Bernanke denials don’t sway angry lawmakers

At a tense House hearing on Thursday, Federal Reserve Chairman Ben Bernanke denied pressuring Bank of America to complete its acquisition of Merrill Lynch last year, but lawmakers appeared unsatisfied and said they will expand their investigation.

Democrats and Republicans grilled Bernanke for more than three hours about whether central bank officials threatened to oust Kenneth Lewis, Bank of America’s CEO, and other managers if the bank did not complete its acquisition of Merrill Lynch at the height of the financial crisis.

ADVERTISEMENT
Citing a string of internal Fed e-mails unearthed by the House Committee on Oversight and Government Reform, lawmakers raised questions about whether the Fed overstepped its authority.

“I did not threaten him,” Bernanke said, referring to Lewis. At one point, Bernanke did say, however, that Lewis’s management decisions had raised questions. “I did have concerns, yes,” Bernanke said.

At issue is whether Bernanke and then-Treasury Secretary Henry Paulson threatened a change in bank management if Lewis pulled out of the deal. Bank of America was considering filing a “material adverse change” (MAC) that would have allowed the bank to back out and avoid taking on roughly $16 billion in losses at Merrill.

“I never said that I would replace the board and management if he invoked the MAC,” Bernanke said. “I expressed concerns about the effects of invoking the MAC, both on the financial system and on the Bank of America itself,” Bernanke said.

The Fed chairman’s comments appeared to do little to satisfy lawmakers. Said Rep. Jason Chaffetz (R-Utah), “I’m just not buying that.”

Lawmakers from both parties indicated they would extend their investigation. Committee Chairman Edolphus Towns (D-N.Y.) said that Congress has only gotten a “peek” at the tense negotiations and the government’s role. Towns pledged to hold additional hearings.

Paulson is scheduled to testify before the committee in July, and Towns indicated at the end of the hearing that he is interested in information from the Federal Deposit Insurance Corporation (FDIC) and Securities and Exchange Commission (SEC).

Lewis testified earlier in June that completing the deal benefited Bank of America and that the threat did not lead him to finish the deal. But several committee members questioned Lewis’s account, saying they found it hard to believe.

“There was not a person in this room who did not understand that he was threatened,” Rep. Elijah Cummings (D-Md.) said on Thursday.

Rep. Darrell Issa (R-Calif.), ranking member on the committee, said that the Fed engaged in a “cover-up” of the transaction at the end of last year. Issa and others raised questions about whether the Fed instructed Bank of America to postpone disclosures of losses at Merrill, which Bernanke strongly denied.

“It’s time to yank the shroud off the Fed and shine some light on these events,” Towns said.

New York state Attorney General Andrew Cuomo is also investigating the negotiations and discussions between Bank of America, Bernanke and Paulson.

The investigation comes at a critical time for the Fed. The Obama administration proposed this month to greatly expand its authority over “systemic risk” in the financial system in an effort to prevent future crises.

The Fed, an institution that traditionally cherishes its independence, has garnered significant scrutiny on Capitol Hill, with lawmakers from both parties seeking greater transparency and accountability. Bernanke himself is in the crosshairs, with his four-year term up at the end of January 2010.

Obama must decide whether to reappoint Bernanke to a second term at the Fed, which could see its authorities dramatically reshaped.