good morning and thank you for being here the committee's investigation into bank of america's acquisition of merrill merrill lynch has resulted in an unprecedented look behind the scenes one of the biggest bailouts in american history did the federal government forced bank of america to go through with the merger every bank of america a senior executive involved has told the committee that the government did not force them to go through with it in fact they told us they decided to go through with it the deal because they thought it was in the best interests of bank of america and its shareholders kinloss also testified that no one in the government did anything in proper doing this transaction there are still people who want to say the government forced bank of america to go through with the deal they are turning a blind eye to the facts we now have before us over the course of this eight month investigation the committee has held five hearings received extensive testimony from top executives at bank of america and senior government officials conducted numerous interviews issued to unprecedented subpoenas to the federal reserve for internal records and reviewed nearly half a million documents most importantly public scrutiny and oversight by this committee has produced tangible results today two days ago bank of america paid back its entire forty five billion dollars federal loan plus interest in addition under pressure from the committee bank of america agreed in september to pay four hundred twenty five million to the treasury department in compensation for toxic asset insurance the bank we see but never paid for and some are bipartisan investigation has resulted in the american taxpayers receiving approximately forty seven point five billion dollars even in today's world that is real money and every member of this committee should be proud of our efforts and i take the time to salute you for your hard work and it's been great to get to this point while we have thoroughly examined all these issues involved in this case i greed to grant the ranking members requests for one more hearing to tie up some loose ends that he is concerned this will close the committee's food and a successful investigation of the make of america merrill lynch emerges on that note i thank you and i yield to the ranking member of the committee gentleman from california congressman i thank you mr chairman and thank you for holding this hearing i have already told the chairwoman that quite frankly i do believe she's the book end of this investigation she's the book and because tim geithner has never appeared before us she's the book and because in fact there never really was much there their bank of america is a regulated bank moneys were made available on an extraordinary bases that have now been paid back today in the short time that we will take of the chairwoman we would we in the minority will ask where do we go from here the security of our banks f d i c insured banks the future of banks conveniently becoming banks when times of trouble and perhaps not being banks in other times these are important questions that this committee should ask not because of the financial services committee but because because we are the watchdog of the american dollar and the american process and the laws that are passed that the executive branch and its affiliates must adhere to chairman i'm deeply concerned that in your opening statement you quite understandably said that the american people were paid back forty seven plus forty five billion with interest over forty seven billion i must caution you the american people didn't get a penny back that money is not come back to the american people in fact it's simply been put back into the slush fund that was created under a republican president with tim geithner and hank paulson's assistance and today in fact not a penny has been paid back the american people that my he is being recycled into do good product causes or whatever the president in this administration would like to do to mr chairman i look forward to us getting the american people's money back as it was promised we were told that in fact we would be paid back all of our money and probably with interest the chairman unless that money comes back immediately when you look at chrysler general motors and of course thirty one plus billion dollars to the tim geitner him self has now said we will not get back it is clear that even if all the other moneys given to various organizations through a process of buying mostly preferred  debt if in fact all of that is paid back with interest the offset of the money that we now know we're going to lose would barely make us whole without considering interest as anything other than principal payback so  chairman this is the book and we have only a few questions for our steam witness and we appreciate your bringing her here today but this is not the end of protecting the american people's money not the end of this committee's jurisdiction  ensuring that the intent of law becomes the fact in law without i think the chairman you know back i think the gentleman for his statement and it may be what we can do is that with some of this forty seven point five b n that use it to create jobs ranking member said very very quickly very quickly i just want to make never know there are members of the side of the aisle who share his view about the need to address the deficit and that the press the obligation of the repayment of tarp money or the use of unused the shareholders of bank of america voted to approve a merger merger with merrill lynch only twelve days later ken lewis c e o of bank of america made a call to vent secretary of treasury hank paulson initiating a process that le to a twenty billion dollars bailout of the merger and a promise of government insurance for losses up to one hundred eighteen billion dollars the chronology of events strained belief was it true that the financial situation in maryland shifted so dramatically in that short amount of time as can those set or did top management know or should they have known about the deteriorating situation at merrill lynch much earlier that they failed to make necessary disclosures to shareholders bank of america would be in legal jeopardy if it failed to disclose to shareholders information about large accelerating losses at merrill lynch known or knowable before the shareholder vote the domestic policy subcommittee investigation has found evidence of possible security laws violations at bank of america bank of america unreasonably and negligently relied on internal fourth quarter oh wait for cash created by merrill lynch that omitted any forecast of how the s and other toxic assets would perform during the quarter the former merrill c f o admitted that this forecast was not in fact a valid forecast bank of america knew at the time that the forecast was of questionable validity however bank of america did not do any actual financial analysis to make up for the merr emissions instead bank of america merely pulled a number out of thin air which was recorded on a forecast as the gut feeling of neal qadi bank of america's chief accounting officer bank of america simply create an assumption that merrill lynch's illiquid assets were almost breakeven for november thereby spreading october's bad results were too much the attorneys at bank of america didn't walk to lipton recklessly did not question this financial information they advised bank of america not to make for the disclosures to assure holders based on the deficient forecast and the gut feeling within only weeks however reality crowded out wishful thinking merrill lynch's exotic investments continued to lose large amounts of money causing merrill to lose over twenty one billion in just the fourth quarter bank of america went running to the u s government for rescue when i asked can lewis about this at our first hearing he told us that he relied on advice of counsel protecting shareholders is often in the final instance the responsibility of corporate general counsels and their outside counsel the subcommittees investigative findings to man the question where were the lawyers where were the lawyers the glaring omissions and accurate financial data in the critical november twelfth forecast so obvious that they should have been a should have alerted the attorneys in this just city of reasonable investigation before making a decision bank of america's legal duties to disclose the apparent fact that they did not mount such an investigation makes the decision not to disclose merrill's l shareholders and egregious violation of securities laws the stage for these possible violations was set by former f c c chairman christopher cox at exactly the time that she dio c d s and other exotic instruments proliferated in financial markets chairman cox discouraged formal investigations of and large corporate penalties against securities fraud stars bank of america's conduct was the corporate reaction to years of weakening and fortune at the  under chairman cox chairman shapiro's made efforts to turn in force and policy around well i applaud the f c c for enforcing the law in the case of the non disclosure of the merrill bonuses bank of america failure to disclose accelerating losses at merrill lynch before the shareholder vote is more significant in those undisclosed losses toward the amount of undisclosed bonuses the reliance on counsel defense asserted by ken lewis raises the broader question will the securities and exchange commission allow corporate management to rely on the advice of counsel defense and then allow the counsel to avoid liability for their advice the investing public and now this congressman wants to know where is the s e c as of yet we don't know there must be limits to government action even in a time crisis and those limits must be respected must also keep in mind that the actions of government officials in this merger occur after many of the nation's banks were forced to accept taxpayer money through the tarp program we know that not to over two banks in exchange for an amount of money of the government's choosing to look forward to learning more about mrs berridge role in that meeting and this entire affair this investigation has occurred to reveal and continue to reveal the unintended consequences the negative implications of the government's unprecedented intervention in the private sector i hope the congress will apply these lessons as we continue to debate the appropriate regulatory framework for our financial system as we move forward with that mr chairman thank you on your back big very much  now live to witness we have with us today to cheer federal deposit insurance corporation mencius longstanding tradition that we swear all of our witnesses and if you would stand and raise your right hand provide assistance to bank of america let me note at the outset the bank of america is an open institution and the f d i c is very sensitive about any discussion of the condition of open and operating insured depository institutions in over the course of time it was clear that officials from the federal reserve and treasury believe that systemic risk would exist absent an agreement by the government to provide assistance to b of a on january fourteenth two thousand and nine the f received from the federal reserve a draft term sheet describing an assistance package the principal elements of which were a capital infusion in a transaction where the f d i c treasury and federal reserve would share in a guarantee against certain losses otherwise known as a quote ring fence and quote transaction the f d i c continue to analyze where and how much the exposures were and how that specifically impacted the f d i c the f d i c board ultimately was persuaded t condition presented a systemic risk and that the ring constrains action would mitigate that risk and the risk to the deposit insurance fund in a cost effective manner the transaction also limited the f t i c s risks to a small portion of the covered exposures recognizing the fact that most of the exposures resided with in the investment bank and not the insured depository institution on january sixteenth two thousand and nine the plan treasury caplin pugin and the treasury said f d i c ring transaction were announced in early may two thousand and nine b of a asset the ringfence transaction not be completed moving forward we have worked continuously with congress the treasury and the financial regulators towards creating a more resilient transparent and better regulated financial system one that combines stronger and more effective regulation with market discipline one of the lessons we have learned over the past two years is that regulation alone is not enough we need to establish an effective and credible resolution mechanism to ensure that market players will actively monitor and keeping firm handle on risk taking we commend you and your colleagues in the progress you have made in moving towards providing the regulators with the tools to effectively deal with any future crises thank you and i will be pleased to take any of your questions thanks very much for your statement and let me just say to the members we'll be really tight on the five minutes to day because five minutes really means five minutes which means five minutes question are there steps you think congress can take to avoid future bailouts of the banking industry yes i think we have put a very high priority on a robust resolution mechanism we have  insured depository institutions and when smaller institutions start to fail they are put into a very severe resolution mechanism that requires shareholders and unsecured creditors to take a loss generally complete loss for non bank entities or activities outside of banks this resolution authority does not apply and we think something very similar to the f d i c process which is shareholders and creditors take losses not the government is very important and we think  just a series of short questions first of all from the standpoint of the f d i c looking back now wasn't forgetting about whether the merger was a good merger the mack all the other things that this committee has worked on wasn't the underpinning of the additional money preferred stock in as a form of loan wasn't that in fact the most appropriate thing for the f d i c to approve of so that the capital worth of bank of america would be that in retro in hindsight it's clear they didn't need it because they paid it back to you essential e without it being from actual new money in any large amount they passed the stress test they passed the stress test said they could pay it back so i know that part of hindsight is clear but the real benefit of the forty five billion dollars of loan and i repeat it was not it's not you know we didn't bail them out we didn't give them anything we bought stock we bought the worth of the company and we got interest guarantee and the ability get our money out ahead of everyone else preferred stock is not all bad but the effectiveness of it was to if you will over capitalize the company in rain hindsight but wasn't that essentially a good thing in that if there was no other benefit to tarp the confidence of knowing that these companies particular banks were extremely well capitalized not as to the stock holders but as to the depositors wasn't that effectively the good thing that came out of this arrangement well i think yes the capital investment certainly created a fortress c in the f d i c finds itself with its funds funds which are designed to ensure that we never have to actually put in taxpayer dollars those funds are stressed right now go when forward do you believe that in fact in the future people should be able to run to the f d i c run to being a bank when it suits them even if they hadn't been when it didn't suit them no i don't think  reform that you presently see on the horizon that would give you that ability next time to say you better be there early or not come at all well i think two things i think we need a robust resolution mechanism so in and get themselves in trouble they just for deposit insurance but for the bad lending facilities we have suggested that there needs to be a systemic risk council that would decide and have the power to say to an entity that became a bank holding company or perhaps later doesn't want to all the regulation that entails that german concerns that america another bank collapse no i but i think there's a lot of work at the needs to be done to continue the stabilization in the clean up and i think the regulatory reform efforts  there is an implied government backstop which which feeds into risk taking if shareholders and creditors think they have the upside and the government has a downside that is going to encourage risk taking we think that's a major factor that drove the crisis and again this is why i hate to sound like a johnny one note but we really need congress need to establish a very robust very secure resolution mechanism that tells shareholders and creditors they will take losses at these institutions that go down right now they're just happily you know  beating extending credit and making equity investments and i fear that they're not really doing their own due diligence in terms of looking at what's going on these very large institutions do they understand the rest are they understand is a management on top of those risks i don't think we have market discipline right now and we need that about the security of their bank deposits are very secure bet is one thing we have been very early on with a public information campaign the resolutions have been smooth everyone's deposits have been completely protected as they always have been so there is no question that the f b i see has resources to deal with whatever may come would you tell us what those immediate resources are to assure security deposits right well we are full faith and credit and we have a treasury line and a congressional a commitment to back  insured deposits and again that's been impact for seventy five years right now we have required prepayment of assessments that's going to bring in another forty five billion dollars at the end of the year which will bring our crash position probably in the first quarter to around sixty billion given what we already have and additional monies that we're going to be bringing in so i think it's a very strong cash position we can borrow up to five hundred billion dollars from the treasury to par i mean if we would need to do that i don't foresee any circumstance where that would become necessary  clear that it is our quote it it was clear that officials from the federal reserve and treasury believe this is some of the systemic risk would exist absence an agreement by the government to provide assistance to b of a that's really the point at which you came in but  true that the deal was already done prior to that time to to give them the money isn't that what we've essentially discovered i will tell you i know conversations are already occurred between the treasury and mr lewis prior to the time we were contacted i wasn't p conversations sure i don't i realise that that we've been very unfair to you in that you came in on the tail end of everything and only if something was a banker be about to become a bank holding company well let me follow up with this question in specifically in your role as f t i see chair if you had a choice and you were told what would you like to do when b of a said we're going to evoke the mac or give us more money it doesn't matter who said it but but that occurred wouldn't the f d i c is position in the future be go to congress or go to the tarp and bail out merrill lynch directly this if they don't want it and there's money needed and obviously that wasn't new management or consolidation in merger at all wasn't really go bail out merrill lynch do whatever you can do with mail at merrill lynch they're not a bank and why why should it be clouded with me isn't that essentially the f d a you in future chairs position that you would prefer well we think it's important to act as one government yes but i have my first job and foremost job is to protect insured deposits i can't with that time about a fifty billion dollars deposit insurance fund bailout the entire economy and everybody else with the resources that we have and i have to take sure that we have credibility protected person for most investment banks are not insured depository institutions and it would have been nice to have other mechanism is we're monday morning quarterbacking up here if there is anything that and since we've determined that chrysler and general motors qualified for tarp money if there's any mistake made it was this very lucrative merger th touting to be honest when faced with the dilemma it was a merrill lynch decision treasury paulson geithner they should have made a merrill lynch decision relative to instead what they do is a pushed it onto a bank holding company and a bank holding company then create would then had a systemic risk problem which fell to your doorstep and forty five billion dollars of taxpayer money albeit paid back in fact was put in pla yesterday this committee on a bipartisan basis moved for a common searchable platform although not x b r l which of course you use we mandated a common uniform platform with rigorous  structure so that there could be transparency either to those cleared or in the case of assets information available normally to the public directly to the public what is your experience and what would you guide us  experience and i would certainly offer i t people to give me more detailed briefing on that if you will but i mean last follow up question and i'll yield back do you believe that this committee is on the right track when we insist that databases be common robust searchable and interactive so that in fact when appropriate the american people can have transparency maybe at me in trouble with other agencies but if i could just follow that we've got a very positive experience i would encourage others recognize that the f b i sees role in the bank of america bailout was different than that of the federal regulators address rate and the federal reserve but nonetheless we have a responsibility to explore all aspects of this tainted transaction in a written testimony you know that the f b i see was notified of potential government assistance in the bank of america merrill lynch merger around december twenty first two thousand and eight you're going to say that over the next three weeks the discussion continued about bank of america's financial condition and the nature of the assistance to be provided you discussed the case with secretary paulson chairman ben ninety and others on january ninth two thousand and nine and were provided a draft term sheet on january fourteenth this is all correct i hope and i'm working from your own written testimony as i write this my concern is the fact that in past hearings in this committee we have heard about how says would be covered by the federal government i'm not asking you what happened in those meetings and i know you weren't there but what i'd like to address is this do you have any reason to believe it can lewis had sufficient bases extent we would and how that would take place whether was necessary based on your testimony the government regulators were still reviewing the bank of america positions and working on whether a deal with occur well into the new year certainly doesn't sound like regulatory policy and very impressive and i'm just just curious on on a in a broad context are you like i can a bit troubled frankly for me it's more than a bit troubled by this what i've called unprecedented involvement by the government in the private sector whether we're talking president ited states deciding who gets to be c e o of general motors whether we're talking about the fact that we now have in the united states of america something i thought i would never see but a federal government pays are telling private american citizens how much money they can make and bailouts and tarp and second stimulus coming in on and on again so just as  accomplished professional individual army are you nervous about this general direction and again this unprecedented involvement of the government in the private marketplace ab so lute lee and we think better tools needed for the government  deal with this in different ways going forward we're very much opposed to and i believe the house bill does this prohibits capital investments and banks and financial institutions going forward i think government ownership of financial institutions has created not only  a lot of public outcry and cynicism but also very difficult issues about back up what should be private entities and private sector decisions based obviously on some potential regulatory ten days later the nine biggest banks were brought to the nation's capital according to mr lewis's testimony mr paulson mr bernanke and you were in that meeting and mister lewis indicated he had no idea what the meeting was about  day the meeting went with a piece of paper slid across the table to be to the banks telling them how much money they were now going to take from the tarp program where they asked for it or not  that they had to sign a statement saying they were they were in agreement to that is his recollection of that meeting accurate and that in fact what took place again not ten days after we were told the congress the united states was told that the tarp program the money that was made available for something entirely different i was invited to attend that meeting i was not involved in decisions about who should come to that meeting and who was going to get what my role was confined to explaining the temporary we could have a guarantee program the debt guarantee program and that was the only the only remarks i made were to explain that program and i did not opine or comment at all on the capital investment piece we were not involved in decision making and we remain silent during that discussion but yes these banks were strongly encouraged to take this money going back to your first question were you were you troubled that day about what you saw taking place in it took my breath away and it was it was quite unprecedented in terms of the private sector system that that we have and so i was concerned and i had was that first time did you know what was going to take place in that meeting or did you come in that meeting much like we did we were told in advance who was going to come and that they were going to be asked to take or agreed to take capital investments we were absolutely told that in advance i did not weigh in one way or the other   that there needs to be more focus in terms of troubled asset relief we still have toxic assets on the books of banks particularly the smaller banks really did not benefit from the capital investments the smaller banks are a large share of small business lending but their need to continue to work out and reserve against these legacy loans that they have is inhibiting their ability to engage in new lending so we have we do think it would be appropriate and consistent with the troubled friend from ohio and he loves to use the phrase this federal intervention in the financial sector as if we didn't have the worst meltdown at seventy years a year ago september federal intervention by a republican ministration by the way what would happen to the banking sector in america where in europe i think it wasn't pretty it wasn't perfect i think in retrospect hindsight's always has additional wisdom so should we have invention that was designed this came from some pointy headed liberal academic from some ivy league college college it didn't come from a republican secretary of state a republican administration did it  businessman who was the republican appointed secretary of the treasury in a republican administration is that correct yes that's my recollection of the gentleman if the gentleman yield no i'm not going to you know let me ask you a question in your testimony you say that you've got wearing your f d i c had a direct interest in both bank of america and merrill lynch because they are depository institutions that correct that's right what well this is not sorry bank of america the bank is a deposit and sure to foster institution merrill lynch was an embezzlement bank i know but i'm reading from your testimony right ok and you assert that f d i c has a continuing stake in the financial well being of those insured right ok so what was the view of the f d i c at the time the bank of america proposed to acquire merrill lynch was that a good business decision or was that a risky business decision where you were aware of the fact that they had unprecedented losses by the way without unprecedented federal regulatory intervention well a couple of things we are not the holding company regulator the fed is and that we do not approve mergers and acquisitions the fed does we are also not the primary regulator for bank of america i understand and sure then we have backup supervisory authority so i think in terms of the more intimate knowledge of that situation would come from the  florida represents today that would constitute a major overhaul of regulation and for the first time finally allow some oversight of the risky derivatives market for example and and would would in effect extend some federal oversight and regulation of investment banking by any other name not many left that none of which existed previously in retrospect just given your financial expertise do you think we made a mistake to explicitly exempt derivatives multi trillion dollar market from any federal regulation absolutely that was that was a mistake so again this unprecedented federal intervention in the financial markets in the case of derivatives since there is no such unprecedented federal intervention at the moment maybe in retrospect we should have had some i think we absolutely should have had more regular idea to extend the f d i c and finance that extension by having the big banks have an extra fee rather than tax payers right yes we do support we have said that for banks and bank holding companies that have insure or institutions we would like to be the resolution authority for non bank we will let congress decide that and i think they've decided they would like one entity doing it all and yes we think that this should be a very robust resolution mechanism that provides no are doing which is right now we have backup authority only for insured depository institutions so activities outside of insured depository institutions like investment banking even though they might be part of a broader holding company structure we have no authority what are your plans to do that well unfortunately they have done a lot of it already we are implementing as one sixty six one sixty seven which basically requires a balance sheet exposures now be counted on balance sheet so you have to hold capital and reserve against them so we will be finalizing rules next week to make clear that you need to hold capital reserves from the regulatory capital that we will treat those on balance sheet assets on the derivatives area the o t c derivative think congress needs to act on that because of the commodity futures modernization act there is very little authority to provide product regulation or market regulation and we've been working with the f c c in the c f to strengthen that were generally but your comment earlier was also with regards to allow small banks are having to absorb some of these are part of the ripple effect of some of the big big guys here and are certainly under stress at this point do you have any plans and help them get over this we don't have park funds available to small guys and we don't have some forbearance for those folks they're the ones who are going to suffer disproportionately compared to what the other folks is and while it may not be a big deal to the folks who are concerned it's certainly going to impact a lot of community said for some of the things like your willingness on your part look at these situations on a case by case basis and say hey the rest of the bank has been profitable it's been under good management that just this one area is a problem therefore we're going to deal with this and work with  can you provide me with the number of banks that have i do not know that up the top of my head but i will certainly get it to you this afternoon when i get back to the office ok but but probably it's either none or more extremely few i would i would really need to check i'm sorry congressman but we've had about i think we'll have a hundred forty failures and it's very difficult to know state by state i will get that information back to you very quickly the fine the community banks in louisiana they did not involve themselves in the subprime mortgage mess and as such many of them were profitable in the past year some of the big banks have failed my question to you here is why are we making these small community banks who were successful who operated within the boundaries of the traditional loaning criteria they follow the rules while we making them pay for the fall of the big banks through this tremendous overhaul process well i i think two things i think you're right the or many banks julie did not make subprime they didn't make these high risk mortgages they didn't gauge in commercial real estate  lending some of that was not prudent a lot of it was it what they were good loans and they were made but because the economy they're going bad now and as the economic problems continue more and more the failures are driven by that but again banks must hold a certain levels of capital and then loss reserves against their loans and if their loans are going to have losses that exceed their capital capabilities they become insolvent or if they can't meet their liquidity demands of deposits to withdraw money and they can't have enough cash do that then they need to be resolved and that is again there's a fairly well defined procedure in our statutes to do that i think this is this congress you know again back to the conversation about the going forward in troubled asset relief i think this is right area for expression for smaller banks to provide some assistance for continued need for troubled asset relief for the smaller institutions and we'll be very strongly supportive but our statute does not allow us to provide open bank assistance to large or small institutions again unless it's under this very near as a democrat seems to me that the small banks would be penalize for the actions of bigger but i think i am greatly troubled and i have spoken out about this for a long time of the disparate the different treatment in large and small and the very large at the tarp money and and get the support and the small ones get close i don't like that going forward i'd like to close a big one too i mean i think that's really if we're going to have a free market system not a free for all system to free market system i think going forward the resolution regime needs to be able to work for small and large institutions and right now can only work for the smaller ones but the immediate problem you're right it's not fair and we have said that tarp needs to we need to figure out a way to make tarp work better for the smaller institutions and i again look again with troubled asset relief not so much capital investments i think that's a problem but troubled asset relief providing support there to help them get rid of these bad loans so they can make new loans i was very supportive of that and work with treasury work with congress on trying to make this progress more effective can you explain to me i agree with you that the big the big banks institutions that were involved in the subprime mortgage loans we need to have a better mechanism of overseeing their operations can you explain to me how regulating these smaller community banks that are already lead by state law how would that improve our country's financial help when they have been profitable when they have been following  supervision and that's been the case for over seventy five years i think moving forward my concern from a supervisor respective with the smaller banks is helping them diversify their balance sheet because of an evil  playing field between small and large and small institutions as well as mean insured depository institutions and the shadow sector the non bank sector community banks have been relegated primarily to commercial real estate lending and small business lending and they provide good support for their communities in those two areas but they have not they don't have much diversification they got the loan the mortgages taken away from them a lot of consumer credit taken away from them and again a lot of that has been driven through an unlevel regulatory requirement so going for recess until ten minutes after the last  ninth of this year thank you for the opportunity to testify on behalf of the f c c regarding bank of america's acquisition of merrill lynch the committee's invitation to ask about the litigation against bank of america because the  t action is ongoing discussion of certain aspects of this litigation pose a risk of negatively affecting our case i am happy however to discuss elements are part of our publicly filed court papers the complaint in our case concerns in november two thousand and eight joint proxy statement that bank of america and merrill sent to their shareholders so that's a shareholder approval for bank of america's acquisition of merrill complaint alleges that the proxy statement  to its executives prior to the closing of the merger without bank of america's consent bank of america however failed to disclose that it already had consented to merrill's payment of up to five point eight billion in discretionary  other bonuses to merrill executives that complaint alleges bank of america's omission of the information rendering the proxy statement misleading and false at the time we filed our complaint the commission submitted a consent judgment for the court's consideration under which bank of america agreed to settle on terms that included payment of thirty three million dollars and an injunction from further proxy solicitation violation the judge declined to approve the settlement and the litigation is the ongoing the judge's decision has not affected our underlying which is set for trial in march of next year we stand by our charges and have the additional discovery available in the litigation to further pursue the facts and to determine whether or not additional claims are in determining how to proceed we will as always be guided by what the facts warrant and the law provides with regard to the we believe it was misrepresentations or it also clearly communicated to shareholders and the public that management had failed to keep the company in compliance with securities laws and undercut the position by bank of america that there was no legal requirement to disclose such information important would have been achieved in a way that did not place an under the burden on shareholders although a thirty three million dollars penalty is a significant amount it is not likely to have had a material adverse financial impact on individual innocent shareholders given the billions of shares of bank of america stock that outstanding you have also asked why our complaint did not charge individuals  corporations solicited the proxy such bank of america had a legal obligation that we alleged it failed to establish that individuals aided and abetted a property solicitation violation or committed fraud under the securities laws is necessary to prove or knowing or reckless misconduct based on the record that existed at that time we did not believe that we could fairly improperly assert charges against individuals under the legal standard we have followed and will continue to follow any additional evidence developed wherever it leads i want to be clear that the proposed settlement in no way reflects a change in the commission's approach to pursuing charges against individuals who violate the federal securities law the commission has been and will continue to be aggressive in bringing actions against individuals who violate the securities laws and also will continue to vigorously pursue penalties from culpable individuals including corporate executives in fact  outlined in my written testimony the commission recently has filed a number of enforcement actions against corporate executives charging violations of federal laws and extensive remedies thank you for the opportunity to address these important issues and i look forward to answering your question thank you very much and again with colleagues as for the break but we have to vote around here so mr because i mean i know you are currently preparing the case against bank of america and  and i don't want do anything say any thing that's going to jeopardize your case but in general what is the f c c but what do they believe bank of america did wrong what do you think happened here that was  wrong in our complaint we allege that the proxy material that was sent to shareholders which was the basis upon which they would decide as to whether or not to vote to approve a merger stated that merrill lynch could not pay discretionary bonuses without the consent of bank of america in fact what the proxy solicitation did not disclose that there already had been an agreement that bank of america will allow merrill to pay up to five point eight billion dollars in exactly those kinds of loans so the property was misleading because it suggested that no consent had been given and no such bonuses would be paid without such consent when in fact the consent had already been you know i know you a very serious prosecutor with ted and that and that's what we need in this day and age what can we expect from the f c c going forward in terms of aggressive enforcement against corporate wrongdoers what can we expect from this point we are talking about a lot of money here i understand look first i would point to the recent cases that we have brought against corporate executives in the mortgage fraud charge the c f o or other senior executives in new century countrywide american home mortgage street securities of fraud or wrongdoing particularly with respect to mortgage and mortgage related products so i think past is prologue and you will continue to see that kind of approach under chairman mary shapiro we're embarking on a number of  internal efforts to streamline our processes and make ourselves more responsive but we are reinvigorated and rededicated too but you do feel that you have the tools to be able to do the job that needs to be done is known legislation anything is required in order to be able to move forward with this aggressive approach that you know the word around here is robust approach yes well look we have a number of legislative proposals that we have presented evolving hedge fund registration the creation of a central clearing party for derivative transactions more and better information on exactly the kind  of activity that goes on in some of these over the counter and opaque markets in addition we've sought information legislation regarding nationwide service of process and some other things to help make our job easier board on december eighteenth of last year but are you familiar with the document dated december tenth which was delivered to the fed on that date which is called the fourth quarter  so let me ask you the real question where the government oversight committee and it's a double on tom because we we oversee the government we're also the government entity that oversees a number of things that are outside the government but in this case the federal reserve the treasury and the f c c as i understand it but through testimony again and again the he was locked out of this process during that time and did not get into the process until january isn't that correct you were not your agency was not informed of what the fed was doing or the treasury was doing and you were not at these meetings you were conspicuous in your absence right i understand that's correct yes so from a standpoint of the security exchange commission the respect the treasury and the fed should show in the future shouldn't you be at the table if tens of billions of dollars of taxpayers money are being thrown in to complete a merger and at the moment that a an executive a party says i'm looking at the mac was i'm looking at breaking up this because things have changed or things were not disclosed or we have learned something wouldn't that in your opinion be an absolute mandate for the security exchange commission to be in the room from that time forward  congressman if it was a matter that impacted on the jurisdiction or responsibilities with respect to shareholder disclosure regulation the securities markets and yes now i'm going to ask you a hypothetical but it's not much of a hypothetical if you had been in the room and december seventeenth eighteenth one thousand if you'd been in the room when they said this is not going to go through forward because there have been material adverse effects and on top of that you were aware of  misstatements in the proxy would you have interjected at least your oversight your opinion and your demand that compliance to law be adhered to which it wasn't well i'm not sure that i would have commented on whether or not i'm not properly involved or not but we've already had testimony that if they invoke the mac they have to go back to the to the stock and the federal government came in with twenty billion dollars and there's some debate about that was forced on b of a or b of a demanded it regardless of which one that is at that point when there's new money a mac clause or money in lieu of and on top of that material misinformation in the proxy shouldn't you be in the room and more importantly if you are in the room wouldn't you have acted to at least advise and let's assuming you're willing to take on the fed chairman and the secretary of the treasury that in fact they're crossing lines at that point that should not be crossed they are failing to disclose to the very stockholders the public that you protect if those events triggered a disclosure obligation we would certainly communicate for christ's sake we've had five six hearings mr coo soonish is dedicated probably a whole wall of his library to this very question and you're saying if let's go back again they fail to disclose these bonuses it became aware that the fed and the treasury became aware of that they also became aware that these losses were mounting and through a negotiation behind closed doors in which you were locked out they negotiated additional money now repaid but additional money to make b of a go through with this deal or to encourage or in fact on their demand to have them go through so all of that occurred with your agency locked out of the room are you going to tell me today if there was something to be reported are you going to say like sheila bair there was here earlier yes i would like to have been in the room and if i had been in the room or when i was in the room i wish i had said or done more which is it are you going to say the f c c should darn well be in the room and be protecting stockholders or you going to say if if if today which one is it you know perhaps i didn't make myself clear i think i did  the staff at the november twelfth forecast was not in fact a valid forecast bank of america knew at the time that the november twelfth forecast was of questionable validity however bank of america did not do any the advise bank of america not to make further disclosures to a shareholders in advance of the merger vote based on the information in the deficient forecast and a gut feeling the november twelfth forecast omission of any projection for when i asked ken lewis about this at our first hearing he told us he relied on advice of counsel protecting shareholders is often in the final instance the responsibility of corporate general councils and or outside counsel the subcommittees investigative findings  the question where were the lawyers glaring omissions and inaccurate financial data in the critical november twelfth forecastle obvious that they should have alerted the authorities of a reasonable investigation before making a decision of bank of america's legal widening investigation to include the issue of bank of america failure to disclose to its shareholders amounting losses at merrill lynch known or know to be a part of and have some oversight over what's your what's your opinion of this transaction how it all happened and this one willingness to put this in writing well congressman what something happen here that you think needs to be changed in existing law do we need to have something more clarified by the way that we have these transactions take place there is more disclosure oxley us to consider real time or robust disclosure and that's a process that continues and we will certainly take experience here and determine whether or not we should change our rules and regulations appropriate ok well you still haven't said yes there are some things when you do and they are can you fill in the blank by the question whether whether or not events such as the should require more formative disclosure obligations is something that we're considering so for example  contracts or discussions short of a formal legal legally enforceable obligation should that be disclosed even though the terms aren't finalized or interim results  that may not rise to the level of a material impairment of an asset which is the current standard are you currently looking at doing that with your rules and regulations or do we need to have some rational action or what do you what do you think congressman that's something that we look at on a regular basis and we're looking now as someone who has gone through this and been in the middle of it and we're in the process now congressionally to try and do something with this too big to fail situation what do you see that we're about what is going on so for example registration of hedge funds which would require better reporting and stronger compliance and inspection authority would be highly beneficial to transparency  that but the same is true in the derivatives markets we would like that kind of of information one case we brought for example recently involves insider trading which typically takes place in the equity world in stocks was actually going on in the credit default swap market yet we don't have nearly the same kind of information in that market as we do in the equity interest versus bank of america there was a settlement that was submitted to the federal court in new york on august third two thousand and nine the settlement agreement provided for the bank of america to pay thirty three million dollars in fines for making false and misleading statements in proxy statements just shareholder of bank of america or its told shareholders that no year end bonuses would be paid to merrill lynch executives when in fact it had been agreed that bank of america would pay up to five point eight billion dollars in bonuses to merrill executives putting that aside the fact that five point eight billion dollars was to be paid to the executives of a company that was hemorrhaging money at the time the decision to settle the matter for thirty three million dollars struck many of us as being a perverse outcome here was a company with forty five billion dollars in government assistance twenty billion dollars of which was from this exact bill and the securities and exchange commission let them pay a fine and this is a piece of got me pay a fine with our money with taxpayers dollars does this strike you as fair to the tax payer shareholders does it fit your mission of protecting american investors to me it's like you find somebody and then take somebody else's money to pay the fine and i'm trying to figure out where is the punishment in that where's the enforcement in that i mean if i'm sitting back i say oh boy i got a great day here got the public's money to pay the fine everything's fine i get i don't have to pay a dime and then one of the things that that i that i that i've read about the settlement when once i read about it i fired off a letter to your inspector general david coats asking him to look into the settlement i'd i'd just read in mr carless recent semiannual report to congress that he is in the midst of this investigation and i look forward to his conclusions one of the main reasons i requested the investigation was because i would not be the least bit surprised that in the aftermath of this crisis that fair the securities laws violations are uncovered and violations may have occurred  firm that has received government assistance in that case what is the calculus that is used to determine how to punish a company without arising the involuntary investors in the firm the taxpayers and i want you to understand i'm concerned about when we catch folks what is the thinking that goes into the process of how to to punish them because to me this was not punishment and i'm glad to judge did reject and i know you may not be able to talk with so much about the case but i assume you can talk about what goes into your thinking as the number one guy who addresses these issues and the only person that you answer to is mr absolutely no sense and i know you've got a great answer for me and i'm waiting here congress to let me take each of those first with respect to the amount of the of the fine  the penalties that we assess have to be proportionate to the actual wrongdoing that occurred and here the wrongdoing was not the payment of the bonuses that may be excessive and wrong as a policy matter as a corporate governance matter as a number of other matters but from a pure enforcement point of view the wrong was the failure to disclose to shareholders that they said that they would not pay bonuses without bank of america's approval when they had already agreed to pay the money and so the wrong was the deprivation of information to the shareholders in deciding how to vote not the fact that the amount of money that was paid was illegal or improper in and of itself so so we look  six billion was ultimately not i don't think the measure of the wrong wrong was that they did not tell shareholders who needed all the information they could to decide whether or not to vote so that was the starting point then we look at the amount and we looked at our precedent in the proxy violation area the largest fine that we had imposed was thirty eight million give or take or so in a case involving frankly more egregious conduct in this because involvement of their stock and obstruction and other things in addition to the proxy violation next we try and balance the benefit of the of the harm to me the benefit of the penalty versus the burden on the shareholders so we recognize the penalties that we assess may come out of the pockets of shareholders who made themselves have been wronged by the contract so we try and balance what we we have to still impose the penalties because it sends a strong deterrent message to other corporations and other issues that this kind of conduct will not be tolerated the deterrence message is critical it tells others they shouldn't do it it says that if you do it you're going to pay a cost incentivize them to fix their own problems before we come knocking allows us to leverage  limited resources so that companies voluntarily engage in corrective measures rather than us having to go to each one of them the lawyers read these things the corporate executives read the decisions they implement changes so there's many good reasons to have the penalty but we don't want to burden the shareholders more than necessary that's a balancing that we look at under our penalty guidelines and we come to the best determination that we can see my time is up thank you mr denham his time is expired gentlewoman from california thank you mr chairman mr who saw me i am deeply troubled by your description of what took place you said that the bad misled the shareholders the bank did mislead the shareholders it lied to the shareholders it was a bald faced lie now on a proxy statement if you make a bald faced  i think that you should have a penalty that is so strong that you won't ever do it again now the courts seem to believe that thirty three million dollars micro merican say let's settle this or that the bank of america come to the f c c and say let's settle this i don't know the answer that congressman typically settlements result from both parties coming together and discussing the possibility someone initiate and if you don't have the answer today would appreciate if you make that available to the committee all right you based your decision on the fact that there was a precedent where thirty eight million dollars was fined in another setting now you know that the f c c historically when you were not a member of the staff was reducing its enforcement actions dramatically in fact a recent g a o study indicated that the enforcement actions had been reduced by some eighty percent and the discords human actions i believe by some sixty percent presuming those figures are indeed accurate i may be off a little bit you're basing a decision on whether or not to impose a fine on a very anemic f c c that was not doing a good job of enforcing the law so i guess my real question to you is if something is substantive if something is significant if it is a lie shouldn't the penalty reflect that and i'm not i'm not accepting the fact that somehow because there was another fine issued before that that somehow should be a measurement when we know that the f c c wasn't doing its job and finally your argument that somehow you've got to balance what happens to the shareholders if that's the if that's the deliberative process you're going to use then the appropriate find is never going to be opposed on companies that do in fact lie effect let me ask you this based on what the judge has said in this case if you were to start over again what would be the fine that you would believe would be appropriate for a proxy statement that had a bald faced lie in it that shareholders relied on or prospective shareholders relied on in terms of purchasing the stock i think actually that the judge's concern in his opinion to do more with whether or not t  my belief is that the settlement that we struck was fair and appropriate so in terms of further negotiations will there be another settlement offered up to the judge or will this go to trial matters schedule for trial in early march so there will not be any further settlement on this  case couldn't couldn't predict the future as to whether or not the case will settle or not as of now the case is proceeding in the discovery phase it's scheduled for march trial why would i just want to understand that could you then go back in to go shoot a smaller fish is what you're saying that the judge wants a smaller fine imposed i find that absolutely unbelievable point was in the judge's opinion he indicated that he was concerned about the penalty because he thought that  s imposed on shareholders who were victimized by the wrong conduct it was his opinion was not based on the fact that the fine with it was too low i don't pockets of individuals or particular corporate executives gentlewoman's time has expired now you know five minutes to the gentleman from ohio ranking member on the  meeting took place in october ten days after after tarp had passed where the nine biggest financial institutions were brought to this town including bank of america told they were now going to have their bank partially nationalized they were going to have to accept money they had to sign a for know what's a place that me so now as we move forward it seems to me that you know i guess your testimony and i apologize for not being here is another commitment you talk about shareholders being misled but it seems to me that this this unbelievable involved by the government the e mail we have that's been part of the record in earlier hearings from mr lacker federal reserve bank of richmond where he  look at these events we look at the roles of all the participants that are relevant and all of the facts so i guess that would be my response so i mean yes you know what it would potential argument by bank of america that the bank and its management were not necessarily completely liable because they were acting at the government's direction well the events that you're talking about i believe occurred after the proxy and so after the merger had been approved and so the question is whether or not with respect to the tarp money whether or not that understanding had  when did you guys first become aware of what was taking place or the mounting losses that marilyn's when you first become aware that unfortunately i wasn't there until march so i can't i don't know the answer the question why do you think when we have the e mail saying we don't want to disclose all that why do you think there was a reluctance by the federal reserve to not have information be made known to the  thank you for this follow appearing we've had several in the past and after listening to testimony from the bank of america c e o kenneth lewis the federal reserve chairman  bernanke and former treasury secretary hank paulson and officials at the bank of america they're still strong questions and i know the intent of this committee do as chair is to get some of these questions answered so we will know really what took place and we want to hear from you the role of the government and what was played in the negotiations the quality of the bank of america's due diligence process and the motivation behind the of a attempt to claim a material adverse change or the mac and the  adequacy of their disclosure to shareholders can you package all that and then and clarify it for us i think this is what the third of the fourth hearing mr chairman  let us hear how you would describe the roles that each one of these sectors play well congressman as involving some or all matters that are currently under investigation and i charged in our complaint we don't believe that the disk that we believe that the disclosure was misleading because bank of america did not disclose what they already had an agreement to pay bonuses when they told shareholders that merrill lynch would not be painful bonuses without their consent but in fact the consent that already been given that is the case that we charged and that is the case that is proceeding let me stop you and i want to query these bonuses ethically i don't see how the bonuses could even be in contention when we are bailing out too big to fail institutions with taxpayers money to try to capitalize these big institutions so they could save people's homes etc cetera is a bonus appropriate under the crisis conditions that exist i just want you to talk about bonuses and then continue well congressman again from an enforcement perspective my  on what the law requires and whether or not the law has been violated do bonuses fall under that provision in the law generally not ok in this situation where they made a representation about what they were going to do about bonuses and it and that representation are that that was all prior to the collapse wasn't it that when when people signed their contract as i understand they had bonuses attached in there but the whole condition has changed now with they have to comply with the positions that were in the original agreement well that's correct the bonuses that were paid in this case were paid frankly shortly after the merger was approved that's correct do continue on with well there's probably not much more i don't mean to disappoint you but there's probably not more i would say on that on that on that topic whether or not you know bonuses  talent that really goes on you know if i feel it's so absurd i don't think at this point that you couldn't find a thousand or you could find a thousand people out there with tremendous talent if that talent goes there are people lined up i mean we are really being hit hard i'm talking about my district now which is los angeles cover city hollywood and people have lost their jobs in droves also investments talent is available believe me and so it's a phony phony excuse but in putting this all together i feel there were tremendous failures on all sides would you agree to that i think there's a lot of there's a lot of blame to go around yeah and my colleague mysterious said it was just downright lies that were given and possibly it was done so that government could support b of a and to give them more support in the merger so i'm just really thoroughly thoroughly disappointed the proper reserves of cover their risk in this market did red flags or alarms ever go all what did you know and when did you know well congressman i didn't well you know there were certainly systemic risks and a bubble that had occurred in the housing market and elsewhere that you know that resulted in the collapse and the excessive leverage and risk taking that we saw you know it is you know what what the commission saw various points along the way it's difficult for me to to answer that question we didn't have regulatory authority over certain areas so it might be better if i have an opportunity respond to you after today's hearing so i can give you more fulsome love to hear from your colleagues in writing  cite for risky practices let me ask you in particular why did bank of america get only a slap on the hand when it was cited in two thousand six for improperly my marketing auction rate securities why were they allowed to continue these practices of using false and misleading information in selling these generally of the auction rate securities matters but as i sit here not with the particulars of whatever action may have been brought in two thousand and six i don't happy to respond would you respond to us and to the committee in writing on  the gentleman from maryland mr cummings you know the first in terms of it seem to me that individual executives the ones who sign off on the proxy  filings should be the ones that are responsible so therefore why wouldn't they be the ones that you go after you know you find them and they are from from from the personal standpoint because you know like you said you know large they feel that the reason and the judge sent it back to you is that you were not aggressive enough that you did not pursue it in the fashion the felt that he should the bed and of course that's the general feeling most people you know if they say in the street as to what's going on now i don't know whether you know that's the case in that but i do believe that you really need to look at that  payment of the fine obviously any entity that receives tarp funding or other money i'm still has to pay the full amount back with interest so whether or not fine was paid with government money which can tend to be fungible in an institution but ultimately had to pay back all the money that they got from the government with interest just make that point second of all you're right the judge expressed concern about not charging individuals we've shown a very aggressive posture of charging individuals and if you look historically at our cases the overwhelming number of cases result in charges against individuals not corporations alone and i just mentioned solicited or or on whose behalf it's being solicited and those are the corporations to charge individuals you need a higher level of proof you need to show what's called c enter or either knowledge or reckless conduct meaning a significant and substantial deviation from normal standards of care and it is that difference in the legal standard that makes a difference and how we can proceed there's a higher burden of proof with respect to the individuals and our determination based on the record we had is that you know we did not have the basis to charges of individuals now as we get into the discovery process we may get additional information and we'll take that into account making our decision but i don't want to leave the impression that we do not aggressively pursue individuals we recognize the deterrent impact of charging individuals as much as corporate penalties deter people nothing substitutes for charging individuals and we do that across the board in many many many of our case it would cause and the shareholders are really the ones who suffer in a case like this let me thank you very much for your testimony and of course we really appreciate the fact  that you're here and that you shared with us you know this is the end of many many here he said of that we've had on this and of course we hope that we will now be able to move in to give the kind of confidence that people really need in order to turn the situation we now find ourselves in a round so want to thank you again this hearing is now in