Federal Reserve Chairman Ben Bernanke faces a grilling today by the House Committee on Oversight and Government Affairs on his role in allegedly forcing Bank of America to buy Merrill Lynch late last year. BankThink is bringing you live coverage from the hearing, at which Bernanke will be the only witness. Republicans on the committee turned up the heat yesterday with a
Will Bernanke be able to defend his contentions that the Fed acted prudently and out of necessity? How will today´s hearing affect President Obama´s regulatory restructuring plan, which would hand the central bank significantly more power? More personally, will this endanger Bernanke´s chances for reappointment? Stay tuned to find out.
10:02am: Hearing is late by a few minutes, but here are some excerpts from Bernanke's prepared testimony:
"I believe that the Federal Reserve acted with the highest integrity throughout its discussions with Bank of America regarding that company´s acquisition of Merrill Lynch," the testimony reads.
"On December 17, 2008, senior management of Bank of America informed the Federal Reserve for the first time that, because of significant losses at Merrill Lynch for the fourth quarter of 2008, Bank of America was considering not closing the Merrill Lynch acquisition. This information led to a series of meetings and discussions among Bank of America, the regulatory agencies, and Treasury. During these discussions, Bank of America´s CEO, Ken Lewis, told us that the company was considering invoking the Material Adverse Event clause in the acquisition contract, known as the MAC, in an attempt to rescind its agreement to acquire Merrill Lynch.
"I expressed concern that invoking the MAC would entail significant risks, not only for the financial system as a whole but also for Bank of America itself."
10:05am: The hearing has begun. Committee Chairman Edolphus Towns is giving his opening statement. He is walking through the story of the struggle Lewis claims to have had with the Fed and the Treasury department. Lewis claims that Bernanke, along with Treasury Secretary Henry Paulson, threatened to fire him if he didn't go through with the deal.
"Was this just an old-fashioned shakedown?" Towns asks. Given the proposal to give the Fed new powers, he continues Congress needs to know. "New emails we have obtained from the Fed may indicate that the Fed may have attempted to keep other agencies in the dark."
10:09am: Towns emphasizes that the committee's investigation is far from complete. "We need to get all of the facts out on the table before we are in a position to say what happened and when it happened," he says. The committee plans to interrogate Paulson next.
10:10am: Darrell Issa, R-Calif., the committee's ranking member, has begun his opening remarks. He opens by patting himself and the other committee members on the back, praising the bipartisan nature of their inquiry. "We came to a consensus that for all the good work in the financial crisis, oversight still needed to discover what was and wasn't done," he says.
10:13am: Issa has thanked Bernanke for his "quick written responses" to the committee's queries. He says he wants to give Bernanke "a full and complete opportunity" to explain his actions. Were the so-called threats to fire Ken Lewis "blown out of proportion?"
"Going forward, if the systemic risk proposal by the Obama administration" gives the Fed the power to oversee all institutions that pose systemic risk, "what will the oversight be?"
10:16am: Dennis Kucinich, D-Ohio, is speaking now. He's says "what the government did not do" is more amazing than what it did to urge the BofA-Merrill deal. BofA knew about the losses at Merrill before shareholders ratified the merger, Kucinich says. The Fed believed that Lewis' threat to back out of the deal was "a bargaining chip," he explains. BofA itself failed to do due dilligence. Why, then, did the Fed agree to bail out BofA with few conditions in return? "If bad decisions by corporate management can have systemic consequences then the Fed's remedy in the BofA case amplifies it," because it demonstrates that bad decisionmaking "will be subsidized, not punished."
10:20am: Kucinich: "We can't afford to make the Fed a super-regulator...without increasing its transparency in a number of ways."
10:20am: Rep. Jim Jordan, R-Ohio, has also given a brief statement in which he expresses concern about the implications of the emails the committee obtained from the Fed.
Now Towns is swearing Bernanke in and explaining the five-minute time limit to him.
10:24am: The committee staff is fumbling with Bernanke's microphone now. All he has managed to say so far is the part about how the Fed acted with full integrity.
10:25am: He repeats the integrity statement and goes on to emphasize that the Fed did not participate in the initial deal, struck in September, to merge BofA and Merrill.
Bernanke reminds the committee that the Fed had to act at many points throughout the fall "to prevent a global banking meltdown."
10:27am: Bernanke is sticking to his written testimony. Now he's going over the "three reasons" why he thought invoking the MAC was a bad idea. It would have destabilized the system, he explains, and it would have thrown BofA's ability to do due dilligence on large deals entirely into question. Also, Bernanke says, invoking the MAC may not have even legally worked, and then BofA would have had to pay heavy penalties for attempting to do so, while suffering losses in the market as investors backed away.
10:30am: Bernanke denies any coercive actions toward BofA and Lewis. He says he never warned of Fed action in the event that the deal fell through. He also believes the Fed acted appropriately in its decisions about when to disclose information about the deal.
He points out that the final decision about what to disclose was ultimately up to BofA itself.
10:32am: Should regulators have revealed their plans to grant aid to BofA earlier? "In retrospect...." No. They followed a prudent course of consultation and planning, Bernanke says.
10:33am: Towns has begun his questioning. Did Bernanke tell Paulson to tell Lewis that he and his board would be fired if they backed out of the Merrill deal?
"I did not," Bernanke says.
Well New York Attorney General Andrew Cuomo said that Paulson told him you did, I just want you to know that, Towns replies.
Did Bernanke threaten Lewis himself?
"I did not."
Towns then asks whether Bernanke promised to prop up BofA if the bank went through with the deal.
"I did not promise a specific sum" of money Bernanke replies.
10:36am: Towns asks Bernanke why the Fed kept information away from the Securities and Exchange Commission about BofA and Merrill losses. "I can't speak for Bank of America," Bernanke says as he begins his replies. The Fed's goal was first and foremost to develop an aid package for BofA.
"So you were forthcoming?" Towns asks. "I was," Bernanke replies.
10:38am: Now Bernanke is explaining why the Federal Deposit Insurance Corp. was uncomfortable with the government assistance proposed for the BofA-Merrill deal. It's because Merrill wasn't a bank! That's the reason. FDIC Chairman Sheila Bair was worried about the FDIC's financial exposure, and she didn't want to assist a non-bank.
10:39am: Now Issa has taken over questioning. He's asking why a Fed official warned not to discuss the hullaballoo with Ken Lewis during a phone call in which an OCC official was participating. Bernanke replies he doesn't know.
10:40am: Issa reads an email from a Fed official who writes of a conversation with Bernanke in which Bernanke told him he planned to threaten Lewis if he invoked the MAC clause. "I don't recall the details of that conversation," Bernanke replies.
He adds that the email doesn't just say that invoking the MAC clause would get Lewis fired--he explains that if Lewis had invoked the MAC clause and had then required a government bailout, "there should be consequences."
10:43am: Issa: "You said that you had three good reasons that BofA should not pull out and one of them was that" BofA would be seen as "inept." But "day after day after day regulators were discovering, 'oh blank,'" another company is failing. Why couldn't BofA's mistake in that case just be par for the course?
Bernanke: "If they tried to invoke the MAC, the market would understand that the chances of success of the MAC would be very low" and therefore both companies' reputations would be compromised.
10:45am: Kucinich is at the mic now. He says he will submit evidence that the Fed knew that BofA failed to do due dilligence. "Your colleague, Kevin Warsh, doubted the competence of BofA's senior management" to handle the Merrill merger.
Kucinich is cleaving to a different smoking gun: It's interesting. He wants to go after the Fed not for bullying BofA but for failing to be tough enough on the company and on Lewis.
10:48am: Kucinich: "In view of the considerable evidence amassed by your staff" that BofA's top management was incompetent, did you require any management changes at the bank? Kucinich asks. "Yes," Bernanke says, subsequent to giving the bank more government aid.
Now Kucinich is asking about other ways in which the Fed could have held BofA accountable: forcing a foreclosure prevention plan along with other changes at the bank.
Bernanke says he can't remember whether they made BofA adhere to a loan modification plan.
10:50am: Kucinich is accusing Bernanke of giving aid to BofA without imposing any changes.
"The supervisory process is not a one-time event," Bernanke replies, implying that the Fed could still impose new changes.
10:51am: Rep. Dan Burton, R-Ind., asks, "Is Mr. Lewis lying?" Bernanke responds: "All I know is that I did not" threaten to fire him. "Is Mr. Paulson lying" about what he told Cuomo? "I believe he's modified that statement," Bernanke replies.
Burton cites a letter to the committee from Cuomo in which Cuomo says Paulson claimed that he conveyed the threat to fire Lewis at the behest of the Fed.
Then he moves on to the email from the Fed official, Jeffrey Lacker, who claimed that Bernanke told him that if Lewis invoked the MAC he'd be "out."
"Was Lacker lying?"
"I don't recall that conversation."
Burton adds pressure. He suggests that to avoid perjuring themselves officials often say they can't remember anything.
10:55am: Now Burton is asking why the SEC was kept out of the loop. Bernanke insists he communicated with the appropriate agencies.
10:56am: Rep. Bill Foster, D-Ill., has begun his questioning. Like the others, he opens by asking whether Bernanke threatened to fire Lewis. "I did not," Bernanke replies.
"Do you believe there is any additional clarity that needs to be added" to the duties of a CEO to shareholders, regulators and the public?
It might be something for Congress to examine, says Bernanke.
Foster: "If you accept that the federal recapitalization of both BofA and Merrill was inevitable," then what was the point of forcing the merger?
Bernanke replies that the merger strengthened the stability of both companies. "We learned that there were problems with the investment banking model," he explained.
10:59am: Now it's Jordan's turn. He brings up the meeting Paulson and Bernanke had with the nine big bank CEOs during which the two officials described the need to infuse government money into the banks. Is it true that the meeting took less than an hour? And is it true that nobody knew it was about "being forced to accept Tarp money" before the meeting began? "I don't know," Bernanke says.
"I was not in contact with the nine CEOs," Bernanke says, passing off responsibility to Paulson on that one.
11:02am: Jordan is moving on to the question of whether Bernanke threatened to fire Lewis. He rehashes the Cuomo and Lacker letters, but doesn't give Bernanke a chance to respond. He moves on to the issue over whether the Fed tried to delay a filing with the SEC that would reveal Merrill's losses.
"Do you see how a reasonable person could reach the conclusion that there in fact was this pattern of pressure from the government?"
"No," Bernanke says.
11:04am: Rep. Jackie Speier, D-Calif., has taken over. She asks why the Fed let Lehman Brothers fail.
We tried to prevent it, Bernanke responds. But we didn't have the authority.
"But you saved AIG that same weekend," Speier replies.
It was a different situation, says Bernanke.
11:06am: Speier is now asking where the Fed came up with the number for the amount of money BofA got in federal assistance. It adds up to the cost of purchasing Merrill, she points out. "Did the American people subsidize the purchase of Merrill Lynch?" She asks. "No," Bernanke says, "the American people made an investment."
Why wasn't the SEC included in the discussions on bailing out on BofA?
They weren't within the sphere of responsibility that was relevant, Bernanke says.
But, Speier says, "some of these emails suggest that there was an active interest in not telling the SEC certain things...I'm just trying to understand why."
Bernanke insists that the Fed told the SEC everything it was supposed to.
"Is there anything you would have done differently," looking back? Speier asks.
No.
11:10am: Rep. Jason Chaffetz, R-Utah, points out that Bernanke did have the authority to fire BofA's management. So how did he NOT seem to be threatening Lewis when he questioned BofA's judgment on the MAC threat?
"We advised him that we did not think that that was a good idea," but we didn't threaten him, Bernanke replies.
"With all due respect, I'm just not buying that," says Chaffetz.
11:13am: Chaffetz asks how Bernanke can say he never directed BofA to withold any information from the public. If that's true then how can he explain the email in which a Fed official is vowing to get Merrill to delay its fourth-quarter filing?
Bernanke points out that despite the email, no actual attempts were made to get Merrill to delay its filing.
11:15am: Rep. Gerry Connolly, D-Va.: "I want to be clear on who was threatening whom," when did you first learn BofA did bad due dilligence? "Did you take it as a threat or did other senior federal officials discuss it as a threat...that Mr. Lewis" was talking about backing out of the deal?
"I was concerned about that when I first heard about it," Bernanke replies. "After some meetings with Mr. Lewis...that impression faded." He seemed "genuinely undecided" about what to do.
11:18am: Connolly: Did you ever warn Lewis not to disclose to the public or the SEC info about Merrill's losses? Bernanke: No.
Connolly: Did you commit to bailing out BofA before the Merrill deal closed?
Bernanke: We informed the other banking regulators that we would do what we needed to bail out BofA if something were to go wrong, but there was not yet a specific plan.
11:20am: Connolly: Did you accelerate aid to BofA in response to Lewis' threat to invoke the MAC?
Bernanke: I did't feel threatened.
"I believe the narrative lends itself to a very different interpretation: Of a wily CEO...gaming the system" and reaping the benefits, Connolly concludes.
11:21am: Rep. John J. Duncan, Jr., R-Tenn., is asking about "too-big-to-fail." Bernanke says there needs to be a resolution regime, better oversight and more controls on big firms.
Duncan: How much money have you spent on bailouts?
Bernanke: "Our balance sheet is $2.2 trillion" but not all of that can be considered bailout money. In fact, only the infusions to Bear Stearns and AIG can be seen as lost money.
11:24am: Duncan brings up the evidence that the Fed withheld information from other regulators and asks, generally, whether Bernanke thinks the Fed is transparent enough?
Yes, Bernanke says. And the Government Accountability Office's suggestions for increasing transparency would actually hinder the Fed's ability to carry out monetary policy with effeciency and safety.
11:26am: Rep. Marcy Kaptur, D-Ohio is presenting the Left Field question of the day. She's asking about BofA and Merrill's connections with BlackRock, the private equity fund. At the time of the BofA-Merrill deal, didn't BofA buy BlackRock, which now owns a majority stake in BofA? And now isn't BlackRock involved in analyzing some of the mortgage-backed securities held by Fannie Mae and Freddie Mac on behalf of the government?
What year did BlackRock's CEO Larry Fink sell the first tranche of MBS to Fannie and Freddie?
Bernanke: I don't know.
"Do you believe you should know that?"
"No."
Now Kaptur is talking about the danger of MBS. Is the Fed in collusion with Mr. Fink "in covering up" fraud by shifting portfolios of MBS around "in ways favorable to those clients he served?"
Bernanke describes the strict firewalls between different parts of BlackRock and vows to provide the Fed's contracts with BlackRock. We have them, Kaptur replies, but they're incomplete. The investment strategy, fee schedule and lists of key officials are blacked out.
"If we're going to fix what's going wrong in this society it seems to me that those who hold extraordinary power to create money...something went seriously wrong and I hear what you said this morning but I am deeply concerned that the Fed itself is involved in the manipulation of the mortgage markets, particularly the toxic assets...I hope you can provide information to the record to convince me that my suspicions are unwarranted."
11:32am: Rep. Mark Souder, R-Ind., begins by observing that the Fed has been "an activist Fed." Will it continue to step in during crises?
"The past two years has been the worst financial crisis since the 1930s," Bernanke responds. "Extraordinary actions had to be taken." But hopefully no one will have to do this again.
Souder asks how the Fed will avoid becoming "politicalized" and how it will extract itself from "Tarp and tarf and all of these other equities injections..."
It will be a challenge, Bernanke admits.
Souder: How will the Fed deal with non-bank lenders in the future?
Bernanke: There are a lot of different suggestions in the administration's reg restructuring plan.
Souder: How will you cooperate with the other regulators and government officials without becoming politicized?
Bernanke: In a time of crisis the American people expect government agencies to work together.
11:36am: Souder: "Agreeing that we were in deep trouble last fall, how would you...have a guideline that says 'oh we're going to have these extraordinary interventions,' how did you determine that this was the greatest crisis since the 1930s when it wasn't there yet?"
Bernanke says once AIG and Lehman failed, it was pretty clear.
Souder: Well, what about the people who say failures would have been good to "cleanse" the market?
Bernanke: "If we have a resolution regime...we can avoid this problem in the future."
11:38am: Rep. Diane Watson, D-Calif., wants to know when the Fed first realized that BofA would need government aid to complete the Merrill deal and that BofA hadn't done due dilligence.
Bernanke: When Merrill and BofA announced their agreement to merge the bailout bill hadn't been passed yet. Both banks got Tarp money in October, and BofA got funds on Jan. 16--that was after an analysis that determined that BofA needed it for stability. (How was that answering her question?)
11:40am: Watson: Many of my constituents complain that they can't get loan mods. Where did all of that bailout money go? Also, in testimony here, Lewis claimed that a Dec. 14 revelation of a big loss at Merrill prompted him to consider invoking the MAC clause. But a New York Fed official has said that Lewis' claim that he didn't know about the Merrill losses earlier seems suspect. What do you think he knew?
"I have no way of knowing. I did have concerns about the quality of due dilligence."
11:43am: Watson: "In an email on Dec. 20, the president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, described a telephone conversation with you" in which he said that you said if BofA invoked the MAC clause Lewis would be out. Do you remember the conversation and do you think Lewis' claim that he was threatened is credible?
"I was concerned initially about whether this was a serious proposal to invoke the MAC...I never made any threat to Mr. Lewis regarding the board and the management." But the Fed has removed management teams--at AIG, for example.
11:45am: Now Rep. Patrick McHenry, R-N.C. is questioning Bernanke. He's talking about Bernanke's close work with Paulson in the early days of the bailout. And with Treasury Secretary Timothy Geithner. "In the context of this controversy that we're analyzing today, did you have conversations with those two about BofA?"
Bernanke replies that Geithner had been designated already as the Treasury Secretary designate and so recused himself from involvment with the creation of BofA's aid package.
McHenry brings up a Dec. 20 email to Bernanke from Geithner asking whether Bernanke was "getting what you need from the troops." "It seems to me that he was all over this," McHenry concludes. Don't you think?
Bernanke: "The troops" probably refers to his staff at the New York Fed. He was probably just asking if they were cooperating.
"My only association with Mr. Geithner during this period was general phone calls to update him."
11:50am: McHenry is now asking about Paulson's threats to fire Lewis. Did Bernanke talk to Paulson about that at all?
Bernanke: Paulson just told me that Lewis decided not to invoke the MAC.
11:51am: Rep. Elijah Cummings, D-Md. "Listening to your testimony, I think I get it. You became so intertwined" with Paulson that it's hard to tell who did what.
"Basically, you did not believe in the competence of Mr. Lewis, is that right? Yes or no."
Bernanke: "I don't think that's a yes or no question."
Cummings: But did you think your judgment trumped his, despite his experience as a bank CEO?
Bernanke: It was his decision. He was uncertain what to do.
Cummings: "There is not a person in this room who did not understand that he" (Lewis) "was threatened. You even used the word yourself! You used it! I didn't, you did."
Bernanke: "To say that I did not threaten anyone."
11:57am: Rep. Brian Bilbray, R-Calif., reminds the room that "this is not an inquisition." Then he asks whether Bernanke thought Merrill was too big to fail.
"I did," Bernanke replies, adding that it Merrill was bigger than Lehman.
Bilbray: You said earlier that you didn't threatened to fire Lewis if he invoked the MAC but that if BofA invoked the MAC and then needed more assistance there would be problems, right?
Bernanke: That's what was in my conversation with Lacker but I didn't say that to Lewis. Although I do think it's unreasonable for a CEO to be kept on after he damages his company enough to need a government bailout.
Bilbray: "When you get into this, you said 'we did not guarantee BofA anything,'" but couldn't you have maybe indicated in some other way that you were dedicated to supporting BofA if something went wrong with the deal?
Bernanke: We committeed to making sure BofA "would not collapse because of this issue."
12:04pm: Rep. Wm. Lacy Clay, D-Mo., asks whether Bernanke thought he should have disclosed any more info than he did. Bernanke says no.
Clay: "At one point does the welfare of the investor become" more important thant he welfare of the system?
Bernanke: Investors' reaction to the collapse of that deal would have hurt the whole system.
Clay: When did you disclose information to the public?
Bernanke, repeating what he has said to many of the committee members, replies that Tarp rules require the government to disclose all new injections within a week--and emphasized that he followed the rules.
12:06pm: Now Bernanke is telling Clay why the Fed couldn't save Lehman. "With respect to the other cases, we did everything we could to avoid a systemic failure." It was easier to save AIG because the company could put up collateral needed to lend to the Financial Products division.
Clay: "Was it really necessary to salvage AIG?"
Bernanke: "If they failed, the consequences would have been a worldwide banking run" and other unknown effects.
12:07pm: Rep. Jeff Fortenberry, R-Neb., says Bernanke's explanations of the bailout make sense.
But, he asks, did Merrill really need to be propped up?
Bernanke: Yes.
Fortenberry: What did you discuss with Bair?
Bernanke: She was concerned about the exposure to the DIF in the BofA bailout.
Fortenberry: What do you think about the fact that 10 banks control the majority of assets in this country?
Bernanke: We need a resolution regime for big companies.
Fortenberry: "But are these banks too big?"
Bernanke: There shouldn't be an incentive for banks to grow just to reach too-big-to-fail status, but we probably do need big banks.
12:12pm: Burton has jumped in again. You said Paulson changed his claim that you told him to threaten Lewis, but he is still claiming that his threat was "based on knowledge" that the Fed didn't like the MAC clause.
Bernanke: "We were strongly opposed to that action for the reasons I've described."
12:13pm: Rep. Peter Welch, D-Vt., thanks Bernanke for his service. Then he recalls Lewis' testimony to the oversight committee: First he said the BofA-Merrill deal was great. Then he said the Merrill losses were so great that they soured the deal. Then he said he was threatened away from invoking the MAC clause. Finally, he assured the committee that the Fed and Treasury had promised to help BofA. Is that true?
Bernanke: Yes we told him that we would help BofA. There were no specifics.
Welch: You said we need a new systemic risk regulatory regime. Now Congress has to decide how to do it. Is a "super-sized" entity to oversee the whole market better, or should an institution be simply prevented from getting too big to fail? That way we wouldn't have to depend "on the vigilance of regulators."
Bernanke: Well you could discuss both options but "very large banks do have an economic function, a global reach, diversity of activities."
12:18pm: Rep. Paul Kanjorski, D-Pa., says "I can't see how people are jumping to the conclusion that by yourself or the Secretary of the Treasury informing memebrs of a board that they have the power to take action," that it's a threat. It's not necessarily a threat. "It's telling the truth."
Bernanke: Yes.
Kanjorski: I don't care what happened in December as much as I do about what happened in September--can you tell the committee how bad things were at the beginning of the crisis?
Bernanke: It was "an incredibly intense period...the world economy went into a nosedive." Regulators "worked overtime to try to prevent additional failures." Tarp helped alot. We coordinated with other countries to prevent "a global financial meltdown."
Kanjorski: "The thing we have to decide is what we're going to do in the future and how we're going to handle it." Why don't regulators act, even when they do have the authority? That seems to be what happened with the Fed. It had opportunities to prevent the economic crisis. Why didn't it write the Hoepa mortgage rules for 14 years? If they had been enacted earlier the mortgage crisis might have been avoided. Also, "there are issues with the Federal Reserve that they are now acquiring additional powers?"
Bernanke: Yes the Fed was late but "we have been very aggressive over the past couple of years." We need to be even stronger in the future "if the Fed retains those powers" (have to assume he's specifically talking about consumer protection). As for making the Fed the systemic risk regulator, it won't be a massive increase in power, but rather a change in strategy.
12:25pm: Rep. Michael Turner, R-Ohio, has taken over. "I have voted against every bailout that has come before this Congress," he declares. The bailout plans were ill-defined in many ways. "There's a lot of unintended consequences."
These BofA-Merrill problems get right to the hart of them. "The federal government has a very mixed record" on issues related to interference. "We're not a very good customer" for contracts. Is there abuse of process? "So when you then put another layer on of us not just being a customer but an investor...I have greater concern."
Now Turner is talking about new legislation he introduced for a constitutional amendment to limit the ability of the government to take stakes in private companies.
12:27pm: Turner: I have 102 original co-sponsors on this baby.
12:28pm: Turner: But enough about me. What do YOU think about my amendment?
Bernanke: I agree that limited government intervention in the private sector is frequently good policy. But we need to have rule and regulations that allow firms to fail. You have to have failure in a way that's not going to bring down the entire system.
Turner: Are you saying that the only way you could have intervened was to take a stake in these companies?
Bernanke: Look at other banking crises: there are instances elsewhere of governments taking temporary stakes in banks. "I'm not sure what the alternative would be. I'll have to think about it."
12:31pm: Rep. Stephen Lynch, D-Mass. reminds Bernanke that he voted against the Tarp bill. He also complains about Congress' having had to pass the "Tarp corrections bill" a few weeks later. "I do want to say the reason why we're going over this chronology is because we've granted an enormous amount of power to the Fed."
12:33pm: Lynch is going over the timeline of the BofA-Merill deal and Lewis' consideration of the MAC. Whatever the timeline, Lewis ultimately went ahead with the deal. What does that mean for the taxpayers? Do you think Lewis was afraid of losing his job if taxpayers had gotten voting rights as BofA shareholders?
Bernanke: I don't know.
Lynch: Are taxpayers really getting what they deserve out of the government support of BofA?
Bernanke: The Fed and the OCC are overseeing BofA and trying to improve the comapny and its functions.
Lynch: But couldn't we have protected taxpayers more? Or gotten more power over BofA? It doesn't seem "commensurate with the amount of support" the taxpayers provided.
12:37pm: Rep. John Tierney, D-Mass.: When you bailed out AIG, you kept the credit default swap counterparties 100% whole. Why?
Bernanke: "I don't see on what basis less than 100% could have been paid. These were contractual obligations. Failure to pay them would have prompted the creditors to pursue bankruptcy, which is exactly what we were trying to avoid."
Tierney: But the AIG employees themselves say they might not have had to pay 100%. It looks bad. "Will you produce to this committee copies of all of the CDS contracts the AIG FP division had with those counterparties?"
Bernanke: I think we pretty much released a lot of the documents already, but please send us a letter with specific requests, "we'll see what's available."
Tierney: "We want everything to be available."
12:42pm: Rep. Danny Davis, D-Ill.: "How involved is the Fed in day-to-day management of BofA" and have there been any attempts to change the management?
Bernanke: The board of directors of BofA manages day to day operations. We told them to add more independent directors.
Davis: Why did you replace AIG's management and not BofA's?
Bernanke: "The merger was undertaken in good faith; at the time it looked like a reasonable combination." Lots of financnial institutions suffered huge losses. We judged Lewis to be able to continue to lead the company.
Davis: Fed Governor Kevin Warsh wrote to you about the Richmond Fed possibly having threatened Lewis or coerced him into getting rid of BofA's dividend. Do you think that the Richmond Fed team threatened or coerced Lewis at all?
Bernanke: "At various points there were some confusions I think about what the position of the Fed was because there were some miscommunications between the Richmod Fed and the board of governors in Washington." But we cleared it up.
Davis: Can the American people really get a grasp of what really happened? "Was Mr. Lewis bullied into going forward with this bad deal?" Or did he "recklessly" agree to go through with it?
Bernanke: "Today, I think, has been very productive in terms of transparency...clearly it was a very difficult period...I believed that we solved this problem without taking any steps that were beyond the law or unethical."
12:47pm: Rep. Eleanor Holmes Norton, D-D.C.: "We did have a series of rather unusual, late-developing factors come to light in the process of negotiations for this agreement...Could not BofA have negotiated a reduction in price with Merrill had it invoked the MAC clause? Wouldn't you think that would be the logical thing?"
Bernanke: The advice I got was that "short-term loses, no matter how large, are not basis for a MAC." Merrill has been a profitable acquisition. And negotiating a better price didn't come up, but it would have created additional danger as investors lost confidence in the deal and in Merrill.
12:51pm: Holmes Norton: Didn't shareholders really take a hit with the Merrill losses?
Bernanke: "Not in our view." Shareholders would have been worse off if BofA had failed or needed a big bailout later.
12:53pm: Issa has the mic again. He's asking whether Bernanke things "the ends justify the means."
Bernanke says no.
Issa: So federal officials should always adhere to the rule of law, right?
Yes.
Issa: Can you answer additional questions in writing?
Yes.
Issa: Do you think Lewis and Paulson lied?
"I have no opinion on that."
Issa: Should regulators pick winners and losers?
Bernanke: "I think all of these interventions are very unfortunate" and they were made only under duress.
Issa: Can't you remember the conversation with Lacker?
No.
12:56pm: Burton has taken over. He's complaining about the general tendancy of the government to "tell the private sector what to do."
Now Burton is re-reading Lacker's email describing Bernanke's intent to threaten Lewis.
Burton: It's not fair that the government bullied a private company into doing a deal it didn't want to do after discovering the losses were higher. "I just think that's wrong. You can make a response if you like."
Bernanke: "I never said that."
Burton: "What about your attorney who said that you were going to put pressure on them?"
Bernanke: "I didn't tie it directly to replacing him or the board."
12:58pm: Kucinich: Your staff believed Lewis knew about the higher Merrill losses a month before he came to the Fed. Did the Fed actually know about the losses before approving the merger?
"No I don't think we did."
Kucinich: But the Fed was receiving detailed information about Merrill's losses, as this email from September demonstrates.
Bernanke: "We are certainly involved in a light way in the oversight of Merrill Lynch since we began to lend to them. But we are not their supervisor."
Kucinich continues to insist that the Fed knew about Merrill's financial peril before it approved the merger.
Bernanke: "All I can says is I was not aware, and I don't think anybody else at the Fed was aware of the $14 billion loss."
Kucinich: But this email is a request for daily reports on profits and losses!
1:03pm: Kucinich has moved on to ask Bernanke whether he really though Lewis was using the MAC threat as a bargaining chip. Bernanke replies that he did at first, but then he says it became clear that Lewis was genuinely confused "we provided advice," Bernanke adds.
Kucinich: The record clearly shows you thought that a collapse of the BofA-Merrill deal would have posed systemic risk. Did Lewis' MAC threat prompt you to promise government assistance when you didn't otherwise intend to provide it?
Bernanke: We probably would have provided it anyway.
Kucinich: If you knew about those losses why did you approve the merger?
Bernanke: We didn't know about that in November.
1:06pm: Issa is asking whether, "on a day-to-day basis," Bernanke knew what some of the toxic assets on banks' books were worth. No, Bernanke says.
Issa: I don't think actually that the foundation for a MAC claim is so shaky.
Bernanke: Our lawyers said it wasn't likely to succeed.
1:08pm: Jordan has the mic. He's asking when the Tarp plan as a scheme to buy toxic assets became unfeasible.
"Did you know before Congress voted on it" (Tarp) "Or did you know after?"
Bernanke: "After."
Jordan: But you had a whole month to convince Congress you were going to do this, why the about-face afterwards? And why did the bankers get called to Washington without any indication of what the meeting they were attending would be about?
Bernanke: The situation went south so fast. We realized we needed capital injections.
Jordan: Now I have questions about the money supply. How are we going to deal with inflation?
Bernanke: The money's not in the system in any real way. It's not being circulated. Now we just have to figure out how to unwind these loans and the stimulus in time.
1:11pm: Kucinich wants to add documents to the record.
1:12pm: Kaptur wants to add documents about the connection between the connection between BlackRock, BofA and the Fed.
Kaptur has launched into another discourse on the unchecked fraud allegedly perpetuated by BlackRock, now a government contractor.
Kaptur wants to know how the Fed will avoid conflicts of interest in dealing with BlackRock.
She also wants an FBI investigation into BlackRock's execution of government contracts.
Bernanke replies that if there's a reason for the FBI to investigate, they certainly will.
Kaptur: Fink should be investigated. Not only at BlackRock but at First Boston, his previous job.
1:15pm: "I will make three observations before we close," Towns says. There are major inconsistencies between today's testimony, that of Paulson and Lewis, and the Fed emails. We have learned that the SEC and the FDIC played a role in the BofA-Merrill deal. We're going to talk to the SEC and the FDIC. Paulson too. He's appearing before the committee in July. But we also need to hear from the FDIC and the SEC.
1:17pm: Hearing adjourned.
