Thursday June 25, 04:41 PM
On hot seat, Bernanke says Fed acted with 'integrity'
WASHINGTON (AFP) - Federal Reserve chairman Ben Bernanke, facing fierce criticism over the rescue of investment giant Merrill Lynch (NYSE: MER - news) , said Thursday the central bank acted "with the highest integrity" on the matter.
Bernanke was summoned to a House of Representatives hearing to explain the Fed's actions in the Bank of America (NYSE: IKJ - news) purchase of the Wall Street group, a deal which was in danger of collapse when the extent of Merrill's losses were revealed.
Some lawmakers have said the Fed kept other regulators in the dark about key issues, while others said the central bank and Treasury pressured Bank of America to finalize the deal after it wanted to walk away.
Bernanke told the panel that the Federal Reserve "acted with the highest integrity throughout its discussions with Bank of America regarding that company's acquisition of Merrill Lynch."
Bernanke acknowledged that the deal, announced last September, ran into troubled on December 17, when Bank of America learned of "significant losses" at Merrill Lynch for the fourth quarter and threatened to walk away, citing a "material adverse" clause or MAC.
Bernanke said he "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."
In the face of a barrage of questions from lawmakers, Bernanke denied that he had threatened to oust Bank of America chief executive Kenneth Lewis.
"I did not instruct (former Treasury Secretary Henry) Paulson or anyone else to convey such a threat or message to Mr. Lewis," Bernanke said.
"I never did make a threat. Never did raise this issue with Ken Lewis at Bank of America," he said in response to further questions.
Asked about the Fed's aid for the deal, Bernanke said, "I did not promise any specific amount of money."
He added that the amount of funds committed "was the commitment of the government to work in good faith with Bank of America to develop a contingency plan that would assure the viability of the company in case of financial crisis."
But some lawmakers expressed concern about the way the matter way handled, particularly the last-minute deal for 20 billion dollars from the US government to help Bank of America absorb Merrill Lynch.
"In short, Bank of America's acquisition of Merrill Lynch began in September 2008 as a private business deal, and was completed in January 2009 with a 20 billion dollar taxpayer bailout," said House Oversight Committee chairman Edolphus Towns in his opening statement.
Representative Dennis Kucinich lamented that "the Fed's leadership orchestrated an aid package that attached no meaningful conditions to the money."
Kucinich added: "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."
Kucinich said the case is important in view of the proposal by the Obama administration to boost the power of the Fed in helping avert failures of companies that pose a "systemic risk" to the financial system.
"The Fed's decision-making process in the Bank of America-Merrill merger makes the case for a significant increase in accountability at the Fed," he said.
"We can't afford to make the Fed a super-regulator, as some have proposed, without also increasing its transparency."
Congress opened the inquiry after documents released by New York state Attorney General Andrew Cuomo indicated that top US Treasury and Federal Reserve officials threatened to push out bank management and board members if the takeover were not completed.
The documents also showed regulators cautioned Lewis not to disclose the extent of Merrill's troubles because of fears of a "disaster in the financial markets."
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