not to go ahead."

Lewis told the committee earlier this month that he felt pressured by the Fed to complete the merger but stopped short of saying he was threatened.

BofA's agreement to buy Merrill occurred in September during a period of unprecedented turmoil that included the failure of Lehman Bros., the government's takeover of mortgage giants Fannie Mae and Freddie Mac and the bailout of insurer American International Group.

The controversy comes at a pivotal time because the Obama administration is proposing to expand the Fed's powers to head off future financial crises.

Republican lawmakers suggested Bernanke and other Fed officials meddled inappropriately into private enterprise by bullying Lewis into a deal that might not have been in BofA's best interest. Bernanke noted the combined company has done well.

Lawmakers also said Fed officials sought to hide BofA's worsening condition late last year. Weeks after the merger was announced, Lewis discovered Merrill's fourth-quarter losses would top $13 billion, far greater than anticipated. The government agreed to provide $20 billion more in financing after Lewis threatened not to close the deal.

But BofA shareholders didn't know that when they approved the merger Dec. 5.

In a Jan. 11 e-mail, Arthur Angulo, a top official at the Federal Reserve Bank of New York, wrote, "Have we conveyed anything" to the Securities and Exchange Commission about the merger?

Scott Alvarez, the Fed's general counsel, responded, "I have not discussed this with the SEC," adding "BofA has complained that someone did talk to the SEC."

Bernanke said he didn't "have any knowledge of this particular exchange." He added, "Neither I nor any member of the Federal Reserve ever directed, instructed or advised Bank of America to withhold from public disclosure any information relating to Merrill Lynch," including its losses.