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MOST OVERLOOKED STORY OF THE DAY: Bernanke Holds Firm in Hot Seat
Legislators yesterday pounded Federal Reserve Chairman Ben S. Bernanke with questions about his role in Bank of America’s purchase of Merrill Lynch, discarding the deference long accorded to him and his predecessors in a demonstration of mounting concern about the Fed’s performance.
At a hearing before the House Committee on Oversight and Government Reform, Republicans repeatedly asked whether the Fed had inappropriately pressured Bank of America to complete the deal, while Democrats pressed Bernanke to explain why the Fed concealed for weeks its plans to provide aid to the company.
Bernanke strongly defended his role and the Fed’s performance, saying that no laws were broken and that the merger has proved successful. He also repeatedly denied that he had pressured Bank of America executives to go forward with the deal. But he became visibly frustrated as he answered the same questions again and again without quieting his interrogators.
The Fed faces some of the broadest criticism in its modern history over its failure to prevent the financial crisis and its central role in the government’s response. The institution has provided more than $1 trillion to prop up more than 400 financial firms. Members of both parties increasingly want the Fed subjected to greater congressional oversight, and there is broad skepticism about an administration proposal to expand the Fed’s responsibilities as part of an overhaul of financial regulation.
The Merrill Lynch deal has become a focus of the debate about the Fed, even though the episode did not appear at the time to be a defining moment in the financial crisis.
“I believe that before Congress acts on the president’s financial services reform proposal we need to have a thorough understanding of what caused the current financial crisis and how the federal government responded,” said committee chairman Rep. Edolphus Towns (D-N.Y.) “It’s time to yank the shroud off the Fed and shine some light on these events.”
Bank of America agreed in September to buy the troubled investment bank without any federal assistance. In December, as Merrill’s losses were rising faster than expected, Bank of America chief executive Ken Lewis informed regulators that his company had cold feet. In January, the deal closed after the government pledged to invest $20 billion and limit Bank of America’s losses on a portfolio of troubled loans.
Lewis testified earlier this month before the same committee that the bank decided to complete the deal after officials urged the company to proceed. He said that Fed and Treasury officials had threatened that Bank of America executives could be removed if the deal did not close.
Bernanke flatly denied yesterday that he had issued such a warning, or told anyone else to do so.
“I did not,” he said several times.
But the denials did not satisfy members of the panel, who repeatedly contrasted his testimony with the accounts of other participants.
According to e-mails from Fed employees, Bernanke told others at the central bank that he planned to inform Bank of America executives that they could lose their jobs if they walked away from the Merrill Lynch deal.
“Just had a long talk with Ben,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, wrote in one such e-mail. “Also intends to make it even more clear that if they play that card and they need assistance, management is gone.”
Lewis later told Bank of America’s board of directors that he had received such a message. “The Treasury and Fed state strongly that were the Corporation to invoke the material adverse change (“MAC”) clause in the merger agreement with Merrill Lynch and fail to close the transaction, the Treasury and Fed would remove the Board and management of the Corporation,” Lewis told directors, according to the company’s minutes from a board meeting.
And then-Treasury Secretary Henry M. Paulson Jr. said in an interview with the New York attorney general’s office that he had conveyed the warning to Lewis “at the request of Chairman Bernanke,” according to a letter from the attorney general’s office to members of Congress.
“Is Mr. Lewis lying?” Rep. Dan Burton (R-Ind.) asked Bernanke yesterday.
Bernanke responded, “All I know is that I never said that I would replace the board and management if he invoked the MAC.”
“Did Mr. Paulson lie?” pressed Burton.
“I didn’t tell him anything like that,” Bernanke said.
“How about Mr. Lacker?” Burton asked. “Is he lying?”
“He’s summarizing a long conversation,” Bernanke said. “I don’t recall exactly what was said.”
Bernanke added that he was sure he had not threatened Bank of America. He also noted that Paulson has since issued a statement saying that his warning to Lewis was based on his own interpretation of the Fed’s position.
Bernanke’s responses suggested an explanation consistent with the known facts and testimony: Paulson could have made the threat in the Fed’s name, correctly representing the Fed’s position, without ever being directly asked by the Fed to do so.
Towns said that the truth remained unclear and that he was determined to continue the investigation.
“We don’t have full sunshine yet,” he said. “There are significant inconsistencies between what we have been told today, what we were told two weeks ago by Ken Lewis, and what the Fed’s internal e-mails seem to say.”
Paulson is scheduled to testify before the committee in July.
The sharp exchanges underscored the political difficulties facing the administration’s proposal to give the Fed new powers to oversee the financial system as a whole and to police the health of the largest companies.
House Republicans have been the most vocal critics, arguing that the Fed is meddling too much in the private sector.
Anger about the federal bailout has increasingly produced attacks not just against the Obama administration but against its Republican predecessor. “I did not approve of the Paulson/Geithner/Bernanke policy under the Bush administration, and I do not approve of it today,” Rep. Darrell Issa (R-Calif.) said in remarks that lumped the two administrations into a single objection.
Some Democrats have criticized the Fed for placing the interest of private companies before the public interest and called for increased oversight.
We can’t afford to make the Fed a super-regulator, as some have proposed, without also increasing its transparency in meaningful ways,” said Rep. Dennis J. Kucinich (D-Ohio), a longtime critic of the Fed who has lately found the congressional mainstream moving in his direction. Article by Binyamin Appelbaum for the Washington Post. For more news and information, click the link below for, www.washingtonpost.com
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