Parties face off over Fed’s tactics

Congressional Democrats and Republicans offered starkly different assessments late Wednesday over whether the Federal Reserve exerted too much or too little pressure on Bank of America in its takeover of Merrill Lynch last December.

Republican members of the House Committee on Oversight and Government Reform leaked internal Fed documents that they said showed the Fed improperly used its powers as Bank of America’s regulator to force the giant bank to complete its planned acquisition of the failed Wall Street firm, despite misgivings about massive losses on Merrill’s mortgage securities portfolios.

But committee Democrats charged in a statement that Bank of America used worries about the growing Merrill losses to extract a commitment from the Fed to a big new bailout for the bank, and the Fed should have exercised more of its powers over the bank to punish it for not discovering the Merrill losses earlier. Democrats said the Fed probably should have ousted the bank’s chief executive, Ken Lewis, and other management when it provided the bank with another $25 billion bailout in January.

“Contrary to the popularly held belief that the government went too far…our investigation reveals that it is what the government did not do that is remarkable,” said Rep. Dennis Kucinich, chairman of the committee’s domestic policy subcommittee. “The Fed required no changes whatsoever in Bank of America’s deficient corporate leadership. The Fed even gave Bank of America more money than Ken Lewis had originally asked for.”

Further details of the matter are expected to be revealed in a committee hearing Thursday featuring testimony by Fed chairman Ben S. Bernanke.

The Republicans pressed their case, saying internal Fed documents reveal that the Fed hid its involvement with Bank of America from other federal banking regulators that had authority over the Charlotte, N.C. bank. They said the Fed’s alleged cover-up shows that the central bank is not qualified to be given new powers to be the principal regulator of such mega-banks in the future, as has been proposed by President Obama.

The Fed “engaged in a cover-up and deliberately hid concerns and pertinent details” from other bank regulators, including the Office of the Comptroller of the Currency and the Securities and Exchange Commission, Rep. Darrell Issa, the committee’s ranking Republican, told Reuters.

The Fed has denied any wrongdoing in the matter. Mr. Bernanke told the committee in a letter in April that the central bank acted with “the highest integrity” in seeking to help Bank of America resolve issues involving ts obligation to inform stockholders about Merrill’s growing losses before the acquisition.

Former Treasury Secretary Henry Paulson also played a major role in the Bank of America acquisition and bailout. The committee plans to call him in to testify next month. The bank received a total of $50 billion in bailout funds from the Treasury before Mr. Paulson left office.