Bernanke defends Fed's handling of BofA

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By Patrice Hill

Federal Reserve Chairman Ben S. Bernanke testified Thursday morning that the Fed acted properly in urging Bank of America in December to consummate its acquisition of Merrill Lynch, which he said helped to prevent deeper turmoil in stricken financial markets worldwide.

In testimony before the House Committee on Oversight and Government Reform, Mr. Bernanke denied Republican allegations that he threatened to remove Bank of America chief executive Kenneth Lewis if he didn't go through with the deal. He said he never made that threat directly to Mr. Lewis, and he couldn't recall making such a threat in conversation with another Fed official.

Richmond Fed bank president Jeffrey Lacker said in an internal Fed e-mail that Mr. Bernanke said Mr. Lewis would be "gone" if he failed to complete the merger and that decision caused a loss of market confidence that forced the federal government to step in and bail out the bank.

Mr. Bernanke at the hearing said that while he couldn't recall making the threat, if Bank of America's actions had forced the Fed and Treasury to rescue the bank with another large bailout package, it would have been appropriate for the Fed and Treasury to remove the executives who caused the crisis. The regulators did so in earlier cases involving American International Group, Fannie Mae and Freddie Mac.

Mr. Bernanke said the Fed drew on its authorities to maintain stability in the financial markets in urging Bank of America to complete the Merrill deal and in arranging with the Treasury to provide the company with an additional $20 billion cash infusion in January to help it weather market reaction to mounting loan losses at both firms.

When Mr. Lewis raised the possibility of pulling out of the deal in mid-December, "I expressed concern that ... would entail significant risks, not only for the financial system as a whole but also for Bank of America itself," Mr. Bernanke said.

"In light of the extreme fragility of the financial system at the time, the uncertainties created by [the pullout] might have triggered a broader systemic crisis that could well have destabilized Bank of America as well as Merrill Lynch," he said. Merrill Lynch likely would have plummeted into an uncontrolled failure like the one experienced by Lehman Brothers in September that sent markets into a nosedive, he said.

Moreover, investors likely would have turned on Bank of America itself out of concern that the bank didn't foresee the risks involved in acquiring Merrill when it announced the deal in September, he said.

"Bank of America's best option, and the best option for the system, was to work with the Federal Reserve and the Treasury to develop a contingency plan to ensure that the company would remain stable should the completion of the acquisition and the announcement of losses lead to financial stress," he said.

Far from apologizing for the deal, Mr. Bernanke defended it as "quite successful," as it not only preserved the stability of the bank and financial markets, but has resulted in profits for taxpayers who are earning interest on their investments in Bank of America, he said.

The Fed chairman added that the central bank did not attempt to delay or interfere with Bank of America's disclosure of the mounting losses at Merrill Lynch to bank shareholders -- disclosures that are required under securities laws.

In response to Republican charges that the Fed kept other federal agencies in the dark, Mr. Bernanke said the Fed kept the two other regulators with jurisdiction over Bank of America informed about discussions with the bank -- the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. But it did not inform the Securities and Exchange Commission about the discussions or concerns about mounting losses because it is not a direct regulator of Bank of America.

In response to Democratic concerns that Bank of America was trying to blackmail the Fed and he was not tough enough on Mr. Lewis, Mr. Bernanke said he thought at first that Mr. Lewis was trying to extract another bailout from the government when he raised the possibility of pulling out of the Merrill deal.

But later after talking face to face with Mr. Lewis, Mr. Bernanke said he decided the bank executive did not have hidden motives for raising the possibility of a pull-out and was genuinely unsure of what to do.

While the Fed and the Treasury did not choose to remove Mr. Lewis in connection with the January bailout, labor unions and liberal groups have been agitating for his ouster ever since, saying he failed to properly inform investors about terms and risks involved in the Merrill deal.