The Federal Reserve sought to hide its involvement in Bank of America Corp's acquisition of Merrill Lynch as Merrill's financial condition worsened, the top Republican on the House Oversight and Government Reform Committee said on Wednesday.
The Fed engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies, Representative Darrell Issa said in a statement released to Reuters.
Bernanke has in the past denied any inappropriate pressure on Bank of America. Fed spokeswoman Michelle Smith on Wednesday referred to a letter Bernanke sent Representative Dennis Kucinich on April 30 and later testimony in which he offered an unconditional assertion that he did not ask Lewis to withhold information regarding Merrill.
The Federal Reserve acted with the highest integrity throughout its discussions with Bank of America, Bernanke wrote to the Ohio Democrat, who chairs a subcommittee on the Oversight panel.
The Democrat who heads the committee, Edolphus Towns of New York, has called Bernanke to testify Thursday. I am not going to prejudge these issues. We are not even close to finishing the Bank of America-Merrill Lynch investigation at this point, Towns said in a statement.
Democrats on the panel have focused on whether Bank of America CEO Ken Lewis illegally misled investors about Merrill's finances, while Republicans have zeroed in on whether the Fed and former Treasury Secretary Henry Paulson inappropriately pressured Lewis to seal the deal.
The issue has become a political football as lawmakers look to blame someone for the troubled deal amid taxpayer anger over the billions of dollars the government infused into banks to try to ease the world financial crisis.
A Democratic source close to the committee said Republican members leaked documents just before the hearing where Lewis testified. They framed the story by looking at only a few of the documents, said the source, who was not authorized to be quoted on the matter.
Some Democrats believe Bank of America's Lewis had to know about Merrill's deepening losses and that Lewis was threatening to pull out of the deal as a way to get more assistance from the Fed. Still, the Democratic source said, The Fed does not come out smelling like roses.
Earlier this month, the same panel questioned Lewis about whether he was pressured to complete the deal with Merrill, which lost $15.8 billion in the fourth quarter of 2008. Lewis told the lawmakers that Bernanke never asked him to keep secret any information the bank wanted to disclose to shareholders.
The committee has obtained a number of emails and documents from the Fed about its behind-the-scenes role in the merger, which was quickly brokered late in 2008 amid turmoil in the U.S. banking sector, according to sources familiar with documents. The sources declined to be identified because they were not authorized to speak publicly on the matter.
The sources said documents showed the Fed tried to keep some information about the Bank of America deal secret from the Office of Comptroller of the Currency, the North Carolina-based bank's direct regulator, and from the Securities and Exchange Commission. The bank is also regulated by the Fed.
That behavior raises important questions about whether the Fed can work collaboratively with other regulators and should gain additional power, as proposed in the Obama administration's financial regulation plan, the sources said.
Documents obtained by Republican panel members suggest that the Fed pushed Bank of America to complete the deal by threatening to fire Lewis and the board, according to the sources.
They cited a December 20, 2008 email in which Jeffrey Lacker, president of the Richmond Fed, said he had spoken to Bernanke about Bank of America potentially trying to get out of the deal by claiming that a material adverse change (MAC) had occurred.
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.
Bernanke's term as Fed chairman expires in January.