tv [untitled] CSPAN June 26, 2009 4:00am-4:30am EDT
america/merrill lynch case amplifies the case posed by poor corp. corporal leadership because it signals that incompetence practice by the management of a very large financial institution will be subsidized, not punished by government regulators. the fed bought decision-making process and the bank of america/merrill lynch merger makes the case for a significant increase in accountability at the fed. its regulation of systemic risk needs to be subject to congressional oversight. its interventions in markets to recover from the current financial crisis need to be audited by the government accountability office as i proposed in a bill and an amendment adopted by this committee. we can afford to make the fed a super regulator as some have proposed, without also increasing its transparency in the hallways that this committee has proposed to the kucinich amendment. wanted thank the chairman for the opportunity to work with you
on this hearing and i look forward to mr. bernanke's testimony and i want to thank you search for being here today. >> i thank the gentleman from ohio. we will now yield five minutes to the ranking member of the policies of committee, congressman jordan of the way. >> thank you for holding today's hearing on the government's involvement in the bank of america deal to purchase merrill lynch. i appreciate chairman bernanke's danced the burkas testimony is important to bring transparence into the role of the federal government in the transaction and the overall financial crisis. i'm troubled by the information and documents the committee's investigation has uncovered. they show mr. bernanke, mr. paulson, ken lewis and his board of directors in order to force the bank of america to acquire merrill lynch for going recognize the actions took place and significant economic challenges and uncertainty but there must be limits to government action even in the time of crisis and those limits must be respected. we must keep in mind is pressure was exerted after many of the nation's banks were forced to
accept taxpayer money to the tar program. winnowed in october 2008 mr. paulson, mr. janke, mr. geithner and ms. bair brought the ceos of the largest banks to the treasury department and demanded they except the partial nationalization of their banks. i look forward to learning more about the role in this process as well. thank you again and i would ask for unanimous consent to include in the record majority and minority reports and all documents referenced in those reports. >> without objection, so ordered. mr. bernanke is a longstanding policy that we swear all of our witnesses in. please stand and raise your right hand. do you solemnly swear to tell the truth, the whole truth and nothing but the truth, if so answer in the affirmative. let the record reflect that the witness answered in the affirmative.
mr. bernanke, we would like for you to summarize your statement in five minutes and which will allow the members to raise questions with you and of course we have a light there. when it starts out, it starts out on green and then it does to yellow, and then it goes into red. red, meaned staub, so we thank you for that. thank you very much you may began. >> thank you chairman towns, ranking member issa and members of the committee. how about now? now? okay. germantown's ranking member ice and members of the committee, i appreciate the opportunity to discuss the federal reserve's role in the acquisition by the bank of america of merrill lynch. >> you know, is it on? staff, help me. because we can't hear him.
pull it closer to him. i believe the federal reserve acted with the highest integrity throughout its discussions. >> still, we are still having trouble. we have some senior citizens up here. [laughter] we are having trouble hearing you. is there any way you can turn the volume up on it? >> we have got a replacement down below that they can pull up. >> there is another one on the floor? a back up on the floor? staff?
>> that sounds better. >> how is that? >> better. >> i would like the full extent of my time if i may. i believe that the federal reserve acted with the highest integrity throughout its discussions with the bank of america regarding the company's acquisition of merrill lynch. i will attempt in this testimony to respond to some of the questions that have been raised. on september 15, 2008 the bank of america announced an agreement to acquire merrill lynch. i did not play a role in arranging this transaction in a federal reserve assistance was promised for provided in connection with that agreement. as with similar transactions the transaction was reviewed and approved by the federal reserve under the bank holding company act in november 2008. it was approved by the shareholders of bank of america and merrill lynch on december 5th. the acquisition was scheduled to be closed on january 1, 2009. as you know, the period
encompassing bank of america's decision to acquire merrill lynch to the consummation of the merger was one of extreme stress in the financial markets. the government sponsored enterprises fannie mae and freddie mac were taken into conservatorship the week before the bank of america deal was announced. that singly lehman brothers build an american international group was prevented from failing by extraordinary government action. he that month wachovia faced liquidity pressures which spread its viability in result of an acquisition by wells fargo. in mid october an aggressive international response was required to avert a local-- global melt them. in of them for the possible destabilization of citigroup was prevented by government action. in short the pig was one of the short risk for the global economy as well as bank of america and merrill lynch. on december 17th 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 the treasury. during these discussions bank of america ceo ken lewis told us the company was considering invoking a material adverse event clause in the acquisition contract nunez the mack and in its him to rescind its agreement to require merrill lynch. in responding to bank of america and these discussions i express concern that invoking it would entail significant risk not only for the financial system as a whole but also for bank of america itself for three reasons. first, in light of the extreme fragility of the financial system at that time, the uncertainties created by indication of the map but it triggered a systemic crisis that could well have destabilize bankamerica as well as merrill lynch. second, an attempt to invoke
mack after public remarks by the management of bank of america about the benefits and the acquisition would cast doubt in the minds of financial market participants including investors, creditors and customers of bank of america about the due diligence and analysis done by the company. its capability to consummate-- its overall risk management and its judgment. third, based on our staff analysis and legal issues we believe it was highly unlikely bank of america would be successful in terminating the contract by evoking the mack for the rather and attempt to invoke the mack would involve extended in costly litigation with merrill lynch that would significantly probability would result in bank of america being required to pay substantial damages or to acquire a firm whose value would been greatly reduced or destroyed by the strong negative reaction to the announcement. for these reasons i believe rather than invoking the mack
bank of america's best option and the best option for the system was to work with the federal reserve and the treasury to develop a contingency plan to ensure that the company would remain stable should the completion of the acquisition and the announcement of losses lead to financial stress. particularly a sudden fall pullback experienced by wachovia, lehman and other firms. all milan december 30 if the bank of america board determined to go forward with the acquisition. the staff of the federal reserve worked diligently with treasury and bank of america to put in place a package that would shore up the combined company's financial position and reduce the risk of market disruption. the plan was completed in time to be announced with bank of america's public earnings announcement which have been moved forward to january 16 from january 20th. the package included an additional $20 billion at one investment from the troubled asset relief program and a loss protection arrangement for a pool of assets valued at
$118 billion. the arrangement has not been consummated in bank of america now believes that, in light of the general improvement in the markets, this protection is no longer needed. importantly, the decision to go forward with the merger rightly remained in the hands of bank of america's board and management and they were obligated to make the choice they believed was in the best interest of shareholders and the company. i did not tell bank of america's management that the federal reserve would take action against the board or management if they decided to proceed with the mack. moreover i did not instruct anyone to indicate to bank of america the federal reserve would take any action under those circumstances. i agreed with the view of others that the indication of the mack in this case involves significant risk for bank of america as well as merrill lynch in the financial system as a whole and it was this concern that i communicated to mr. lewis and his colleagues. the federal reserve also have to appropriate regarding issues of public disclosure.
as i wrote in a letter to this committee neither i nor any member of the federal reserve directed come instructed board buys bank of america to withhold from public disclosure and information relating to merrill lynch including its losses, compensation packages are bonuses or any other related matter. these obligations belongs squarely with the company and the federal reserve did not interfere in the company's disclosure decisions. the federal reserve had a legitimate interest in knowing when bank of america or merrill lynch intended to disclose those losses at merrill lynch. given the fragility of the financial markets at that time we were concerned about the potential for a strong adverse market reaction to the reports of significant losses at merrill lynch. if federal assistance is stabilizing these companies were to be effective the necessary facilities would have to be in place as of the disclosure date. dessauer planning with importantly influence by the company's plan disclosure schedule. but the decisions and responsibilities regarding public disclosure always
remained as it should with the companies themselves. a related question is whether it there should have been earlier disclosure provided by the u.s. government to the bank of america. importantly there was no commitment on the part of the government regarding the size and structure of the transaction until very late in the process. hall do it indicated to bank of america in december that the government would provide assistance to keep the company from being to stabilize as it did then in cases during this time of extraordinary stress in the financial markets this december discussions were followed in january by significant in intense negotiations involving bank of america, the federal reserve, the treasury, federal deposit insurance corporation and the office of the comptroller of the cancer and-- currency regarding key transactions including the type of assistance to be provided, the size the protection of the assets to be covered, the terms for payments, the fees and length of the facility. the agreement in principle on these items was reflected in the term sheet that was not
>> ken lewis testified under oath here and also told his board of directors that you and mr. paulson made verbal commitments to him in december of 2008 to provide bank of america with enough money to fill the hole created by the 12 billion lost at merrill lynch. in december of 2008 did you promise mr. lewis that you would provide bank of america with enough capital to fill the $12 billion hole created by losses at merrill lynch? >> i did not promise any specific amount of money. what was committed was the commitment of the government to work in good faith with bankamerica to develop a contingency plan that would assure the viability of the company in case of a financial crisis. >> chairman bernanke, in an e-mail the committee recently
obtained under subpoena to a topic employee of the new york federal reserve communicates with your general counsel regarding questions the sec had about the bank of america bailout. can you explain why bank of america would complain about someone talking to the sec and why it appears federal reserve and employees were not completely forthcoming with the sec about flow was going on at bank of america? >> chairman, i can't speak for bank of america but i will explain the federal reserve's position. first of all federal reserve position has worked closely and collaboratively with other agencies. as you know, the sec has to specific functions. one relates to disclosure and the federal reserve had no issues relating to disclosure. those were issues for bankamerica and shareholders. its second function has to do
with oversight regulation. in that capacity i am sure the sec already knew about losses at merrill lynch. from now or perspective the issue was we needed to work with bankamerica to develop a package that would assure the viability of the company in case of financial instability. the bank of america's regulators besides ourselves with the office of the comptroller of the currency and federal deposit insurance corporation whom we involved throughout the process and which i personally spoke to both john dugan and sheila bair to make sure they were informed about the situation. >> you were forthcoming? >> i was indeed appropriate with the other agencies. >> and another e-mail we have obtained recently the head of the fdic says to you there is strong discomfort with the bank of america bailout package and that the fdic board does not want to do this. mr. bernanke, what were the
concerns at the fdic about the bank of america's bailout, and why did you and the treasury department go through with of the bailout despite the concerns fdic had? >> my recollection of the fdic concerns were not with the issues of trying to prevent instability. their concern was the fdic own disclosure to the deal. they noted merrill lynch wasn't a bank and therefore wanted to be sure to restrict whatever financial resources to commit it to be relative to the bank rather than the acquired company so they had concerns about the structure of the deal as it related to their own financial exposure but in the end of course they did agree to contribute to the arrangement the government put together. >> ken lewis told the committee to weeks ago that he called you and ask you to put in writing the verbal commitment he said
you and hank paulson made to him regarding a government bailout of the merrill lynch deal. what did he say to you exactly during the phone call what did he say? >> he wanted to know if we could provide a written description of the commitment that he could use with his board. we were unable to provide such written description because we did not have any deal. we didn't have a transaction completed at that point so there was nothing specific we could commit to. all we had was a good faith agreement to work together to find some arrangement that would help avoid destabilization of the bank of america. >> my time is expired. i yield to the ranking member of california. >> thank you mr. chairman. following all the questioning you said you kept the occ informed and had personal conversations. can you explain from your own for information you provided to us why brian peters of the federal reserve bank of new york would say given the presence of the occ on the call, i think we
should not discuss or reference the call with ken lewis and paulson. >> i don't know precisely what motivated that. all i can tell you is that on the 21st we had to conference calls which i participated in and john dugan participated in and we provided him. >> okay. the mail we receive from jeffrey lacquer, federal reserve bank of richmond, that indicates that in fact they felt there was pressure related to the mac. how do you explain that? is that just another independent person that misunderstood? >> well, i don't recall the details of that conversation but i would like to make two points first, as i said -- >> let me give you the details to make accurate.
per quote, just had a long talk with ben, the parentheses, bernanke, says 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 they need assistance, management is gone. now, is he misunderstanding with the conversation he has with you in those quotations? >> i don't recollect everything said in the conversation. i would like to make again, two points if i may. >> do you believe that he is incorrect according to your recollection? because he's saying in a nutshell you planned to make a threat. now you may not have done it but he's saying he planned. is he lying? >> i don't recollect the details of the conversation. i would like to say to things. first, as you point out, i never did make a threat. i never did raise this issue
with ken lewis or bank of america -- >> did you think pulling the trigger on the map was a bargaining chip? >> may i make my second point? >> briefly -- >> i would like to point out what he referred to was not -- he didn't say that if lewis were to invoke the mac he would be fired, he said if he invoked the mac and required assistance then there would be consequences. i think if somebody makes the decision that results in their company feeling and being rescued by the government there should be consequences. >> let's go through fi mac. e3 money in almost on a daily basis without informing congress because defense were moving that quickly that you discovered and officers and directors of company after company, aig, wachovia, you name it made these discoveries and came to you in you became aware of it on a daily basis. isn't that true? >> we learned about some of
these problems at the very late date, that is true. >> so let me put this in perspective. the fed, the treasury, the sec, the fdic, they were on able to predict on a day-by-day basis who was going to be next. that is what we saw publicly and privately. so why is it between september and december 1 would think it was a complete absence of fear due diligence to discover that accompany your seeking to acquire that we held hearings on because of stand o kneal's alleged mismanagement of the company had deteriorated quickly and they had not anticipated toxic assets going bad quickly. why would that be on a reasonable to assume in a deal in the environment in which day after day after day you're watching collapses of hundred-year-old businesses? >> we did raise the question whether or not think america should have discovered those losses earlier but that wasn't the relevant question for us in terms of maintaining the stability of the financial
system. >> we are not talking about the financial system's stability. you said you had good reasons they shouldn't pull out and one of them was their credibility would be adversely affected and the whole market be adversely affected if they couldn't have predicted in two months of to diligence by a company trying to get high dollar or in this case high stock exchange in the transactions. so you have an arm's length transaction people are trying to tell you what ever the need to get the highest stock and you say in one of your three points they be viewed as an act. if i & correctly day after day after day regulators were discovering bnk another once dropping. in that environment, wouldn't it have been just as easy to say you're looking at invoking the mac, what are you trying and to get to? is your 80 cents to 1 dollar exchange rate of stock in fact materially different and would you go through if the deal but
have a slightly different amount? wouldn't that be the ordinary affect rather than to say directly and indirectly the number of people clearly communicated including paulson then they would in fact have to go through with this deal or else. >> it was my view and the view of the staff if they try to invoke the mac the market will understand the chances of their act we consummating -- of the mac being successful was quite low. and as a result, both merrill lynch and bank of america would be affected by a financial crisis at that moment and that was our concern. >> i now yield five minutes to the gentleman from ohio, congressman kucinich. >> chairman bernanke, our investigation reveals staff at the fed quickly came to the conclusion that ken lewis's representation to the government and the meeting of december, 2008 were as one put it,
somewhat suspect. at the appropriate time going to insert into the record a number of documents that show that senior staff and officials at the fed believed in contradiction to ken louis's representations' that bank of america failed to do adequate due diligence in acquiring merrill lynch. the fed found bank of america had known about accelerating losses at merrill since that november when shareholders could have used the information to decide on ratification. your colleague doubted the competence of bank of america's top management to address the problems at merrill and bank of america writing to you and i quote, spoke with folks this morning, mostly joe price, cfo, did not instill a ton of confidence that they have got a comprehensive handle on the situation, and of quote, and the senior lawyer at the fed believed the bank of america could be in violation of security laws for failing to inform shareholders about the
merrill loss is known in the mid november. this was writing to you, quote, lewis should have been aware at the problem at merrill lynch earlier. perhaps as early as mid november and not caught by surprise. that could cause other problems for him and around the disclosures made for the shareholder vote, and of quote. chairman bernanke, did you agree with your senior staff and colleagues at the fed who had drawn those unflattering conclusions about ken louis's managementt bank of america? >> the staff and principles of the fed had serious concerns and questions -- >> did you have serious concerns? >> i did have questions but that -- >> about the characteristics? >> yes. >> our investigation also finds there was considerable interest of the staff level in the fed to attach meaningful conditions to whatever aid package you gave bank of america because doubts about the quality of management at bank of america. however, it's not evident you,
it yourself had an interest in increasing accountability of bankamerica's management and in talking points prepared by your staff or confirmation you would have with bank of america a number of restrictions seriously proposed to accompany any federal aid to bank of america. i would like to go through some of these suggested conditions and assess whether you in fact opposed those conditions on bank of america. did you require any changes in bank of america's top management in view of the considerable evidence by your staff that can if lewis had in the done adequate due diligence and may have committed securities fraud? >> subsequently to the transaction we have asked and required think of america to look at top management and the have made changes in the board. >> was that age yes or no? >> the answer is yes, we have done that. >> do you require more severe economic executive compensation limitations for bank of america than had been required und