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Fed chair Bernanke grilled over BofA-Merrill deal

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BernankeTestimonyonBAMer-dealJune252009

It is always a special day when the powerful and mighty are commanded to defend their innocence in front of  a panel of congressional judges. The judges are appointed by the American public and form the House Oversight and Government Reform Committee and the defendant is chairman of the Federal Reserve, Ben Bernanke. In question is the alleged role of the Federal government, which the Fed is part of, in the takeover of investment firm Merrill Lynch (MER) by Bank of America (BofA) in December of last year.

Some lawmakers accuse the Fed and Bernanke in particular to have Ken Lewis, chairman of BofA, pressured into the deal with Merrill. Earlier this month Lewis testified in front of the same panel and left committee members in doubt about the Fed’s role during the acquisition.

After analyzing a number of email conversations between Fed officials, Ben Bernanke and then Secretary of the Treasury, Henry Paulson, one of the key questions for the Fed chairman centered around an email from Jeffrey Lacker, president of the Richmond Fed, about a conversation he had with Bernanke regarding a potential withdrawal of BofA from the Merrill deal on the grounds of a material adverse change (MAC) clause.

“Just had a long talk with Ben (Bernanke). Says that they think the MAC threat is irrelevant because it’s not credible. Also intends to make it even more clear that if they play that card and they need assistance, management is gone,” Lacker wrote, according to the sources.

In his sworn testimony Bernanke assured the panel that he did not tell BofA’s management that the federal reserve would take action against the board or management if they decided to invoke the MAC clause.

Initially the brisk questioning from lawmakers about the Lacker email seem to physically upset Bernanke. For the most part he denied any accusations and could not recall any details about the conversation. After being asked if he thinks that Lacker is incorrect in his statement Bernanke again stated that he did not know the details of that conversation.

Being asked by Congressman Burden if he believes that Mr. Lacker is lying he again insisted that he did not know if he did say these things or not. Annoyed by Bernanke stonewalling the investigation Burden asked him: “Are you sure you cannot remember?”, and the Fed chairman answered: “I am sure that I can’t remember”.

After it became known that losses at Merrill would be higher than previously thought CEO Lewis intended to evoke the MAC clause. This provoked the Fed and Bernanke to conclude that BofA exerted a serious lack of due diligence and misjudgment in the course of the deal. Congressman Chaffetz from Utah asked Bernanke if he had the power to replace the board, which he affirmed. Chaffetz continued and asked if claiming misjudgment could not be seen as a threat to BofA, which Bernanke again denied by reiterating that he never said anything about firing the board to Lewis.

Congresswoman Kaptur from Ohio touched on an interesting point regarding the relationship of investment firm BlackRock with the Fed in purchasing toxic mortgage related assets. The Fed has several contracts with BlackRock involving programs to purchase and manage a portfolio of toxic mortgage assets the Fed has acquired in the course of diverse bail-outs. Kaptur asked Bernanke if the Fed will support an FBI investigation of BlackRock handling Freddie Mac paper? Bernanke replied that the Fed will certainly not stand in the way if there is an appropriate FBI investigation.

The rest of the questions were rather benign. The chairman seemed to be able during this hearing to pull his head out of the noose, at least for this time , but it seems clear that his reputation is bruised. Even if he did not personally press Ken Lewis into this deal he certainly made his wishes been forcefully known. Whether that constitutes an overreach of government power is not clear at this point. It is too early to see if this will impact his reappointment in January of next year. President Obama has already lent his support to Bernanke. Of great interest will be a hearing before the same committee of Henry Paulson and his recollection of the events around the Merrill-BofA deal next month.

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Written by Alfred

25. June 2009 at 11:34 pm

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