tv [untitled] CSPAN June 28, 2009 4:00pm-4:30pm EDT
destabilization of the company in the event of a financial crisis. i can say the other agencies were in sympathy with the idea of trying to stabilize the company but at that point there hadn't been any specific transaction late on the table so there was no agreement on the specific shape and structure of the transaction. >> i'm going to have to sneak this and and a mouthful of you would respond because my time is about up. when and how did you learn mr. lewis threatened not once but twice to invoke the mac and back out of the merrill lynch deal and to what extent were you concerned and did you have conversations with secretary paulson that that would sort of unravel a lot of things therefore we had to accelerate the t.a.r.p. funding for b of a and did you take it or did secretary paulson take it as an implied threat if i don't get that line going to go public and let everybody know we are pulling out of the deal?
>> when i first heard about it on december 17th i took that as a possibility i was concerned about but subsequently i thought as i said mr. lewis was genuinely uncertain how to proceed. >> mr. chairman, my time is up i want to say on the record while some one this narrative to be some one this narrative to be this poor >> my time is up. i thank the chair and chairman. >> you have now five minutes to the gentleman from tennessee, congressman duncan. >> thank you. thank you very much mr. chairman. many articles and columns have described the actions taken by the fed in regard to the bank of america, merrill lynch dealing and other dealings of that time
period as being -- following too big to fail policies. would you describe your activities in that time period as -- in that way and do you think there needs to be more control or more -- little closer oversight by the fed and other federal regulators of the biggest banks and financial firms? >> yes, i do to the last part. too big to fail is not a policy, it's a major problem, we were faced on numerous occasions in the last year with large firms whose failure likely man would significantly disrupt the world financial system and economy. we had no good options to deal with those companies. it's extraordinarily important as i have said for some time as congress reforms the financial regulatory system we develop a resolution regime for resolving failing critical firms, increase oversight and take steps to make sure too big to fail will not be a problem in the future. i agree strongly with that.
>> let me ask you, i have read many articles over these last few months and seen all different sorts of figures as to how much money in total the fed has loaned, pledged, paid and all the different bailouts. would you tell us what you believe those total amounts to be that the fed has committed over these last few months. >> in terms of bailouts, the amount of money we have involved in a.i.g. and bear sterns is about $100 billion. >> in other actions, what other actions did you take? i've seen figures as high as -- like 2.2 trillion. >> the balance sheet is 2.2 trillion but more than half of that is u.s. government bonds and guaranteed mortgage-backed securities which have no risk and are supporting the mortgage markets of the united states. a good portion of the remainder is short-term collateralized loans to financial institutions which are very safe and help to provide liquidity to support the
financial system. none of that would i characterize as a bailout other than monies involved in a.i.g. and bear stearns which we got involved with in great regret and i hope the system will be changed so that will never be necessary in the future. >> congress daily said it this morning that fed officials purposely declined to consult with other federal regulators. one e-mail expressed concern an s.e.c. employee quote knows something is up. the journal reported and you mr. paulson attended two weekly meetings of the financial stability oversight board and refused or declined to disclose the seriousness of the problems that were being faced by the bank of america and merrill lynch at that time. what would you say to the majority of this congress who has now co-sponsored the bill to require audits of the federal reserve? do you feel that the federal
reserve is operating with too much secrecy and too much refusal to disclose information that you have to other federal banking regulators? >> the federal receiver has made enormous strides in the last year and under my chairman sin we have expanded information rerelease. we release monthly information on all the programs we have. we have developed a web site and a monthly report that involves all kinds of information. we think we are quite transparent. we are happy to work with congress if they have further concerns about any of our programs. we are more than happy to work with to you make sure you are comfortable that they are well-managed and are serving the public purpose. >> do you think it would cause problems for the fedor for the economy if that legislation was to pass? >> my concern about the legislation is if the g.a.o. is auditing not only the operational aspects of our programs and details of the
programs but making judgments about policy decisions, that would effectively be a takeover of monetary policy by congress, a recomputer yaition of the independence of the federal reserve which would be highly destructive to the stability of the system, the dollar and our national economic situation.. >> thank you. >> thank you very much. now i yield five minutes to the gentle woman from ohio. >> thank you thank you, mr. chairman. chairman bernanke, welcome to this committee. i am very concerned about those who create money in our society and how we hold them accountable in those who counterfeit, if we find them, they go to jail for a long time but to those who credit wrait money in sophisticated what's through our system and then do great damage, sometimes they are more difficult to apprehend and
prosecute. today i would like to explore the relationship between the bank of america, merrill lynch, and a firm called black rock that went public in 1999 after its founding about a decade earlier. let me say i'm also concerned that there may be some clever foxes in the henhouse over there at the fed as our nation proceeds to dig out of this housing collapse which still continues in regions like my own and hold those truly responsible accountable. now, as i understand it, the bank of america acquired merrill lynch last september but at the time of that acquisition, because of several relationships, bank of america actually also bought black rock which now owns the near majority share of bank of america. recently, the -- that had to do with the interrelationship between black rock and merrill lynch as you know. recently the fed just hired
black rock to execute at least four contracts and maybe five to analyze and handle the troubled assets of freddie mac and fann fannie mae, making black rock the dominant player in pricing these distressed assets. i am concerned that black rock and its chief executive officer mr. fink may not be fair and impartial in conducting these responsibilities because they in fact have been heavily involved in inventing, creating and trafficking in those instruments for most of the last two decades. indeed, doing the risk analysis associated with them and selling billions of them to the government of the united states. so one of my questions, mr. bernanke, is do you know in what year mr. fink sold his first trench of mother-backed securities? the first was a girlon dollar.
do you know what year that occurred in. >> i do not. >> do you think that's important for you to know? >> no i don't because arrangements we have with black rock and other asset management companies are carefully set up to prevent conflicts of interest, to set up fire wals between the portion of the company that is working for us and the portion that is engaging in other market activities. >> do you know what other instruments black rock and its subsidiary sold to the federal government over the last ten years? >> you do not? i would say it's pretty important for you to know some of that because one of the difficulties with securities is you can't unwind them, you cut them up in pieces, sell them off and given what we know about these pools of toxic assets, i have to say that i ask whether the fed could actually be in collusion with mr. fink in covering up his own potential fraud by giving him the
opportunity to shift the portfolios and have access to information that no one on this committee has access to in ways favorable to those clients he served and in ways favorable to that company today. how can we assure ourselves that is not happening? >> we can provide you with the contracts we have with black rock and they involve very careful controls, make sure there's a operation between the parts of the company that are working, managing assets with the fed according to our instructions and the other parts of the company that are involved in a variety of asset management activities. >> you know, mr. chairman, when you appeared before the budget committee, i asked you for those contracts and i want to thank you because they were finally placed on the web site of the feds. however, the contracts that were place there had have multiple exhibits missing. for example, the investment guidelines are absent. except for one single statement
of policy objectives, fee schedules and payments are omitted along with the designated representatives of the federal reserve bank of new york as well as key personnel. given that you are using taxpayer dollars to pay these contracts, why only mitt the fee schedule and payment procedures? >> we have a committee that works through all these different types of information, some of which is confidential and releases all that it believes is appropriate but i will go back to talk to them to make sure they are looking at all those issue. >> well, i'll tell you the housing crisis is at the heart of this crisis and if we're going to fix what's gone wrong in this society it seems to me those who hold extraordinary power to create money and certainly the new york federal reinvestor has more power than any regional reserve bank does or people who live on the street that i live on where homes are
being foreclosed as we sit here. something went seriously wrong and i hear was said this morning but i am deeply concerned that the fed itself is involved in the manipulation of the markets, of the mortgage markets, particularly the toxic assets the public of the united states now owns and i am not convinced what you have said to me about the contracts at the fed has signed with black rock will be properly administered in a way that would be fair and impartial to all holders. i hope you can provide information to the record to convince me my suspicions are unwarranted. >> time has expired. congressman from indiana. >> thank you. i think that there was some prediction as you went into office that it was going to be a
relatively activist fed and i think that you have certainly been an activist fed. do you see in the descriptions as we look at these e-mails and i think cases can be made that there was a certain feeling of intimidation at b of a and at the same time they tried to leverage their best game. do you see how you got involved here if something extraordinary in the sense of you felt the system was collapsing or is this going to be a repetitive pattern of the fed? obviously we -- >> could you talk directly who into the microphone. we are having difficulty hearing you. >> several other times, whether it be the asian flu or various mini-crisis, had you been fed chairman taken this aggressive a role? >> the past two years has been the worst financial crisis since the 1930s, threatening the stability of the global system and global economy,
extraordinary actions have had to be taken. we have learned a great deal and as i said in my testimony, i hope the congress will take actions to ensure the system remains stable and that no such actions will be needed in the future. i very, very much regret being involved in them but i saw no alternative at the time. >> how do you see yourself extricating at this point, given the fact that you have been fairly political liesed, your treasury is directly political, you have quasi-political entities you work with? now in directly in t.a.r.p. and t.a.r.f. and all the different programs, we have equity stake in companies. how do you get yourself un29ed from this so you are not political liesed. >> we work cluesly with the treasury. as the crisis enth, we will withdraw all our nonstandard programs we saw a couple weeks ago that ten banks repaid their t.a.r.p. money. we'll expect to see as we go forward more withdrawal of
programs and support as the economy normalizes and the financial system normalizes. >> do you see yourself because in this particular case part of the problem was that bank of america moved into the nonbank sector with merrill lynch and that about 40% of our lending and as you know one of my challenges has been recreational vehicles and autos and how we get money into floor plans and how to do that type of things. most of that was a nonbank sector. how do you see the fed in the future dealing with this nonbank sector which is is not normally where you would be. >> there are suggestions in the administration reform plan and others for dealing with that. certainly the extraordinary steps we've taken, for example, to revitalize asset-backed securities market, we are seeing a lot of progress there, we will certainly withdraw and not be involved with that further. >> do you see yourself or see
the fed in the future being -- i mean we've gone back and forth here. sometimes as one independent said, sometimes we're saying you're all the government, you ought to be sitting down at one table to work this out. where do you see the fed going, based on this experience, and getting increasing -- i don't see in the short term you are getting less political liesed because you're getting in the middle and everybody is asking you to do this and that? >> i think the american people expect their government to work together to try to serve the problem. we have worked closely with both the former treasury and current treasury as well as other agencies and that's relevant to the crisis. we have maintained very strong independence on monetary policy that's critical going forward. we expect, of course, as the crisis eases to stand down on the financial crisis-related policy. >> agreeing that we were in deep
trouble last fall, how would you -- because some of your expertise is deinflammation and sometimes when it's your expertise you have a tendency to anticipate, in this case i think we have proven we have had deflation but you projected it would happen before and it did not. how would you have a guideline that says, oh, we'll have these extraordinary interventions? how did you determine that this was the greatest thing and the greatest crisis since the great depression when it wasn't there yet? >> well, it was my judgment, based on history, lots of research and reading and thinking and experience, that the collapse of major financial firms can be very detrimental to the economy and if there was any doubt about that, the failure of lehman brothers and the near failure of a.i.g. should put that to rest. i think it's critically important going forward we find measures to avoid such a situation in the future and i would very much like, again, not
to be involved in such activities. >> you have outlined the challenge because some feel that some failures would have cleansed the system, some believe they would have brought down the whole thing and in fact this debate has occurred probably at least five times in the last 15 years as to whether we were at the precipice and the question is if it will lead to this much intervention every time there's extraordinary discretion in a few individuals to say this is -- i'm not disagreeing on this one, i voted every single time with great political duress for each of the financial interventions but the process here concerns me and the more data we get the more it concerns me. >> again, if we have a resolution regime that would be more appropriate for resolving firms in a crisis we can avoid this in the future. >> your time has expired. now your five minutes to the gentlemanwoman from california, congresswoman watson.
>> mr. chairman and thank you mr. bernanke for coming here. i'm going to give you a series of events and i'll give you a list of questions and you can answer them altogether. first, despite the fact that the plan for a merger was announced on september 15 of 2008, there was no mention of the $20 billion capital injection from the government until january 16. at what point during the negotiation between bank of america, merrill lynch and the federal government, was it determined that this money would be necessary for the merger to be finalized and then given that as of january 16, merrill lynch's projected losses for the fourth quarter were approximately $15.3 billion, how is this sum of the $20 billion
agreed upon and finally in this set of questions to date, how much of this money has been drawn down and how has it been used. >> well, at the time merrill lynch and b of a announced the merger agreement in middle september this was before congress passed the t.a.r.p. law so there had been no capital injection or expectation of injection. both merrill lynch and bank of america received capital in the middle of october during the intense phase of the banking crisis. an additional $20 billion was injected as you say january 16, that was based on a review of what the supervisors and the other experts of the federal reserve believed would be sufficient to reassure the market that bank of america would be stable going forward, they have used that capital to support their activities including lending, and they of course are repaying the government dividends.
they hope to repay at least part of the t.a.r.p. in the future. >> i am sure this might be the experience in other members' offices. i represent a district out in los angeles and we get calls every day, up to 10 to 30 calls, people who have gone to the bank and they're not having their loans restructured and i am very curious about where that money went when it went into the system. it's like trying to unscramble eggs but i know that the consumers and owners of property are not being assisted with refining their loans. let me go on. in testimony before the committee on june 11, bank of america ceo ken lewis claimed that the revelation of a $12 billion loss at merrill lynch on december 14 of 2008 caused him
to consider invoking the material adverse effect clause, referred to as mac, to back out of the deal nine days after shareholders had voted to approve the acquisition, however, in an e-mail on december 19, the bank supervision office of the new york fed, tim clark, stated lewis's claim that they were surprised by the rapid growth of the losses seemed somewhat suspect. chairman bernanke, given that shortly after the deal was announced in september, bank of america has installed 200 people at merrill lynch to thoroughly review their books, do you believe that mr. lewis was honestly surprised by the acceleration of losses? >> i have no way of knowing. we did have concerns about the quality of the due diligence but i have no direct evidence he was in fact informed about the loss.
>> 200 people were installed at merrill lynch so that seems like they were going to dig very deeply, you know, somewhere the due diligence kind of fizzled out. i just think that bank of america's due diligence was not as thorough as it should be. do you believe that there were insights into merrill lynch's books that the government had that bank of america did not? >> i can't answer that with certainly. we would have had some information about merrill lynch because we were working with the f.c.c. to supervise it after we began lend to go investment banks but i don't think that we had knowledge of the size of the losses either. i'm quite sure we did not. >> all right. mr. chairman, i'm going to try to make another statement or questions and if the time runs out, i would ask mr. bernanke to
give me his answers in writing. in an e-mail on december 20, the president of the federal reserve bank of richmond, jeffrey lacher described a telephone conversation with you where you expressed the belief that the m.a.c. threat is irrelevant because it's not credible, and that you plan to make it even more clear that if they play that card, and then need assistance, management is gone. so do you remember the phone call with mr. lacher that the e-mail was referring to and do you believe that mr. lewis' claim that he would invoking the m.a.c. in back of his deal were credible and had the bank of america decided not to complete the merger would the fed have pursued the removal of their management and board and had the fed ever taken action to remove
the management of a private entity before? do your best and -- >> i was concerned initially about whether this was a serious proposal to invoking the m.a.c. because i did believe it would be very detrimental to b of a as well as for the financial system. i never made any threats to mr. lewis regarding removing the board and the management. one example of where the federal rer reserve removed management was a.i. g where there was an agreement the c.e.o. would be replaced upon the consummation of the loan we made to stabilize that company. >>. >> the gentlemanwoman's time has expired. >> thank you, mr. chairman. >> congressman mchenry from north carolina. >> thank you. chairman bernanke, thank you for your testimony. i know this is certainly not easy to recall what happened in those very, very busy days of the fall and you certainly had a very challenging tenure with the
federal reserve, you did not come in in easy times so thank you for your service to your country. during your testimony in front of financial services which i'm on, in your numerous comments, you worked very closely in the fall with the former secretary of the treasury mr. paulson. correct? >> that's correct. >> in some testimony, some comments, almost daily or hour-by-hour conversations, throughout the fall with your counterpart there. >> daily, certainly. >> with then-new york fed head tim geithner you also had significant involvement with him on a very regular basis. is that true? >> that's correct, yes. >> so the combination of the two, in context of this event,
this controversy that we're analyzing today, did you have conversations with those two about bank of america? >> i had conversations with secretary paulson who of course was the treasury secretary at that time and we talked about the plans, for example, of how we might construct a package to help bank of america avoid being destabilized. at that point president geithner had already been designated as the treasury secretary nominee and therefore he recruised himself from detailed intervention or involvement in such transactions. we did give him basic information so he would be informed but he was not involved in the details of the package that was put together for b of a. >> so he was not directly involved and recused himself
because of confirmation hearings and the potential of going from the fed to the treasury and the conflicts that would pose. you know, did you have conversations with mr. geithner to give him -- to keep him informed of what was going on? >> i did. >> okay. there was a e. mail from tim geithner on december 20 at 8:02 in the morning. are you all over b of a/ml and are you getting what you need from the troops? this was to kevin roersch. now, this e-mail sort of raises to me that while mr. geithner was concerned, and we have another chain here that says that he's basically washed his hands in concern for potentially tough confirmation hearing, makes sense, but seems to me that he was all over this.
is that your impression? >> no, my impression was he was informed about the general situation but i would assume that what he meant the troops he was referring to the staff at the new york fed where he was still the president. but i should say to the best of my knowledge, he was not involved in the detailed negotiations that developed the package for bank of america. >> you know, in an e-mail, we know from a subpoenaed e-mail from the fed that mr. geithner was, like you said, aware, and was at least aware of an ultimatum to ken lewis as well. he says can't m.a.c. have to close. there's also notes from bank of america with the c.f.o. mr. price who said fire b.o.d. if you do it, meaning the m.a.c., tim g agrees. so it seems that he ve