WASHINGTON — In a mix of gripping political theater and a financial "whodunnit," Federal Reserve Chairman Ben Bernanke strenuously denied on Thursday that he strong-armed Bank of America into absorbing troubled investment bank Merrill Lynch against its will.
Lawmakers from both parties were unmoved, promising to expand their widening probe.
Summoned before the House Committee on Oversight and Government Reform, Bernanke denied that he threatened Bank of America Chief Executive Ken Lewis with removal if Lewis backed out of the government-brokered merger.
"I never made this threat," Bernanke said in response to testy questioning by Rep. Darrell Issa, R-Calif.
A day earlier, Issa had issued a news release accusing the Fed and Bernanke of a cover-up — words that he seemed to back away from during a nonetheless aggressive hearing that lasted three hours and 15 minutes.
Asked about the treatment of Bernanke, White House Press Secretary Robert Gibbs said that President Barack Obama retains confidence in the Fed chief, whose four-year term expires in February. Obama hasn't said whether he'll reappoint Bernanke.
Bank of America's $50 billion acquisition of Merrill Lynch came amid the unprecedented global financial panic last fall, when the Fed and the Treasury Department aggressively brokered the sale of Wachovia and Merrill Lynch, and the Federal Deposit Insurance Corp. seized and sold the nation's largest thrift, Washington Mutual.
Lawmakers are probing the Merrill acquisition because the deal almost fell apart in mid-December after Merrill warned of worse-than-expected fourth-quarter losses. Then the nation's largest commercial bank, Bank of America considered citing "material adverse changes" to back out of the deal. Taxpayers eventually stepped in to provide $20 billion in emergency lending to those two banks as a consequence.
Bank of America's share prices plunged amid the confusion and haven't recovered. Shareholders have sued Lewis for failing to inform them of material changes in the company's health as a result of the Merrill losses that Bank of America absorbed. Lewis brought more attention to this dispute by suggesting that he'd been strong-armed into the acquisition, leading Congress to probe whether in fact he was forced to swallow a bad deal.
Following Thursday's hearing, the panel's chairman, Rep. Edolphus Towns, D-N.Y., suggested that Bernanke's testimony only raised the need to probe further. He promised to haul former Treasury Secretary Henry Paulson before the committee in July and said he now wants to talk also with officials from the Securities and Exchange Commission and the FDIC.
"At this point, I would say we got a peek, not much, but we don't have full sunshine yet," Towns said. "There are significant inconsistencies between what we have been told today and what we were told two weeks ago by Ken Lewis and what Fed internal e-mails seem to say."
Paulson has testified previously to New York Attorney General Andrew Cuomo that he threatened Lewis with removal on behalf of the Fed chairman. Paulson later amended that to say the threat was his, but was consistent with the Fed's strong concern about Bank of America backing out of the deal.
Bernanke's statement is squarely in conflict with what Lewis testified under oath. He told the same panel on June 11 that he'd been threatened with removal if he tried to back out of the deal to absorb Merrill.
"What gave me concern is that they gave that threat to a bank in good standing," Lewis testified.
As Bernanke denied making the threat, he was asked to explain an e-mail in the committee's possession. In it, the president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, wrote to other Fed officials that he'd just had a long talk with Bernanke and that the chairman suggested that Bank of America "management is gone" should the deal fall through.
"I don't recollect everything that was said in that conversation," Bernanke told lawmakers. Rep. Dan Burton, R-Ind., chastised him, suggesting that the Fed chairman's memory was deliberately foggy in order to avoid perjuring himself under oath.
Bernanke clarified later that while he didn't remember all that was said in the phone call with Lacker, he stood by the thrust of the e-mail. The Fed felt that backing out of a deal would bring great turmoil to a weakened global financial system, he said, and should Bank of America back out and later seek taxpayer support, its management would have acted against the interest of both its shareholders and the global financial system.
"I think there should be consequences" in such circumstances, Bernanke said.
Under questioning, Bernanke acknowledged that he believed Lewis, by threatening to back out, was trying to get a better price, essentially a shakedown.
"I thought initially that it might be, yes," the Fed chairman said.
There would be precedent for that. In his new book, "House of Cards," financial author William Cohan details how J.P. Morgan Chase held out to drive down the purchase price when the Treasury Department and Fed desperately brokered the March 2008 sale of investment bank Bear Stearns in a bid to prevent a global financial meltdown.
Despite being roughed up by lawmakers, and with his reappointment in question, Bernanke said there isn't anything he would've done differently in hindsight.
"I have nothing to regret about the whole transaction," the Fed chairman said, voicing confidence that the Fed and Treasury helped prevent a disastrous collapse in global finance.
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