WASHINGTON — Federal Reserve Chairman Ben Bernanke defended the central bank's actions during tense negotiations with Bank of America Corp. over the acquisition of Merrill Lynch, but faced open hostility and skepticism from federal lawmakers who questioned the central bank's actions.
Ignoring the deferential tone usually reserved for Fed chairmen, lawmakers on the House Committee on Oversight and Government Reform repeatedly interrupted Bernanke and grilled him on internal Fed emails subpoenaed by the committee and projected on a screen in the hearing room.
The central issue: claims by Bank of America CEO Kenneth Lewis that officials threatened to oust management if they abandoned the Merrill Lynch deal.
"Did you personally tell Mr. Lewis that you would fire him or remove the Bank of America board?," Chairman Edolphus Towns, D-N.Y., asked, striking a common refrain.
Bernanke's simple answer: No.
"I never made any threats to Mr. Lewis about removing the board or the management," Bernanke repeated and rephrased frequently.
But that simple response did not sit well with lawmakers in light of a Dec. 21 email unearthed by the panel between Federal Reserve Bank of Richmond President Jeffrey Lacker and other Fed employees. In that email, Lacker recounts a conversation with Bernanke and says the Fed chief planned to tell Bank of America that "management is gone" if they quashed the deal and later needed more government aid.
Pressed on the issue repeatedly, Bernanke said he did not make such a comment to Lewis and did not remember the conversation with Lacker.
"I don't recollect everything that was said in that conversation," Bernanke said.
Rep. Dan Burton, R-Ind., a former Oversight chairman, said he has always been concerned when witnesses cite a lack of memory when faced with questions.
"One of the things I learned was, in order to keep people from perjuring themselves, they couldn't remember anything. Are you sure you can't remember?" Burton said.
"I'm sure I can't remember," Bernanke said.
The hearing comes at a sensitive time for Bernanke, whose term as chairman runs out in January. President Barack Obama has not indicated whether he will ask Bernanke to remain in the post.
Additionally, Congress is embarking on a wide-ranging overhaul of the regulatory system and Fed officials will be at the center of the debate on which agencies will receive more authority. The Obama administration's regulatory proposal would give the Fed vast new powers. Issues like the Bank of America bailout in January are among those being cited by those skeptical of giving the central bank more authority.
The Bank of America issue, which has been slowly growing for months, is unlikely to go away soon. Towns said there has been "significant inconsistencies" in the testimony of Lewis, Bernanke and the documents obtained by the committee. Former Treasury Secretary Henry Paulson is scheduled to appear before the panel next month, and Towns said he also wants to hear from the Securities and Exchange Commission and Federal Deposit Insurance Corp.
"He made me much more eager to pursue this investigation," Towns said when asked about Bernanke's testimony.
Despite the sharp tone of lawmakers, asked after the
For his part, Bernanke offered his most aggressive defense yet of the Fed's actions, saying the central bank acted with the "highest integrity" during the negotiations with Bank of America.
"I did not tell Bank of America's management that the Federal Reserve would take action against the board or management," Bernanke said.
"Moreover, I did not instruct anyone to indicate to Bank of America that the Federal Reserve would take any particular action under those circumstances," Bernanke said.
Bank of America had approached top U.S. officials in mid-December about possibly stepping away from the Merrill deal in the face of growing losses at the investment bank.
The end result: Bank of America closed the Merrill deal with the help of a government-orchestrated rescue package of $20 billion and some loan guarantees.
"These actions were taken under highly unusual circumstances in the face of grave threats to our financial system and our economy," Bernanke said.
Lawmakers expressed concern about the Fed's actions, despite Bernanke's remarks. Towns charged that the Fed may have tried to keep information from other agencies and warned that lawmakers need to find out more about the central bank's actions before imbuing the agency with more power as envisioned by the Obama administration's regulatory overhaul plan.
Rep. Darrell Issa, R-Calif., said documents subpoenaed by the committee show government officials did make threats against Lewis and suggested there have been conflicting statements made under oath about what transpired at the end of last year.
"I question the appropriateness of their actions and the wisdom of their judgment," Issa said, referring to Bernanke and Paulson.
Bernanke said if Bank of America stepped away from the Merrill deal it would pose "significant risks" for both the financial system as a whole, as well as for the bank, Bernanke said. A breakup of the two firms could have lead to a systemic crisis that may have destabilized the two firms, and would have also raised doubts about the bank's management in the eyes of market participants.
Lawmakers also questioned what role current Treasury Secretary Timothy Geithner played in the negotiations and eventual government aid for Bank of America in January. Bernanke said officials kept Geithner, who had recused himself from institution-specific matters after being chosen as the Treasury nominee in November, apprised of general information. But Bernanke said he did not know of any role Geithner played in the detailed negotiations with Bank of America.