Facing an unusual political trial, Federal Reserve Chairman Ben Bernanke disputed accusations Thursday that he pressured Bank of America to acquire Merrill Lynch in a deal that cost taxpayers $20 billion.
In a three-hour hearing of the House Oversight and Government Reform Committee, Bernanke denied threatening to oust Bank of America's CEO Kenneth Lewis or the bank's board members if they abandoned the takeover after discovering spiraling losses at Merrill.
"I never said that I would replace the board and management" if Lewis decided to invoke a clause in the acquisition contract to try to stop the deal, Bernanke told the committee.
It was Bernanke's first public response since the committee launched an investigation into whether he or other government officials bullied Bank of America to stick with its plan to combine the two financial powers.
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Throughout the day, Bernanke faced often hostile questioning -- unusual for a Fed chairman, who typically commands deference in public settings.
Of Bernanke's denial that he threatened Lewis' job, Rep. Jason Chaffetz, R-Utah, said: "With all due respect, I'm just not buying that."
Neither was Rep. Dan Burton, R-Ind., who huffed: "This is not a socialist society."
Adopting the role of outsider, Republicans in particular have turned aggressive toward Bernanke, trying to link him to the Obama administration as advocates of government meddling in private industry. Many Republicans are suspicious of the administration's plan to expand the Fed's regulatory powers.
It's an odd shift, because Bernanke is a Republican appointee, and many of his key advocates are Democrats. And it comes at a pivotal time: Bernanke's term expires early next year, and President Barack Obama will have to decide whether to pick his own Fed chief or reappoint Bernanke.
The Fed chief said it would have been a bad idea for Bank of America to invoke the deal's escape clause, because it would have led to extended and costly litigation with Merrill Lynch. That would have "greatly reduced or destroyed" the value of the investment bank, he said.
"I expressed those concerns, which is appropriate, but it was always (Lewis') decision whether or not to go ahead and take that decision," Bernanke said.
Earlier this month, Lewis testified that his job had been threatened after he expressed second thoughts about the deal. Lewis said the Treasury secretary at the time, Henry Paulson, and federal regulators made clear that if Charlotte-N.C.-based Bank of America Corp. reneged on its promise, he and the bank's board members would be fired.
Bernanke also denied allegations that he or any other Fed official urged Bank of America to keep quiet about Merrill Lynch's financial problems. Failing to divulge what he knew about Merrill's troubles would violate Lewis' fiduciary duty to Bank of America's shareholders.
"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, compensation packages or bonuses or any other related matter," Bernanke said.
But the committee's ranking member Darrell Issa, R-Calif., accused the Fed of having "deliberately kept other regulators in the dark regarding the negotiations with Bank of America."
"The Federal Reserve's cover-up of important information and willingness to exclude key regulatory partners," such as the Securities and Exchange Commission and the Office of the Comptroller of the Currency, "raises troubling questions," Issa said.
Rep. Jim Jordan, R-Ohio., spoke of a "pattern of pressure from the government."
But Democrats, including Rep. Dennis Kucinich of Ohio, said the investigation revealed that Fed officials thought Bank of America failed to properly review Merrill Lynch's finances.
When asked about Bank of America's management, Bernanke said: "I did have concerns, yes."
Bank of America ultimately received $45 billion from the government's financial bailout program, $20 billion of which was linked to its acquisition of New York-based Merrill Lynch.
"We don't have full sunshine yet," the committee chairman, Rep. Edolphus Towns, D-N.Y., said at the end of the hearing. "It is still unclear whether Bank of America was forced by the federal government to go through with the Merrill deal, or whether Ken Lewis pulled off what may have been the greatest financial shakedown of all time."
As part of the panel's continuing investigation, Towns said Paulson has agreed to appear before the committee in July.
Bernanke defended the deal and government bailout, saying the action was needed to avoid another blow to the financial system, which at the time was in distress.
"I think it was a very successful transaction," the Fed chairman said.
"It helped stabilize the financial markets. It put the two companies back on a healthy path. It's protected our economy. And it was a good deal for taxpayers. I think I have nothing to regret about the whole transaction."
The transaction was hammered out over the same September weekend in which another investment bank, Lehman Brothers, went under. That led to the biggest corporate bankruptcy in U.S. history and plunging financial markets worldwide into crisis.
One day later, the government was forced to bail out teetering insurance giant American International Group Inc. The week before, the government had seized control of mortgage finance companies Fannie Mae and Freddie Mac.
Bank of America completed its purchase of Merrill Lynch on Jan. 1.
E-mails between Bernanke and other Fed board members, released by the committee, indicate that the Fed played hardball with Bank of America in the days leading up to the completed deal.
Fed board member Kevin Warsh said in a Dec. 29 e-mail to Bernanke that Bank of America thinks "they are entitled to some favorable terms" in government support "because they have agreed to go forward to closing."
"I reminded them that they are the ones who would look equally bad in the eyes of the market and regulators if they chose to terminate the transaction," Warsh wrote.
Just a few weeks after the completed transaction, Bank of America reported a $2.39 billion fourth-quarter loss, and Merrill Lynch disclosed a loss of more than $15 billion. Bernanke said it was up to Bank of America to make those disclosures. It wasn't the Fed's responsibility.