Federal Reserve Chairman Ben S. Bernanke withstood a grilling Thursday from lawmakers on the far left and far right about his handling of the banking crisis last winter, displaying a grace and authority that likely will improve his chances of being reappointed in January.
Mr. Bernanke’s four-year term ends in 2010 and the capital is rife with speculation about whether President Obama, who has repeatedly voiced support for the Fed chairman, will give him another term.
The president has not showed his hand. But opponents of Mr. Bernanke’s reappointment appear to be isolated and mostly from the political right. That fact probably enhances his chances with Mr. Obama, because Mr. Bernanke was appointed by President Bush and is a Republican, albeit one who has demonstrated a strong pragmatic bent that enables him to work with Democrats.
Mr. Obama has praised Mr. Bernanke’s performance during the financial crisis that started in 2007. But he recently noted that the Fed’s performance before the crisis — both under Mr. Bernanke, who became chairman in 2006, and his predecessor, Alan Greenspan — left much to be desired because they both failed to act to prevent the meltdown in the mortgage market that eventually triggered a worldwide financial collapse.
The Fed’s failure to draft strong consumer protection regulations that could have blunted the crisis is a principal criticism from congressional Democrats as well, although many give Mr. Bernanke credit for moving quickly to draft stronger rules guarding consumers against the most risky subprime and exotic mortgages after congressional banking chairmen raised the issue in early 2007.
“In the past few months, the Bernanke Fed has become much more aggressive on consumer protection issues — mortgages and credit cards — and has received some pretty good reviews on the handling of the financial crisis,” said Brian Gardner, a Washington analyst with Keefe, Bruyette & Woods Inc. who thinks Mr. Bernanke’s chances of being reappointed are growing.
“Some think that Larry Summers will succeed Chairman Bernanke next year,” he said, referring to the White House National Economic Council chairman who previously was President Clinton’s Treasury secretary. Mr. Gardner does not expect the president to make a decision until the fall.
Worries about the Fed chairman’s future surfaced on Wall Street late Wednesday after Republicans on the House Oversight and Government Reform Committee issued a memo attacking Mr. Bernanke for purportedly putting undue pressure on Bank of America in December to complete its acquisition of Merrill Lynch, and then “engaged in a cover-up” of its actions.
Stocks plummeted in late trading Wednesday as a result of the news, but then rallied strongly Thursday after several Democrats came to Mr. Bernanke’s defense as he presented a strong rebuttal before the committee. The Dow Jones Industrial Average closed up 178 points.
The markets’ preference for Mr. Bernanke is an important factor that weighs in his favor. President Clinton reappointed Alan Greenspan, a Republican, in 1994 in part because he already had won the confidence of financial markets. Then, as now, the economy was in the early, fragile stages of recovery from a recession and the White House did not want to risk a period of financial instability that often comes as markets adjust to a new Fed chairman.
Mr. Greenspan, like Mr. Bernanke, also had worked hard to win the confidence of the new Democratic president to ensure his reappointment.
At the hearing Thursday, the most vehement criticism of Mr. Bernanke came from Republicans who opposed the Fed’s strong-arm tactics as it arranged bank mergers and bailouts during the financial crisis last fall. Republicans accused Mr. Bernanke of threatening to remove Bank of America Chief Executive Officer Kenneth Lewis if he didn’t comply with the Fed’s wishes — a charge the chairman vigorously denied at the hearing.
“Now, that’s the problem I have. The government is coming in and saying, ‘you’re going to do this or else,’ ” said Rep. Dan Burton, Indiana Republican. “This is not a socialistic society. This is a government of free enterprise and of the people and by the people and for the people.”
Many of the same conservatives also oppose Mr. Obama’s proposal to codify and augment the Fed’s powers to both address and prevent financial crises as part of his sweeping regulatory reform plan. Mr. Bernanke strongly defended those proposals and sought to blunt conservative objections in his testimony.
“It’s not a massive increase in our powers. It’s really a change in our strategy,” which would require the Fed to review the activities of the largest banks from the standpoint of their impact on the whole economy and financial markets, he said.
Currently, the Fed regulates bank activities primarily if they pose a danger to the individual bank, he added.
Mr. Bernanke also ran into criticism from liberal Democrats on the committee for his handling of the Bank of America deal. They mostly took the opposite tack as Republicans, saying the Fed should have been much tougher on Mr. Lewis, who they accused of using problems with the Merrill deal to try to “shake down” the Fed for more bailout money.
The Fed and Treasury ended up giving Bank of America an additional $20 billion in bailout funds in January on top of $25 billion the Charlotte, N.C., bank had received in October, partly to compensate for burgeoning losses at Merrill Lynch that Bank of America took on as a result of the acquisition.
“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 in a long, long time,” said committee Chairman Rep. Edolphus Towns, New York Democrat.
Democrats and Republicans alike also fault the Fed for being too secretive and say it should operate more openly. Mr. Bernanke has sought to respond to those calls this year by opening up its books selectively and providing regular reports on the progress of its crisis intervention programs.
Still, most committee members were deferential to the Fed chairman, thanking him for his service at a time of economic stress. Some outright defended him against criticism.
“I’m not inclined to second-guess the judgment of people who are in the midst of a crisis, an unusual crisis at that,” said Delegate Eleanor Holmes Norton, District Democrat.
• Patrice Hill can be reached at phill@washingtontimes.com.
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