U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

55–102 PDF 2010

BANK OF AMERICA AND MERRILL LYNCH: HOW

DID A PRIVATE DEAL TURN INTO A FEDERAL

BAILOUT? PART II

JOINT HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

AND THE

SUBCOMMITTEE ON DOMESTIC POLICY

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

JUNE 25, 2009

Serial No. 111–41

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

DANNY K. DAVIS, Illinois

CHRIS VAN HOLLEN, Maryland

HENRY CUELLAR, Texas

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

JACKIE SPEIER, California

STEVE DRIEHAUS, Ohio

——— ———

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

——— ———

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

SUBCOMMITTEE ON DOMESTIC POLICY

DENNIS J. KUCINICH, Ohio, Chairman

ELIJAH E. CUMMINGS, Maryland

JOHN F. TIERNEY, Massachusetts

DIANE E. WATSON, California

JIM COOPER, Tennessee

PATRICK J. KENNEDY, Rhode Island

PETER WELCH, Vermont

BILL FOSTER, Illinois

MARCY KAPTUR, Ohio

JIM JORDAN, Ohio

MARK E. SOUDER, Indiana

DAN BURTON, Indiana

MICHAEL R. TURNER, Ohio

JEFF FORTENBERRY, Nebraska

AARON SCHOCK, Illinois

JARON R. BOURKE, Staff Director

(III)

C O N T E N T S

Page

Hearing held on June 25, 2009 ............................................................................... 1

Statement of:

Bernanke, Ben S., chairman, Federal Reserve Board ................................... 16

Letters, statements, etc., submitted for the record by:

Bernanke, Ben S., chairman, Federal Reserve Board, prepared statement

of ..................................................................................................................... 21

Bilbray, Hon. Brian P., a Representative in Congress from the State

of California, e-mail dated December 21, 2008 .......................................... 55

Issa, Hon. Darrell E., a Representative in Congress from the State of

California, prepared statement of ................................................................ 10

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio:

E-mail dated September 17, 2008 ............................................................ 93

Prepared statement of ............................................................................... 14

Various e-mails .......................................................................................... 99

Towns, Chairman Edolphus, a Representative in Congress from the State

of New York, prepared statement of ........................................................... 4

(1)

BANK OF AMERICA AND MERRILL LYNCH:

HOW DID A PRIVATE DEAL TURN INTO A

FEDERAL BAILOUT? PART II

THURSDAY, JUNE 25, 2009

HOUSE OF REPRESENTATIVES, COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM JOINT WITH THE SUBCOMMITTEE ON DOMESTIC POLICY,

Washington, DC.

The committee and subcommittee met, pursuant to notice, at 10

a.m., in room 2154, Rayburn House Office Building, Hon. Edolphus

Towns (chairman of the committee) presiding.

Present: Representatives Towns, Kanjorski, Maloney, Cummings,

Kucinich, Tierney, Clay, Watson, Lynch, Connolly, Quigley, Kaptur,

Norton, Davis, Cuellar, Welch, Foster, Speier, Issa, Burton, Souder,

Duncan, Turner, McHenry, Bilbray, Jordan, Fortenberry, Chaffetz,

and Schock.

Staff present: John Arlington, chief counsel—investigations;

Brian Eiler, investigative counsel; Jean Gosa, clerk; Adam Hodge,

deputy press secretary; Carla Hultberg, chief clerk; Marc Johnson

and Ophelia Rivas, assistant clerks; Mike McCarthy, deputy staff

director; Jesse McCollum, senior advisor; Jenny Rosenberg, director

of communications; Joanne Royce and Christopher Staszak, senior

investigative counsels; Christopher Sanders, professional staff

member; Ron Stroman, staff director; Jaron R. Bourke, staff director, Subcommittee on Domestic Policy; Lawrence Brady, minority

staff director; John Cuaderes, minority deputy staff director; Jennifer Safavian, minority chief counsel for oversight and investigations; Dan Blankenberg, minority director of outreach and senior

advisor; Adam Fromm, minority chief clerk and Member liaison;

Kurt Bardella, minority press secretary; Seamus Kraft and Benjamin Cole, minority deputy press secretaries; Christopher Hixon,

minority senior counsel; and Brien Beattie, minority professional

staff member.

Chairman TOWNS. The committee will come to order.

Today we are continuing our investigation of Bank of America’s

acquisition of Merrill Lynch. This was a most unusual transaction.

On September 15, 2008, Bank of America announced that it was

purchasing Merrill Lynch, creating one of the Nation’s largest financial institutions. At the time it was a merger negotiated between two private parties designed for the exclusive benefit of private shareholders and paid for exclusively with private money.

Four months later, on January 16, 2009, the world discovered

that Merrill Lynch had experienced a $15 billion fourth quarter

2

loss. Most importantly, we discovered that the merger had taken

place only after the Federal Government had committed to give

Bank of America $20 billion in taxpayer money.

In short, Bank of America’s acquisition of Merrill Lynch began

in September 2008 as a private business deal, and was completed

in January 2009 with a $20 billion taxpayer bailout.

What happened in the interim has been shrouded in secrecy. But

the broad outline is this: When Bank of America urged its shareholders to approve the acquisition of Merrill Lynch on December 5,

2008, there was no public disclosure of any problems with the

transaction. However, Bank of America’s CEO Ken Lewis has testified that just 9 days after the shareholder vote, he discovered a $12

billion loss at Merrill Lynch. Mr. Lewis said he told then Treasury

Secretary Hank Paulson that he was strongly considering backing

out of the deal. According to Lewis, Paulson ultimately told them

that if he didn’t go through with the acquisition he and the board

would be fired.

Internal e-mails we have obtained from the Federal Reserve indicate officials there were very skeptical about Mr. Lewis’ motives in

threatening to back out of the Merrill Lynch deal. Fed Chairman

Ben Bernanke thought Lewis was using the Merrill losses as a bargaining chip to obtain Federal funds. FDIC Chairwoman Sheila

Bair was opposed to providing assistance saying, ‘‘My board does

not want to do this.’’

In essence, Ken Lewis claimed that, ‘‘The government made me

do it.’’ But was Bank of America forced to go through with the deal,

or was this just an old-fashioned shakedown?

These questions are particularly important, given the administration’s new proposal to give broad new powers to the Federal Reserve. I believe that before Congress acts on the President’s financial services reform proposal, we need to have a thorough understanding of what caused the current financial crisis and how the

Federal Government responded.

Unfortunately, much of what the Fed, the Treasury, and other

agencies did in these transactions remain shrouded in secrecy. It

is time to yank the shroud off the Fed and shine some light on

these events.

The Bank of America-Merrill Lynch deal is a case in point. New

e-mails we have obtained from the Fed indicate that Fed officials

may have attempted to keep other agencies in the dark about what

was going on. A Fed e-mail discusses not telling the Office of the

Comptroller of the Currency what was happening. Others discuss

how to minimize the amount of information given to the SEC. In

a remarkable exchange, Fed officials note that an SEC official can

be counted on to be discreet.

I am not going to prejudge the issues. At this point we are not

even close to finishing this investigation. Bank of America’s CEO

Ken Lewis gave us his story. Now it is Fed Chairman Bernanke’s

turn to give his side of the story. Next, it would be former Treasury

Secretary Hank Paulson to give his side. We need to get all the

facts out on the table before we are in a position to say what happened and when it happened. But I promise you this, we will follow

this investigation wherever the road leads, and we will do our best

3

to make sure the facts get out on the table where everyone can see

them, by subpoena, if necessary.

Let me stop and thank Chairman Bernanke for coming today to

this hearing, and I look forward to your testimony.

I now yield 5 minutes to our ranking member on the full committee, Mr. Darrell Issa of California, for his statement.

[The prepared statement of Chairman Edolphus Towns follows:]

4

5

6

7

8

Mr. ISSA. Thank you, Mr. Chairman, for holding this second

hearing in a series today. Our work together on a bipartisan basis

should in fact be a model for all the Members of Congress.

Today, Chairman Bernanke is here as part of this process not because of one side or the other, but because we came to a consensus

that for all the good work in a financial crisis, Oversight still needed to discover what was or wasn’t done, was it consistent with the

kind of behavior behind closed doors that we would like to always

know is going on even when appropriately government shares information only discreetly with other government agencies.

Additionally, yours and my role as reformers is critical in a process in which the President’s financial reform system or proposal

has included broad and sweeping increases in Chairman Bernanke

or his successor’s powers.

Additionally, former Secretary Paulson, acting in good faith and

in concert, in fact deserves his opportunity to tell us about the

events.

Let there be no doubt, Mr. Chairman, all of us on the dais are

aware that, 24/7, leaders of the Fed, the Treasury, the FDIC, the

OCC, and the SEC all worked diligently to get us out of a financial

crisis that was many years in the making, in almost every case not

something in which those getting us out participated in a direct

way, and in fact was done in the best interests of the American

people. And I want to thank Chairman Bernanke for his effort and

his major role in that effort, which is still ongoing today.

Through the committee’s investigation, we have learned the Federal Government, led by both Chairman Bernanke and then Secretary Paulson, and made certain threats against Ken Lewis during a time in which he was in fact considering pulling out or renegotiating the Merrill Lynch merger. There have been conflicting

reports under oath by Ken Lewis and by Secretary Paulson about

what occurred. To his credit, Chairman Bernanke has been quick

to give us written responses, both publicly and privately, that today

we would hope lead to a thorough understanding of whether in fact

there is a vast misunderstanding of what a threat was, what the

intent was, whether or not what we often call and I have called a

cover-up was in fact simply appropriately determining why an

agency should be not informed. I for one personally doubt that all

of these can be explained away, but it is very possible that today

hindsight will show us that if we all had to do it again, we would

do it differently.

I think it is important today that we give Chairman Bernanke

a full and complete opportunity to talk about the environment in

which he was working, his desires and reasons for doing what he

did, and where the discussions that he might or should or could

perhaps replace the board and the CEO of Bank of America may

have in fact been blown out of proportion, may have been misunderstood. I for one, though, am looking at Main Street America,

the stockholders who in some cases got less than they would have

gotten through other means. This includes Chrysler, General Motors, and of course Bank of America and Merrill Lynch.

I am also deeply concerned that, going forward, if the systemic

risk proposal by the President, which would give vast authority

over any entity, bank or otherwise, that represents a potential sysVerDate 11-MAY-2000 14:36 Apr 19, 2010 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 U:\DOCS\55102.TXT KATIE PsN: KATIE
9

temic risk is to be given to an agency, and if that, Mr. Chairman,

is to be the Fed; and if that power is used, what will be the oversight? What will be the consultation? How will we know that, although the Fed has the lead, will the SEC, the OCC, and other

agencies charged with their responsibilities always be kept informed?

I appreciate today, Mr. Chairman that not everyone on the dais

agrees that the focus is on what was done behind closed doors relating to this merger. Others may say, and it is their prerogative,

that the question is, ‘‘what did officers and directors of these companies do?’’ I for one am also interested to hear that, but today primarily I would like to understand how we can have statements

made by government officials be so different, and why the evidence

provided today to us in the way of e-mails and other documentation

appears to see changes and disagreements that cannot be explained

away.

Mr. Chairman, I look forward to continuing this on a bipartisan

basis. Your support and friendship and our ability to work together

in a way not often found in Congress has made this Congress more

effective, this committee more effective, and I thank you for your

service, and yield back.

[The prepared statement of Hon. Darrell E. Issa follows:]

10

11

12

Chairman TOWNS. Thank you very much. I thank the ranking

member for his statement and thank him for his kind words as

well.

At this time I yield to the ranking member of the Subcommittee

on Domestic Policy for 5 minutes and of course the gentleman from

Cleveland who has done a fantastic job, Congressman Kucinich.

Mr. KUCINICH. Thank you very much, Mr. Chairman, and Chairman Bernanke.

Contrary to the popularly held belief that the government went

too far in the Bank of America-Merrill Lynch deal, our investigation reveals that what is remarkable is what the government did

not do.

In two meetings in December 2008, Bank of America’s Ken Lewis

asserted that he had only recently become aware of the deteriorating situation at Merrill Lynch. He asserted that he believed he

could justify invoking the Material Adverse Event Clause [MAC],

to back out of the deal. And he asserted that he needed considerable help from the government, including $13 billion more in new

cash, as well as protection from Merrill Lynch’s losses.

Staff and officials at the Fed looked more closely at the basis for

Lewis’ assertions, and determined ‘‘that they were somewhat suspect.’’ The Fed found, in contradiction to Ken Lewis’ representations, that Bank of America failed to do adequate due diligence in

acquiring Merrill Lynch. The Fed found that Bank of America had

known about accelerating losses at Merrill Lynch since mid-November, when shareholders could have used that information to decide

on a ratification of the merger. And senior officials at the Fed believed that Bank of America could be in violation of securities laws

for failing to inform shareholders about the Merrill Lynch losses

known in mid-November. Furthermore, they believed that Ken

Lewis’ threat of invoking a MAC was a bargaining chip and was

not credible; that Bank of America was experiencing its own losses

independent of Merrill Lynch, and needed to be bailed out itself,

and that there were serious doubts about the competence of Bank

of America’s management.

Yet in spite of the Fed’s doubts felt about Ken Lewis’ management of Bank of America, the Fed’s leadership orchestrated an aid

package that attached no meaningful conditions to the money. The

Fed required no changes whatsoever in Bank of America’s deficient

corporate leadership. The Fed even gave Bank of America more

money than what Ken Lewis had originally asked for.

The disconnection between the Fed’s analyses of what went

wrong at Bank of America and what the Fed was willing to do

about it is significant for all of us and is the subject of today’s hearing.

If the Bank of America-Merrill Lynch merger posed a systemic

risk in December 2008, the post-rescue merger entity continues to

pose a systemic risk or potential systemic risk in 2009. If bad decisions by corporate management can have systemic consequences,

then the Fed’s remedy in the Bank of America-Merrill Lynch case

amplifies the risk posed by poor corporate leadership, because it

signals that incompetence practiced by the management of a very

large financial institution will be subsidized, not punished, by government regulators.

13

The Fed’s decisionmaking process in the Bank of America-Merrill

Lynch merger makes the case for a significant increase in accountability at the Fed. Its regulation of systemic risk needs to be subject to congressional oversight. Its interventions in markets to recover from the current financial crisis need to be audited by the

Government Accountability Office, as I proposed in a bill and in an

amendment adopted unanimously by this committee.

We can’t afford to make the Fed a super regulator, as some have

proposed, without also increasing its transparency in meaningful

ways, as this committee has proposed through the Kucinich amendment.

I want to thank the chairman for the opportunity to work with

you on this hearing, and I look forward to Mr. Bernanke’s testimony. And I want to thank you, sir, for being here today. Thank

you.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

14

15

16

Chairman TOWNS. I thank the gentleman from Ohio.

We will now yield 5 minutes to the ranking member of the Domestic Policy Subcommittee, Congressman Jordan of Ohio.

Mr. JORDAN. Thank you, Mr. Chairman. I have a brief statement

here.

Thank you for holding today’s hearing on the government’s involvement to purchase Merrill Lynch. I appreciate Chairman

Bernanke’s appearance before the committee today. His testimony

is important to bring further transparency to the role of the Federal Government in the Bank of America-Merrill Lynch transaction

and the overall financial crisis.

I am troubled by the information and documents that the committee’s investigation has uncovered. They show that Mr. Bernanke

and Mr. Paulson threatened to fire Ken Lewis and his board of directors in order to force the Bank of America to acquire Merrill

Lynch.

I recognize that these actions took place in a time of significant

economic challenges and uncertainty, but there must be limits to

government action even in a time of crisis, and those limits must

be respected. We must also keep in mind that this pressure was

exerted after many of the Nation’s banks were forced to accept taxpayer money through the TARP program. We know that in October

2008, Mr. Paulson, Mr. Bernanke, Mr. Geithner, and Ms. Bair

brought the CEOs of the largest private banks in America to the

Treasury Department and demanded that they accept a partial nationalization of their banks. I look forward to learning more about

Mr. Bernanke’s role in this process as well.

Thank you again, Mr. Chairman. I would ask for unanimous consent to include in the record majority and minority reports and all

documents referenced in those reports.

Chairman TOWNS. Without objection, so ordered.

Mr. Bernanke, it is a longstanding policy that we swear all of our

witnesses in. Please stand and raise your right hand.

[Witness sworn.]

Chairman TOWNS. Let the record reflect that the witness answered in the affirmative.

Mr. Bernanke, we would like for you to summarize your statement in 5 minutes, which will allow the Members to raise questions with you. And of course, we have a light there. When it starts

out, it starts out on green and then it goes into yellow and then

it goes into red. Red means stop. So we thank you for that.

Thank you very much. You may begin.

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, FEDERAL

RESERVE BOARD

Mr. BERNANKE. Chairman Towns, Ranking Member Issa, and

other members of the committee, I appreciate the opportunity to

discuss the Federal Reserve’s role in the acquisition by the Bank

of America of Merrill Lynch.

Chairman TOWNS. Is the mic on, staff? Help me, because we can’t

hear him.

Mr. BERNANKE. I believe that the Federal Reserve acted with the

highest integrity throughout its discussion.

17

Chairman TOWNS. We are still having trouble. We have some

senior citizens up here, and we are having trouble hearing you. Is

there any way to turn the volume up on it? There is a backup mic

on the floor, staff. Better. Thank you very much.

Mr. BERNANKE. I would like the full extent of my time, if I may.

I believe that the Federal Reserve acted with the highest integrity throughout its discussions with the Bank of America regarding

that company’s acquisition of Merrill Lynch. I will attempt in this

testimony to respond to some of the questions that have been

raised.

On September 15, 2008, the Bank of America announced an

agreement to acquire Merrill Lynch. I did not play a role in arranging this transaction, and no Federal Reserve assistance was promised or provided in connection with that agreement.

As with similar transactions, the transaction was reviewed and

approved by the Federal Reserve under the Bank Holding Company Act in November 2008. It was subsequently approved by the

shareholders of Bank of America and Merrill Lynch on December

5th. The acquisition was scheduled to be closed on January 1, 2009.

As you know, the period encompassing Bank of America’s decision to acquire Merrill Lynch through the consummation of the

merger was one of extreme stress in financial markets. The government-sponsored enterprises, Fannie Mae and Freddie Mac, were

taken into conservatorship a week before the Bank of America deal

was announced. That same week, Lehman Brothers failed and

American International Group was prevented from failing only by

extraordinary government action. Later that month, Wachovia

faced intense liquidity pressures which threatened its viability and

resulted in its acquisition by Wells Fargo.

In mid-October, an aggressive international response was required to avert a global banking meltdown. In November, the possible destabilization of Citigroup was prevented by government action.

In short, the period was one of extraordinary risk for the financial system and the global economy, as well as for Bank of America

and Merrill Lynch.

On December 17, 2008, senior management of Bank of America

informed the Federal Reserve for the first time that, because of significant losses at Merrill Lynch for the fourth quarter of 2008,

Bank of America was considering not closing the Merrill Lynch acquisition. This information led to a series of meetings and discussions among Bank of America, the regulatory agencies, and the

Treasury.

During these discussions, Bank of America’s CEO Ken Lewis told

us that the company was considering invoking the Material Adverse Event Clause [MAC] in the acquisition contract, in an attempt to rescind its agreement to acquire Merrill Lynch.

In responding to Bank of America in these discussions, I expressed concern that invoking the MAC would entail significant

risks not only for the financial system as a whole but also for Bank

of America itself for three reasons.

First, in light of the extreme fragility of the financial system at

that time, the uncertainties created by an invocation of the MAC

18

might have triggered a broader systemic crisis that could well have

destabilized Bank of America as well as Merrill Lynch.

Second, an attempt to invoke the MAC after 3 months of review,

preparation, and public remarks by the management of Bank of

America about the benefits of the acquisition would cast doubt in

the minds of financial market participants, including the investors,

creditors, and customers of Bank of America, about the due diligence and analysis done by the company, its capability to consummate significant acquisitions, its overall risk management processes, and its judgment of its management.

Third, based on our staff analysis of legal issues, we believed

that it was highly unlikely that Bank of America would be successful in terminating the contract by invoking the MAC. Rather, an

attempt to invoke the MAC would likely involve extended and costly litigation with Merrill Lynch that with significant probability

would result in Bank of America being required either to pay substantial damages or to acquire a firm whose value would have been

greatly reduced or destroyed by the strong negative market reaction to the announcement.

For these reasons, I believed that, rather than invoking the

MAC, Bank of America’s best option and the best option for the

system was to work with the Federal Reserve and the Treasury to

develop a contingency plan to ensure that the company would remain stable should the completion of the acquisition and the announcement of losses lead to financial stress, particularly a sudden

pullback of funding of the type that had been experienced by

Wachovia, Lehman, and other firms.

Ultimately, on December 30th, the Bank of America board determined to go forward with the acquisition. The staff of the Federal

Reserve worked diligently with Treasury, other regulators, and

Bank of America to put in place a package that would help shore

up the combined companies’ financial position and reduce the risk

of market disruption. The plan was completed in time to be announced simultaneously with Bank of America’s public earnings

announcement which had been moved forward to January 16th

from January 20th. The package included an additional $20 billion

equity investment from the Troubled Asset Relief Program and a

loss protection arrangement, or RingFence, for a pool of assets valued at about $118 billion. The RingFence arrangement has not

been consummated, and Bank of America now believes that, in

light of the general improvement in the markets, this protection is

no longer needed.

Importantly, the decision to go forward with the merger rightly

remained in the hands of Bank of America’s board and management, and they were obligated to make the choice that they believed was in the best interest of the shareholders and the company. I did not tell Bank of America’s management that the Federal Reserve would take action against the board or management

if they decided to proceed with the MAC. Moreover, I did not instruct anyone to indicate to Bank of America that the Federal Reserve would take any particular action under those circumstances.

I agreed with the view of others that the invocation of the MAC

clause in this case involved significant risk for Bank of America as

well as for Merrill Lynch and the financial system as a whole, and

19

it was this concern that I communicated to Mr. Lewis and his colleagues.

The Federal Reserve also acted appropriately regarding issues of

public disclosure. As I wrote in a letter to this committee, neither

I nor any member of the Federal Reserve ever directed, instructed,

or advised Bank of America to withhold from public disclosure any

information relating to Merrill Lynch, including its losses, compensation packages, or bonuses, or any other related matter. These

disclosure obligations belonged squarely with the company, and the

Federal Reserve did not interfere with the company’s disclosure decisions.

The Federal Reserve had a legitimate interest in knowing when

Bank of America or Merrill Lynch intended to disclose those losses

at Merrill Lynch. Given the fragility of the financial markets at

that time, we were concerned about the potential for a strong adverse market reaction to the reports of significant losses at Merrill

Lynch. If Federal Reserve assistance to stabilize these companies

were to be effective, the necessary facilities would have to be in

place as of the disclosure date. Thus, our planning was importantly

influenced by the company’s planned disclosure schedule, but the

decisions and responsibilities regarding public disclosure always remained, as it should, with the companies themselves.

A related question is whether there should have been earlier disclosure of the aid provided by the U.S. Government to Bank of

America. Importantly, there was no commitment on the part of the

Government regarding the size or structure of the transaction until

very late in the process.

Although we had indicated to Bank of America in December that

the Government would provide assistance, if necessary, to keep the

company from being destabilized, as it had done in other cases during this time of extraordinary stress in financial markets, those December discussions were followed in January by significant and intense negotiations involving Bank of America, the Federal Reserve,

the Treasury, the Federal Deposit Insurance Corporation, and the

Office of the Comptroller of the Currency regarding many key aspects of the assistance transaction, including the type of assistance

to be provided, the size of the protection, the assets to be covered,

the terms for payments, the fees, and the length of the facility. The

agreement in principle on these items was reflected in a term sheet

that was not finalized until just before its public release on January 16, 2009. The Federal Reserve Board and the Treasury completely and appropriately disclosed the information as required by

the Congress in the Emergency Economic Stabilization Act of 2008.

In retrospect, I believe that our actions in this episode, including

the development of an assistance package that facilitated the consummation of Bank of America’s acquisition of Merrill Lynch, were

done not only with the highest integrity but have strengthened

both companies while enhancing the stability of the financial markets and protecting the taxpayers. These actions were taken under

highly unusual circumstances in the face of grave threats to our financial system and our economy. To avoid such situations in the

future, it is critical that the administration, the Congress, and the

regulatory agencies work together to develop a new framework that

20

strengthens and expands supervisory oversight and includes a

broader range of tools to promote financial stability.

I would be pleased to take your questions. Thank you.

[The prepared statement of Mr. Bernanke follows:]

21

22

23

24

25

26

27

Chairman TOWNS. Thank you very much for your testimony. I

will begin with questions. And then, of course, we will allow each

Member to have questions.

Chairman Bernanke, did you instruct Hank Paulson to tell Ken

Lewis that he and his board would be fired if they backed out of

the Merrill deal?

Mr. BERNANKE. I did not.

Chairman TOWNS. Well, I understand that Mr. Paulson told Mr.

Cuomo that you did. I just want to share that with you.

Mr. BERNANKE. I did not instruct Mr. Paulson or anyone else to

convey such a threat or message to Mr. Lewis.

Chairman TOWNS. Did you personally tell Mr. Lewis that you

would fire him or remove the Bank of America board if Mr. Lewis

backed out of the Merrill Lynch deal?

Mr. BERNANKE. I did not.

Chairman TOWNS. Ken Lewis testified under oath here and also

told his board of directors that you and Mr. Paulson made verbal

commitments to him in December 2008 to provide Bank of America

with enough money to fill the hole created by the $12 billion loss

created by Merrill Lynch.

In December 2008, did you promise Mr. Lewis that you would provide Bank of America with enough capital to fill the $12 billion

hole created by the losses at Merrill Lynch?

Mr. BERNANKE. I did not promise any specific amount of money.

What was committed was the commitment of the government to

work in good faith with Bank of America to develop a contingency

plan that would ensure the viability of the company in case of a

financial crisis.

Chairman TOWNS. Chairman Bernanke, in an e-mail the committee recently obtained under subpoena a top employee of the New

York Federal Reserve communicates with your general counsel regarding questions the SEC had about the Bank of America bailout.

Can you explain why Bank of America would complain about

someone talking to the SEC and why it appears that Federal Reserve employees were not completely forthcoming with the SEC

about what was going on at Bank of America?

Mr. BERNANKE. Chairman, I can’t speak for Bank of America, but

I will explain the Federal Reserve’s position.

First of all, the Federal Reserve throughout this process has

worked closely and collaboratively with the other regulatory agencies. As you know, the SEC has two specific functions. One relates

to disclosure. And the Federal Reserve had no issues relating to

disclosure. Those were issues for Bank of America and its shareholders.

Its second function has to do with oversight regulation. In that

capacity, I am sure the SEC already knew about the losses at Merrill Lynch. From our perspective, the issue was that we needed to

work with Bank of America to develop a package that assured the

viability of the company in case of financial instability. The Bank

of America’s regulators besides ourselves were the Office of the

Comptroller of the Currency and the Federal Deposit Insurance

Corporation, whom we involved continually throughout the process

and which I personally spoke to both John Dugan and Sheila Bair

to make sure they were informed about the situation.

28

Chairman TOWNS. So you are saying you were forthcoming?

Mr. BERNANKE. I was, indeed, as appropriate with the other

agencies.

Chairman TOWNS. In another e-mail we obtained recently, the

head of the FDIC says to you there is strong discomfort with the

Bank of America bailout package, and that the FDIC board does

not want to do this.

Mr. Bernanke, what were the concerns at the FDIC about the

Bank of America’s bailout? And why did you and the Treasury Department go through with the bailout despite the concerns that the

FDIC had?

Mr. BERNANKE. My recollection of the FDIC’s concerns were not

with the issues of trying to prevent instability. Their concern was

the FDIC’s own financial exposure to the deal. They noted that

Merrill Lynch was not a bank and, therefore, they wanted to be

sure to restrict whatever financial resources they committed to be

relevant to the bank rather than to the acquired company. So they

had concerns about the structure of the deal as it related to their

own financial exposure, but in the end of course they did agree to

contribute to the arrangement that the government put together.

Chairman TOWNS. Ken Lewis told the committee 2 weeks ago

that he called you and asked you to put in writing the verbal commitment he said you and Hank Paulson made to him regarding a

government bailout of the Merrill Lynch deal. What did he say to

you exactly during that phone call?

Mr. BERNANKE. He wanted to know if we could provide a written

description of the commitment that he could use with his board.

We were unable to provide such written description because we did

not have any deal. We didn’t have a transaction completed at that

point, and so there was nothing specific that we could commit to.

All we had was a good-faith agreement to work together to find

some arrangement that would help avoid destabilization of the

Bank of America.

Chairman TOWNS. My time has expired. I yield to the ranking

member from California.

Mr. ISSA. Thank you, Mr. Chairman.

Following up on the chairman’s line of questioning, you said you

kept the OCC informed and had personal conversations. Can you

explain from your own information you provided to us why Brian

Peters of the Federal Reserve Bank in New York would say: ‘‘Given

the presence of the OCC on the call, I think we should not discuss

or reference the call with Ken Lewis and Paulson?’’

Mr. BERNANKE. I don’t know precisely what motivated that. All

I can tell you is that on the 21st we had two conference calls which

I participated in and which John Dugan participated in, and we

provided him with all the information that I was aware of at that

time.

Mr. ISSA. The e-mail that we received from Jeffrey Lacker, Federal Reserve Bank of Richmond, that indicates that in fact they felt

there was pressure related to the MAC, how do you explain that?

Is that just another independent person that misunderstood?

Mr. BERNANKE. Well, I don’t recall the details of that conversation, but I would like to make two points. First, as I was——

29

Mr. ISSA. Let me just give you the details to make it accurate.

‘‘Just had a long talk with Ben (Bernanke). Says that they think

the MAC threat is irrelevant because it is not credible. Also intends

to make it even more clearer that if they play that card and they

need assistance, management is gone.’’

Now, is he misunderstanding the conversation he had with you

in those quotations?

Mr. BERNANKE. I don’t recollect everything that was said in that

conversation. I would just like to make again two points, if I may.

Mr. ISSA. I would like to have your recollection. Do you believe

that he is incorrect, according to your recollection? Because he is

saying in a nutshell you planned to make a threat. Now, you may

not have done it, but he is saying you planned. Is he lying?

Mr. BERNANKE. I don’t recollect the details of that conversation.

I would like to say two things, if I may. First, that as you point

out, I never did make a threat. I never did raise this issue with

Ken Lewis/Bank of America.

Mr. ISSA. Did you think that pulling the trigger on the MAC was

a bargaining chip?

Mr. BERNANKE. May I make my second point?

Mr. ISSA. Briefly.

Mr. BERNANKE. I would just like to point out that what Mr.

Lacker referred to was not—he didn’t say that if Lewis were to invoke the MAC that he would be fired. He said that if he invoked

the MAC and he required assistance, then there would be consequences. I think if somebody makes a decision that results in

their company failing and being rescued by the government, I think

there should be consequences for it.

Mr. ISSA. Let’s go through the MAC. You threw money in almost

on a daily basis without informing Congress that you planned to

do it because events were moving that quickly that you discovered,

and officers and directors of company after company, AIG,

Wachovia, you name it, made these discoveries and came to you

and you became aware of it on a daily basis. Isn’t that true?

Mr. BERNANKE. We learned about some of these problems at a

very late date. That is true.

Mr. ISSA. Let me put this in perspective. The Fed, the Treasury,

the SEC, the FDIC, they were unable to predict on a day-by-day

basis who was going to be next. That is what we all saw publicly

and privately here. So why is it that between September and December, one would think it is an absence of fair due diligence to

discover that a company that you are seeking to acquire, that we

held hearings on because of Stan O’Neal’s alleged mismanagement

of that company, had deteriorated quickly and that they had not

anticipated toxic assets going bad quickly? Why would that be unreasonable to assume in a deal in the environment in which day

after day after day you are watching collapses of 100-year-old businesses?

Mr. BERNANKE. Well, we did raise the question of whether or not

the Bank of America should have discovered those losses earlier.

But that wasn’t the relevant question for us in terms of maintaining the stability of the financial system going forward.

Mr. ISSA. But we are not talking about the stability of the financial systems. You said that you had three good reasons that BofA

30

should not pull out. And one of them was that their credibility

would be adversely affected and the whole market would be adversely affected if they could not have predicted in 2 months of due

diligence by a company trying to get high dollar, in this case high

stock exchange, in the transactions. So you have an arm’s-length

transaction in which people are trying to tell you only what they

need to tell you to get the highest stock. And you are saying that,

basically, in one of your three points that they would be viewed as

inept.

Well, if I understand correctly, day after day after day’s regulators were discovering, oh—‘‘blank’’—another one’s dropping and

the market is seizing up.

In that environment, wouldn’t it have been just as easy to say,

you are looking at invoking the MAC? What are you trying to get

to? Is your 80 cents to $1 exchange rate of stock—is it in fact materially different? And would you still go through with the deal but

just at a slightly different amount?

Wouldn’t that be the ordinary effect, rather than to say, directly

and indirectly, a number of people clearly communicated, including

Paulson, that they would in fact have to go through with this deal

or else?

Mr. BERNANKE. It was my view and the view of our staff that if

they tried to invoke the MAC, that the market would understand

that the chances of their actually consummating; that is, of the

MAC being successful, was quite low. As a result, both Merrill

Lynch and Bank of America would probably be affected by a financial crisis at that moment. And that was our concern.

Mr. ISSA. Thank you, Mr. Chairman.

Chairman TOWNS. The gentleman’s time has expired. I now yield

5 minutes to the gentleman from Ohio, Congressman Kucinich.

Mr. KUCINICH. Chairman Bernanke, our investigation reveals

that staff at the Fed quickly came to the conclusion that Ken

Lewis’ representations to the government in the meeting of December 17, 2008, were, as one put it, somewhat suspect. At the appropriate time I am going to insert into the record a number of documents that show that senior staff and officials at the Fed believed,

in contradiction to Ken Lewis’ representations, that Bank of America failed to do adequate due diligence in acquiring Merrill Lynch.

The Fed found that Bank of America had known about accelerating

losses at Merrill since mid-November, when shareholders could

have used that information to decide on ratification of the merger.

Your colleague, Governor Warsh, doubted the competence of Bank

of America’s top management to address the problems at Merrill

and at Bank of America, writing to you, ‘‘Spoke with BOA folks

this morning, mostly Joe Price, CFO, did not instill a ton of confidence that they have a comprehensive handle on this situation.’’

And the senior lawyer at the Fed believed that Bank of America

could be in violation of securities laws for failing to inform shareholders about the Merrill losses known in mid-November. And this

is writing to you. ‘‘Lewis should have been aware of the problem

at Merrill Lynch earlier, perhaps as early as mid-November and

not caught by surprise. That could cause other problems for him

around the disclosures BA made for the shareholder vote.’’

31

Chairman Bernanke, did you agree with your senior staff and

colleagues at the Fed who had drawn those unflattering conclusions about Ken Lewis’ management of Bank of America?

Mr. BERNANKE. The staff and the principals at the Fed had serious concerns and questions about——

Mr. KUCINICH. Did you have serious concerns?

Mr. BERNANKE. I did have concerns and questions. But——

Mr. KUCINICH. About the characteristics of the management?

Mr. BERNANKE. I did have concerns. Yes.

Mr. KUCINICH. Our investigation also finds that there was considerable interest at the staff level in the Fed to attach meaningful

conditions to whatever aid package you gave Bank of America because of doubts about the quality of management of Bank of America. However, it is not evident, that you, yourself, had an interest

in increasing accountability of Bank of America’s management.

In talking points prepared by your staff for a conversation you

would have with Bank of America, a number of restrictions were

seriously proposed to accompany any Federal aid to Bank of America. I would like to go through some of these suggested conditions,

and assess whether you in fact imposed those conditions on Bank

of America.

Did you require any changes in Bank of America’s top management in view of the considerable evidence amassed by your staff

that Ken Lewis had not done adequate due diligence and may have

committed securities fraud?

Mr. BERNANKE. Subsequently to the transaction, we have asked

and required Bank of America to look at its top management, and

they have made changes in their board.

Mr. KUCINICH. Was that a yes or a no?

Mr. BERNANKE. The answer is, yes, we have done that.

Mr. KUCINICH. OK. Did you require more severe executive compensation limitations for Bank of America than had been required

under the TARP program in which the conditions were deliberately

not intended to be onerous so as to maximize participation by

banks that did not need financial assistance?

Mr. BERNANKE. I believe the executive compensation restrictions

that were imposed were those—the standard ones but the ones associated with extraordinary actions on the TARP.

Mr. KUCINICH. Did you require any limitation on various types

of corporate expenses with Bank of America, other than those it

had already imposed on itself?

Mr. BERNANKE. Not that I recall.

Mr. KUCINICH. Did you require a government foreclosure policy,

such as was imposed by the FDIC in the case of IndyMac.

Mr. BERNANKE. Yes. I believe we did. I believe we did.

Mr. KUCINICH. Do you know for sure?

Mr. BERNANKE. I will get back to you, but it is my belief that we

did.

Mr. KUCINICH. We need to know that.

Now, Chairman Bernanke, isn’t it true that there was a highlevel concern at the Fed about neglecting the opportunity to press

for greater accountability in Bank of America’s corporate management?

32

Let me direct your attention to an e-mail sent to you by Eric

Rosengren, President of the Boston Fed. It says, ‘‘Dear Ben, I am

concerned if we too quickly move to a RingFence strategy, particularly if we believe that existing management is a significant source

of the problem and that they do not have a good grasp of the extent

of their problems and appropriate strategies to resolve them. I

think it is instructive to look at the example of the Royal Bank of

Scotland, the U.K., replace senior management. The bank is maintaining operations without significant disruptions. I would not

want to discard this option prematurely.’’ That is a quote.

Chairman Bernanke, Ken Lewis came to you with a story that

the Fed didn’t believe. You were getting advice from your staff and

from peers that considerable concessions should be required of

Bank of America because of concern about the quality of top management, and yet you decided to give the aid away without any

meaningful changes to Bank of America’s corporate management or

its compensation policies.

How do you explain that, Mr. Chairman.

Mr. BERNANKE. Congressman, the supervisory process is not a

one time thing. It is an ongoing process. And in our ongoing supervisory process we have made demands of the Bank of America in

terms of their management.

Mr. KUCINICH. So you give them the money first and then you

start supervising?

Mr. BERNANKE. Well, we have the ability to insist on these

changes at any point.

Mr. KUCINICH. Thank you, Mr. Chairman.

Chairman TOWNS. Thank you very much. I now yield to the gentleman from Indiana, Mr. Burton.

Mr. BURTON. Is Mr. Lewis lying?

Mr. BERNANKE. With respect to what, sir?

Mr. BURTON. I said is Mr. Lewis lying when he tells this committee that you put pressure on him along with Mr. Paulson?

Mr. BERNANKE. All I know is that I never said that I would replace the board and management if he invoked the MAC.

Mr. BURTON. What did you say? Sometimes there is an implication without a direct order.

Mr. BERNANKE. I expressed concerns about the effects of invoking

the MAC both on the financial system and on the Bank of America

itself, expressed those concerns, which is appropriate. But it was

always his decision whether or not to go ahead and take that decision.

Mr. BURTON. Did Mr. Paulson lie when he told Mr. Cuomo that

he was acting under your suggestions or orders to tell them that

the board would be fired if they didn’t comply?

Mr. BERNANKE. I believe he has modified that statement. I did

not tell Mr. Paulson——

Mr. BURTON. What did you tell him?

Mr. BERNANKE. I didn’t tell him anything like that.

Mr. BURTON. What did you tell him? You say you didn’t tell him

anything like that.

Mr. BERNANKE. Mr. Paulson and I had conversation on a variety

of matters. All I can say is I am sure that I never told him to convey such a message to Ken Lewis.

33

Mr. BURTON. Mr. Paulson says in a letter from New York Attorney General Andrew Cuomo to Congress, told him that Paulson

made the threat at the request of Bernanke. That is not correct?

Mr. BERNANKE. No.

Mr. BURTON. Did you say he modified his statement? How did he

modify his statement? We don’t have any information.

Mr. BERNANKE. He issued a statement to the effect that he did

not receive that information from me, that he made inferences but

he did not—as far as I know, he modified his statement on that

particular issue.

Mr. BURTON. How about Mr. Lacker? Is he lying?

Mr. BERNANKE. He is summarizing a long conversation. I don’t

recall exactly what was said.

Mr. BURTON. ‘‘Just had a long talk with Ben. Says they think the

MAC threat is irrelevant because it is not credible. Also intends to

make it even more clear that if they play that card and then need

assistance, management is gone.’’ You didn’t say anything like

that?

Mr. BERNANKE. I don’t know if I did or not.

Mr. BURTON. You know one of the things, I was chairman of this

committee for 6 years and we did a lot of investigating. One of the

things that I learned was in order to keep people from perjuring

themselves they couldn’t remember anything.

Are you sure you can’t remember?

Mr. BERNANKE. I am sure I can’t remember. But I think it is important to note that whatever conversation I had with Mr. Lacker,

who is a Federal Reserve official, that I did not—in subsequent

conversations with Mr. Lewis did not make that threat.

Mr. BURTON. Why did you keep the SEC in the dark?

Mr. BERNANKE. I did not keep the SEC in the dark. We were

working carefully and closely with our other regulatory agencies.

The agencies that were most relevant for the Bank of America discussion were those that were involved in regulating the Bank of

America and in the transaction. That would have been the Treasury, the Federal Deposit Insurance Corporation and the Office of

the Comptroller of the Currency, who were well-informed.

Mr. BURTON. Well, according to the New York Attorney General,

Mr. Cuomo, Hank Paulson said that he intentionally kept the SEC

out of the loop about your efforts to police the Bank of America

merger with Merrill Lynch. This seems to be backed up by the following exchange between your General Counsel Scott Alvarez and

a New York Fed official: ‘‘The New York Fed officials asked have

we conveyed anything to the SEC regarding the Bank of America

situation? They know something is up. How much, if anything, has

been shared with the SEC?’’ Mr. Alvarez has replied, ‘‘I have not

discussed this with the SEC. Bank of America has complained that

someone did talk to the SEC with the result that the SEC called

late last week to say that they heard the Bank of America was negotiating a Citi type deal with the U.S. Government and to ask

Bank of America to explain the unexpectedly high losses at Merrill

Lynch.’’

You didn’t direct any of those?

Mr. BERNANKE. I did not.

Mr. BURTON. Does Mr. Alvarez work for you?

34

Mr. BERNANKE. He does.

Mr. BURTON. He does? He did this on his own?

Mr. BERNANKE. Again, I would emphasize that the issues at

hand did not directly involve the SEC. They involved the OCC——

Mr. BURTON. Are you his boss?

Mr. BERNANKE. I’m sorry.

Mr. BURTON. Are you his boss?

Mr. BERNANKE. Yes.

Mr. BURTON. Mr. Alvarez.

Mr. BERNANKE. I am.

Mr. BURTON. Would he do something like this, make this kind

of a statement that could cause these kinds of problems without

your authority?

Mr. BERNANKE. I didn’t have any knowledge of this particular exchange. And again, the rationale for it, as I understand now, having discussed it with him, is that the agencies that were relevant

to our transaction were the FDIC, the OCC, and the Treasury.

That is the ones that we kept closest in communication.

Chairman TOWNS. The gentleman’s time has expired. Mr. Foster

from Illinois.

Mr. FOSTER. Thank you for appearing here, Chairman Bernanke.

I appreciate it and I am sure everyone here does.

Just for clarity, at any point in these negotiations did you or anyone you know of point out to Mr. Lewis that the government agencies had the power to remove him and/or the Bank of America

board?

Mr. BERNANKE. I did not.

Mr. FOSTER. Now, without any specific reference to the case at

hand, do you believe that there are circumstances in which the

CEO of a systemically important firm might be expected to have

his shareholders take a bullet to protect the overall health of the

economy in a crisis situation?

Mr. BERNANKE. No. That is not appropriate under supervisory

practice, and we have not done that.

Mr. FOSTER. So do you believe that there is any need for any additional legal clarity about the duties of a CEO to the shareholders,

to the regulators, and to the overall economy in times of systemic

crisis?

Mr. BERNANKE. Well, that might be something for Congress to

consider, but I think the rules as they currently stand are quite

clear that you can’t force somebody to take actions against the interest of that company for systemic reasons alone.

Mr. FOSTER. So you did not sense at any time in this that there

were ambiguities that would be better if they had been made explicit in law?

Mr. BERNANKE. It was always clear in our thinking and in our

advice to Mr. Lewis that it was not just an issue with the financial

system but also an issue of Bank of America specifically that was

at risk and that he should take that into consideration when he

made his decision.

Mr. FOSTER. So it was the indirect benefits to the shareholders

from not having the whole system collapse that he was optimizing

for?

Mr. BERNANKE. Correct.

35

Mr. FOSTER. Now, if you accepted that Federal recapitalization of

both Merrill and Bank of America were probably inevitable, do you

think that the net effect of the merger was just representative of

the reshuffling around of the total funds that we would eventually

have to commit or do you think it is a more complicated situation

than that?

Mr. BERNANKE. No, I think the combination strengthened the

two companies and particular what we learned during the crisis

was that the investment banking model was not very stable, that

it was subject to funding problems. By combining Bank of America,

with a large retail deposit base, it was possible to solve some of

those funding problems to some extent.

Mr. FOSTER. Thanks again. I yield back the balance of my time.

Chairman TOWNS. I yield to the gentleman from Ohio, Mr. Jordan.

Mr. JORDAN. Thank you, Mr. Chairman. Chairman Bernanke, let

me go back to what I think sort of starts this pattern of pressure

on behalf of the government, pattern of intimidation. I want to go

back to the October 13th initial meeting that my understanding is

you, Mr. Paulson, Ms. Bair, Mr. Geithner had the nine biggest

banks come here to Washington. Was that meeting something that

you and Mr. Paulson decided needed to happen? Was that your

call, his call? How did that happen?

Mr. BERNANKE. My recollection is Mr. Paulson’s decision. But we

all participated in that meeting.

Mr. JORDAN. Mr. Lewis in his testimony a few weeks ago he said

the meeting—he described the meeting with the four of you on one

side, the nine CEOs of the banks on another. They were given a

form to sign where they had to write in the amount of TARP

money, bailout money that they felt that was needed or that you

suggested. The impression he left with this committee was that

they had to comply. In fact, I asked him permanently. Did anyone

express any reservations at that meeting about accepting taxpayer

money? He said, yes, one of the other CEOs in fact did express reservations. Nevertheless, they signed that. He also indicated that

the entire meeting took less than an hour.

Is that an accurate description of what took place in that meeting?

Mr. BERNANKE. I think the time was less than an hour. Yes.

Mr. JORDAN. And he also said when I asked him did he know

what the meeting was going to be about when he came here to

Washington, he informed the committee that he had no idea it was

going to be about signing a form being forced to accept TARP

money.

Is that accurate?

Mr. BERNANKE. I don’t know.

Mr. JORDAN. Well, let me ask it this way. Did you inform the

nine CEOs of the banks who were called to Washington that the

meeting was going to be about them taking TARP money from the

legislation that had just enabled that to happen that frankly had

just been passed 2 weeks prior to that?

Mr. BERNANKE. I was not in contact with the nine CEOs. I think

the Treasury was in contact with them.

36

Mr. JORDAN. Do you believe that Mr. Paulson let them know

what the meeting was about?

Mr. BERNANKE. I do not know.

Mr. JORDAN. But the recollection of how I described the meeting

and how Mr. Lewis described the meeting, that is in fact what took

place that day? Less than an hour, nine CEOs given a form they

had to sign saying they were going to take a certain amount of government money.

Mr. BERNANKE. Mr. Paulson strongly urged them to take capital

and argued that, given what was going on in the world at that

time, which was a global financial crisis, that it was very much in

their interest and the interest of the financial system for them to

do so, and they signed the forms.

Mr. JORDAN. Again, Mr. Lewis felt like they had to sign that

form, had to comply, based on the testimony he gave this committee. Then we jump forward 2 months ahead to December, and we

have the e-mail and letter that both Mr. Issa and Mr. Burton had

brought up. The letter that Mr. Cuomo a New York AG sent to

Members of Congress, where he said, Secretary Paulson has informed us that he made the threat dealing with the Merrill Lynch

acquisition at the request of Chairman Bernanke.

We also have the e-mail from Mr. Lacker, the Richmond Fed

chairman talking about, just had a long talk with Mr. Bernanke,

who says that I think the MAC threat is irrelevant because it is

not credible, also tends to make it even more clear that if they play

that card and they need assistance management is gone.

And then the third one I would point out, too, is the e-mail from

Mr. Angulo at the New York Fed which deals with the disclosure

concern. Also this is in December of last year where he says: ‘‘I

think I will ask Merrill Lynch a current estimate of the fourth

quarter.’’

And he makes a statement: ‘‘If I get a sense that Merrill Lynch

is leaning toward an early January filing, I will try to steer them

toward a later filing.’’

I mean, I guess what I am trying to point out is you have all this

pattern here and—which, as I asked Mr. Lewis when he was here,

if what took place at the October 13th had an impact on his decisionmaking, his thought process, as he moves through this dealings

in December with you and with Treasury relative to the Merrill

Lynch acquisition.

Do you see how a reasonable person could reach the conclusion

that there, in fact, was this pattern of pressure from the government?

Mr. BERNANKE. No, not if you’re sufficiently informed. As I said,

I did not tell Mr. Paulson to convey any threats. The e-mail from

Mr. Lacker was a summary of a long conversation. It very explicitly

said that problems with the management would be related to their

needing assistance in an emergency situation. And as I said——

Mr. JORDAN. Need assistance? They already had assistance. You

made him take it on October 13th. So I don’t see how those two

clauses—you made that point when Mr. Issa was questioning you.

They already had assistance. You made them take $15 billion October 13th.

37

Mr. BERNANKE. No, they revoked the MAC, against our advice,

and then they had to be rescued on a Sunday afternoon operation

at great cost and risk. That would hardly be an accommodation for

the management’s quality.

Chairman TOWNS. The gentleman’s time has expired.

Mr. JORDAN. Thank you.

Chairman TOWNS. The gentlewoman from California, Congresswoman Speier.

Ms. SPEIER. Thank you, Mr. Chairman.

Mr. Bernanke, what went into your decision to allow Lehman to

fail?

Mr. BERNANKE. It bears very much on this discussion. The problem was that we were unable to save it within legal means. We had

made every attempt to do so, but we had no legal authority to inject capital at that time, and we had no legal authority to compel

Mr. Lewis, for that matter, to buy Lehman, and therefore we had

no way to prevent a failure. If we could have done so, we would

have done so.

Ms. SPEIER. Well you did, in fact, save AIG that same weekend.

Mr. BERNANKE. The conditions were quite different, because

there the financial products division was part of a much larger insurance company which could provide the collateral for a loan to

replace the loss of liquidity that financial company was experiencing. So it was a very different situation.

Ms. SPEIER. So if you had TARP funds at the time, you would

have saved Lehman Brothers as well.

Mr. BERNANKE. I believe we would have at least given that a try.

Ms. SPEIER. Let me ask you about the process that you went through in determining to give Bank of America $15 billion in October. Why that number, how did you come up with that number?

Mr. BERNANKE. I did not develop that number. I’m sure it was

related to the size of the firm and its capital ratios.

Ms. SPEIER. Who came up with that number?

Mr. BERNANKE. I’m not certain. It was probably Treasury, but

I’m not certain.

Ms. SPEIER. You are not certain who came up with the number?

Mr. BERNANKE. No.

Ms. SPEIER. And so the $10 billion that was given to Merrill

Lynch at a subsequent point in time, you don’t know who came up

with that number either?

Mr. BERNANKE. This was TARP money and this was the Treasury’s responsibility.

Ms. SPEIER. And you didn’t have conversations with Mr. Paulson

about this?

Mr. BERNANKE. I don’t recall.

Ms. SPEIER. As I look at it, it appears that if you take the $15

billion that BofA got in October, the $15 billion that Merrill got,

the $20 billion that was given to BofA in January, that pretty

much pays for what the BofA paid for Merrill. So did the American

people basically subsidize the purchase of Merrill Lynch to Bank of

America?

Mr. BERNANKE. No. The American people made a capital investment, on which they are currently getting dividends, and which I

expect they’ll be fully repaid.

38

Ms. SPEIER. The obligation to inform the OCC and SEC, do you

believe you have an obligation to inform them about any erratic

conditions of companies that you come in contact with?

Mr. BERNANKE. It depends what kind of company it is. This was

a bank, and therefore the most pressing communication were with

the bank regulators, the FDIC and the OCC, which we did inform.

And I personally informed both Mr. Duggan and Ms. Bair about

the situation, and we had them on conference calls to discuss the

situation in some detail. The SEC is not directly a supervisor of

Bank of America.

Ms. SPEIER. May not be a supervisor, but certainly the way they

engage in their business relative to stock is of interest to the SEC,

is it not?

Mr. BERNANKE. Repeat the question, please.

Ms. SPEIER. Doesn’t the SEC have a role in evaluating the bank

as it relates to its investor relations.

Mr. BERNANKE. Yes, but that’s the Bank of America’s responsibility, not ours.

Ms. SPEIER. Well, we’re all one government, aren’t we?

Mr. BERNANKE. Well, we all have our spheres of responsibility as

well.

Ms. SPEIER. So you didn’t believe you had a responsibility to inform the SEC.

Mr. BERNANKE. Well, we were dealing with an emergency situation, and our focus was on the agencies that were most relevant to

the situation. That was the banking regulators, so that’s who we

focused on.

Ms. SPEIER. But some of these e-mails would suggest that there

was an active interest in not telling the SEC certain things, and

that they were finding out through other means. I mean, this is a

government. We are all part of the government. It’s really our responsibility to work together. So it appears that someone was trying to hide the ball, and I’m just trying to understand why.

Mr. BERNANKE. There was just no priority to go to the SEC, but

we did disclose to them what was going on. And I think it’s appropriate for them to know, broadly speaking, what was going on.

Ms. SPEIER. Do you believe that Bank of America had a responsibility to inform its shareholders and the American people that it

was going to get another injection of $20 billion from the U.S. Government?

Mr. BERNANKE. That was——

Ms. SPEIER. Earlier than January 20th?

Mr. BERNANKE. That was Bank of America’s decision and their

counsel.

Ms. SPEIER. I’m just asking you.

Mr. BERNANKE. I’m not a lawyer. I can’t tell you.

Ms. SPEIER. Do you think you had a responsibility as the head

of the Fed to tell the American people that we were going to inject

another $20 billion into the Bank of America earlier than January

20th?

Mr. BERNANKE. My responsibilities are very explicitly set out by

the Emergency Economic Stabilization Act, which says that after

the completion of a deal we must report within 1 week, which we

did.

39

Ms. SPEIER. So you don’t think you had any further responsibility.

Mr. BERNANKE. We followed the law exactly.

Ms. SPEIER. In hindsight—you know, hindsight is always 20/20—

is there anything that you would do differently?

Mr. BERNANKE. I think it was a very successful transaction. It

helped stabilize the financial markets. It put the two companies

back on a healthy path. It protected our economy, and it was a

good deal for taxpayers. I think I have nothing that I regret about

the whole transaction. I think it was, in fact, a very successful operation overall and it achieved the public policy objectives that

were very important.

Ms. SPEIER. I yield back.

Chairman TOWNS. The gentlewoman’s time is expired. I yield to

the gentleman from Utah, Congressman Chaffetz.

Mr. CHAFFETZ. Thank you, Mr. Chairman. I appreciate it.

And thank you, Mr. Chairman, for being here. A question. For

those recipients of the TARP money, do you have the power and

authority to replace the board or its president?

Mr. BERNANKE. That’s a good question. The Treasury with its

ownership——

Mr. CHAFFETZ. Thank you.

Mr. BERNANKE. You’re welcome. The Treasury with its ownership, obviously, has some influence, but it has not used that influence.

Mr. CHAFFETZ. But it could.

Mr. BERNANKE. I suppose it could, yes. The supervisors of the

Federal Reserve can make changes or recommend changes in management if we believe that the management——

Mr. CHAFFETZ. Let me move on. My time is short. I appreciate

it.

So on this December 17th meeting you are meeting in person,

you have their chairman—or the CEO, Lewis, who is there expressing that he might invoke the MAC.

And then in your written testimony today on page 2, it says, ‘‘in

responding to Bank of America in these discussions I expressed

concern that invoking the MAC would entail significant risks.’’

Going down to your point you made on No. 2, mid-sentence it

said, because you had concerns and you expressed this back, it cast

doubt in the minds of the financial market participants, including

investors, creditors and customers about the due diligence and

analysis done by the company, its capability to consummate significant acquisitions, its overall risk management processes and judgment of its management.

How is that not a threat? If you have the power and authority

to release the board of directors and fire the CEO and you are

questioning their judgment and you are saying if you don’t go

through with this deal, how is that not a threat?

Mr. BERNANKE. I never said anything about firing the board and

the management.

Mr. CHAFFETZ. But if you are questioning somebody’s judgment

and you are in the supervisory role with the authority to let them

go, how is that not a threat?

40

Mr. BERNANKE. I was focusing particularly—and this was based

on supervisory advice—on the reaction of the marketplace. What

you have to understand is that during this period the markets were

extraordinarily fragile, and very quickly money could pull away

from a bank and put it into serious trouble, very quickly. That’s

what happened to Wachovia, for example.

Mr. CHAFFETZ. So you think that was a threat—your belief on

what the threat would be from the market. But how could that not

be a threat directly to Mr. Lewis and its board of directors, if you

are questioning their judgment?

Mr. BERNANKE. We advised him that we didn’t think it was a

good idea from the perspective of Bank of America for him to take

that action. However, if he had taken it, it was his option to take

it. And if he had taken it and there had been no adverse consequences, we would not have had much basis for responding to

that.

Mr. CHAFFETZ. With all due respect, I’m just not buying that.

You are in charge, you have the ability to affect their outcome, to

fire them, to let them go. You are telling them that if they don’t

come to the same conclusion as you do that they would obviously—

everybody in the room, everybody in the marketplace, would know

that their judgment was miscalculated.

I think that’s a threat, and I think it’s reasonable for the CEO

and the board of directors to take that as a threat. I don’t see any

other conclusion. If we were sitting across the table, you controlled

my destiny, that’s one of the consequences.

Mr. BERNANKE. Well, we don’t control his destiny unconditionally. We would have to make a case that he made decisions that

were damaging to the company. And if he had made that decision

and the company had prospered, there would be no basis whatsoever for any action.

Mr. CHAFFETZ. All right. I’m going to move on.

I want to go to page 4 of your testimony here. It says in the second—in the kind of mid-paragraph, this is from your testimony

today—‘‘neither I nor any member of the Federal Reserve ever directed, instructed or advised Bank of America to withhold from

public disclosure any information related to Merrill Lynch.’’

And yet in an e-mail of December 22nd, e-mail No. 18, we get

this quote from Art Angulo. I believe Mr. Jordan referenced this

earlier. ‘‘I’ll ask Merrill Lynch’s current estimate of fourth quarter

losses versus market expectations and whether and when Merrill

Lynch intends to file an 8(k). If I get a sense that Merrill Lynch

is leaning toward an early January filing, I’ll try to steer him toward a later filing.’’

That is so inconsistent with the comment that you made. Do you

see that they’re consistent or is there an inconsistency here?

Mr. BERNANKE. Well, I didn’t see that e-mail exchange until after

I had written my letter. But having looked now at the exchange,

I note that if you look at the subsequent e-mails, that in fact Merrill Lynch had taken its disclosure decision and Mr. Angulo did not

attempt to make them change it.

So in the event, he did not make any attempt to effect the disclosure.

Mr. CHAFFETZ. But the intent is still there right?

41

Mr. BERNANKE. But he did not take the action.

Mr. CHAFFETZ. Do you feel in any way, shape or form that you

adversely affected or threatened Mr. Lewis or the board of directors?

Mr. BERNANKE. I do not.

Mr. CHAFFETZ. Thank you, Mr. Chairman.

Chairman TOWNS. Thank you very much. The gentleman from

Virginia, Mr. Connolly.

Mr. CONNOLLY. Thank you, Mr. Chairman. And welcome Chairman Bernanke.

Mr. Bernanke, I guess I come at it just a little bit differently

than my friend from Utah. I guess I’m interested in who was really

threatening whom. At what point did you learn from Mr. Lewis

that the deal with Merrill Lynch, oops, had a $12 billion hold to

it that they hadn’t realized in doing their due diligence?

Mr. BERNANKE. On December 17th.

Mr. CONNOLLY. I can’t hear you, sir.

Mr. BERNANKE. On December 17th when he called Secretary

Paulson.

Mr. CONNOLLY. On December 17th?

Mr. BERNANKE. Yes.

Mr. CONNOLLY. And when in retrospect, to your knowledge, did they learn they had a $12 billion problem?

Mr. BERNANKE. They claimed they had not known any earlier

than December 14th, and we have no direct evidence to the contrary.

Mr. CONNOLLY. Were you concerned about the lack of due diligence on their part?

Mr. BERNANKE. We did have concerns about it, yes.

Mr. CONNOLLY. Did you take it as a threat or do you think—well,

did you take it as a threat or did other senior Federal officials perhaps discuss it as a threat, implied or otherwise, that Mr. Lewis,

far from being a victim here, was actually manipulating the Federal Government that we’re going to back out of this deal because

of that $12 billion problem we didn’t catch, unless in exchange we

get some assurance from you the TARP money will help us cover

that little $12 billion problem?

Mr. BERNANKE. I was concerned about that when I first heard

about this, that there might be some attempt to get government

support or government subsidy on that basis. After some meetings

with Mr. Lewis my impression became that he was genuinely undecided about what to do and rather uncertain about how to go forward. So that impression faded after some time, but I was worried

about that at the beginning.

Mr. CONNOLLY. Was there any discussion about, at that time

when you learned about it, Chairman Bernanke, the need to disclose this to the public and to the shareholders of Bank of America?

Mr. BERNANKE. We leave the disclosures to the responsibility of

the management of Bank of America and their counsel. And we left

that decision to them completely.

Mr. CONNOLLY. You are aware of the fact that under oath Mr.

Lewis said that there was no deliberate attempt to keep this from

the public, that people were just trying to work out the details.

When in fact, subsequently, this committee is in possession of an

42

e-mail from him dated, I believe, December 22nd, that in conversations with both the Fed and with Treasury, strong reaction on the

part of the Federal officials not to disclose or to put anything in

writing because they didn’t want at that point this to come out in

the public forum because of adverse reactions in the market.

Mr. BERNANKE. I never conveyed any such thought.

Mr. CONNOLLY. When asked—well, let me read to you, if I may,

an excerpt from the minutes of the December 22nd BOA board

hearing or meeting.

‘‘He,’’ Mr. Lewis, ‘‘reported that in addition to the previously described conversations he had spoken again with Mr. Bernanke, who

stated that he,’’ Mr. Bernanke, ‘‘had spoken to other Federal regulators, and we are informed of the commitment of the corporation

by the Fed and Treasury that all concur with the commitment of

the Federal regulators,’’ obviously to BOA.

Could you comment on that? What is that in reference to and

what is the nature of the commitment he’s referring to?

Mr. BERNANKE. Well, as I mentioned before, we did inform—the

Treasury and the Fed informed the FDIC and the OCC about the

situation, and about the Fed and Treasury’s commitment to work

in good faith with the Bank of America to find a transaction, a

package, that would avoid destabilization of the company in the

event of a financial crisis. I can say that the other agencies certainly were in sympathy with the idea of trying to stabilize the

company. But at that point there had not been any specific transaction laid on the table, and so there was no agreement on a specific shape and structure of the transaction.

Mr. CONNOLLY. I’m going to have to sneak this in in a mouthful.

If you would respond, Chairman Bernanke, because my time is

about to be up.

When and how did you learn that Mr. Lewis had threatened not

once—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 would sort of unravel a lot of things and therefore we had to

accelerate the TARP funding for BOA? And did you take it, or, to

your knowledge, did Secretary Paulson take it as an implied threat

that if I don’t get that, I’m going to go public and let everybody

know we’re pulling out of the deal?

Mr. BERNANKE. When I first heard about it on December 17th,

I took that as a possibility which I was concerned about, but subsequently I thought that, as I said, that Mr. Lewis was genuinely uncertain about how to proceed.

Mr. CONNOLLY. Mr. Chairman, my time is up. But I just want

to say on the record, while some want this narrative to be this poor

CEO, you know, moderately-sized bank with the hob-nailed boot of

government on his neck forcing him to do things he didn’t want to

do, I believe the narrative lends itself to a very different interpretation of a wily CEO of a major corporation gaming the system because he could recognize an opportunity when he saw it, and it was

a $15 billion to $20 billion opportunity.

My time is up. I thank the Chair and I thank Chairman

Bernanke.

43

Chairman TOWNS. I thank the gentleman. I yield now 5 minutes

to the gentleman from Tennessee, Congressman Duncan.

Mr. DUNCAN. Thank you very much, Mr. Chairman.

Chairman Bernanke, many articles and columns had described

the actions taken by the Fed in regard to the Bank of AmericaMerrill 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 in that

way, and do you think there needs to be more control or a little

closer oversight by the Fed and other Federal regulators of the biggest banks and financial firms?

Mr. BERNANKE. 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, like Lehman,

would significantly disrupt the world financial system and the

world economy. We had no good options to deal with those companies.

It’s extraordinarily important, as I’ve said for some time, that as

Congress reforms the financial regulatory system that we develop

a resolution regime for solving failing systemically critical firms,

that we increase the oversight of those firms, and that we take

steps to make sure that too-big-to-fail will not be a problem in the

future. So I agree very strongly with that.

Mr. DUNCAN. And let me ask you, I’ve read many articles over

these last few months and I’ve seen all different sorts of figures as

to how much money in total the Fed has loaned, pledged, paid in

all the different bailouts. Would you tell us what you believe the

total amount to be that the Fed has committed over these last few

months?

Mr. BERNANKE. In terms of bailouts, the amount of money we had involved in AIG and Bear Stearns is about $100 billion.

Mr. DUNCAN. And in other actions that you’ve taken, I’ve seen

figures as high as—I’ve seen figures like $2.2 trillion.

Mr. BERNANKE. Our balance sheet is $2.2 trillion, but more than

half of that is U.S. Government bonds and government-guaranteed

mortgage-backed securities, which have no risk and which 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 provide liquidity to support

the financial system.

So none of that I would characterize as a bailout, other than the

moneys that were involved in the AIG and Bear Stearns situations,

which we got involved in with great regret, and I hope that the system will be changed so that there it will never be necessary in the

future.

Mr. DUNCAN. But Congress Daily says this morning that Fed officials purposefully declined to consult with other financial regulators, and one e-mail expressed concern the SEC employee, ‘‘knows

something is up.’’

The Wall Street Journal reported that you and 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.

44

What would you say to the majority of this Congress who has

now co-sponored—who have 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?

Mr. BERNANKE. The Federal Reserve has made enormous strides

in the last year under my chairmanship to expand the information

that we release. We release monthly information on all the various

programs that we have. We’ve 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 you to make sure that you are comfortable that they are well

managed and are serving a public purpose.

Mr. DUNCAN. Do you think it would cause problems for the Fed

or for the economy if that legislation was to pass?

Mr. BERNANKE. My concern about the legislation is that if the

GAO is auditing not only the operational aspects of our programs

and the details of the programs, but is making judgments about

our policy decisions, that would effectively be a takeover of monetary policy by the Congress, a repudiation of the independence of

the Federal Reserve, which would be highly destructive to the stability of the financial system, the dollar, and our national economic

situation.

Mr. DUNCAN. Thank you.

Chairman TOWNS. Thank you, the gentleman from Tennessee.

Thank you very much.

I now yield 5 minutes to the gentlewoman from Ohio, Marcy

Kaptur.

Ms. KAPTUR. Thank you, Mr. Chairman, very much.

And, Chairman Bernanke, welcome to this committee. I am very

concerned about those who create money in our society and how we

hold them accountable. For those who counterfeit, if we can find

them, most often they go to jail for a long time. But to those who

create money in sophisticated ways through our financial 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 BlackRock 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

BlackRock which now owns a near majority share of Bank of America. Recently—that had to do with the interrelationship between

BlackRock and Merrill Lynch, as you know.

Recently the Fed has just hired BlackRock to execute at least

four contracts, and maybe five, to analyze and handle the troubled

assets of Freddie Mac and Fannie Mae, making BlackRock the

45

dominant player in pricing these distressed assets. I am concerned

that BlackRock 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 tranche of mortgage-backed securities

to Freddie Mac? The first tranche was $1 billion. Do you know

what year that occurred in?

Mr. BERNANKE. I do not.

Ms. KAPTUR. Do you think that’s important for you to know?

Mr. BERNANKE. No, I don’t, because the arrangements we have

with BlackRock and with other asset management companies are

carefully set up to prevent conflicts of interest, to set up firewalls

between the portion of the company that’s working for us and the

portion of the company that’s engaging in other market activities.

Ms. KAPTUR. Do you know what other instruments BlackRock

and its subsidies sold to the Federal Government over the last 10

years?

Mr. BERNANKE. No, I don’t.

Ms. KAPTUR. You do not. Well, I would say that I think it’s pretty

important for you to know some of that. Because one of the difficulties with these securities is you can’t unwind them. You cut them

up in pieces, you 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.

Mr. BERNANKE. We can provide you with the contracts we have

with BlackRock. And they involve very careful controls to make

sure there’s a separation between the parts of the company that

are working managing the assets of the Fed according to our instructions, and the other parts of the company that are involved in

a variety of asset management activities.

Ms. KAPTUR. Well, 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 Fed. However, the contracts that were placed there have

multiple exhibits missing.

For example, the investment guidelines are absent, except for

one single statement of policy objective. The fee schedules and the

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 omit the fee schedule and payment procedures?

Mr. BERNANKE. We have a committee that works through all of

these different types of information, some of which is confidential

or proprietary, and releases all that it believes is appropriate. But

46

I will go back and talk to them and make sure they are looking

at all those issues.

Ms. KAPTUR. Well, I will tell you, the housing crisis is at the

heart of this economic crisis. And if we are going to fix what’s gone

wrong in this society, it seems to me that those who hold extraordinary power to create money—and certainly the New York Federal

Reserve has more power in that 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 what you 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

that the public of the United States now owns. And I am not convinced what you’ve said to me about the contracts that the Fed has

signed with BlackRock will be properly administered in a way that

will be fair and impartial to all holders. And I hope that you can

provide information to the record to convince me that my suspicions are unwarranted.

Chairman TOWNS. The gentlewoman’s time is expired. Congressman Souder from Indiana.

Mr. SOUDER. 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 certainly have 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 Bank of America at the same time that Bank of

America probably used the situation to try to leverage their best

gain—do you see how you got involved here as 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——

Chairman TOWNS. Could the gentleman talk directly into the

mic? We are having difficulty hearing you.

Mr. SOUDER. That several other times in—whether it be the

Asian flu or various mini-crises, had you been Fed chairman taken

this aggressive a role?

Mr. BERNANKE. The past 2 years have been the worst financial

crisis since the 1930’s. It has threatened disability of the global financial system and the global economy. Extraordinary actions had

to be taken. We’ve learned a great deal from them. And as I said

in my testimony, I hope that Congress will take actions to ensure

that the system will remain 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.

Mr. SOUDER. And how do you see yourself extricating at this

point—given the fact that you’ve been fairly politicalized, your

Treasury is directly political, you have quasi-political entities that

you are working with now indirectly in TARP and TARF and all

the different programs, we have equity stake in companies—how do

you get yourself untwined from this so you are not totally

politicalized?

Mr. BERNANKE. Well, we work closely with the Treasury to deal

with the crisis. As the crisis ends, we will withdraw all of our nonVerDate 11-MAY-2000 14:36 Apr 19, 2010 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 U:\DOCS\55102.TXT KATIE PsN: KATIE
47

standard programs. We saw just a couple of weeks ago that 10

banks repaid their TARP money, and, as we go forward, will expect

to see more withdrawal of programs and support as the economy

normalizes and the financial system normalizes.

Mr. SOUDER. 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 percent 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 thing, most of that was the nonbank

sector—how do you see the Fed in the future dealing with this

nonbank sector which isn’t normally where you would be?

Mr. BERNANKE. Well, there are a number of suggestions in the

administration’s reform plan and other reform plans for dealing

with that. Certainly the extraordinary steps we’ve taken, for example, to revitalize the asset-backed securities market—we’re seeing

a lot of progress there, by the way, as that market revitalizes and

financial systems normalize. We will certainly withdraw and not be

involved in that any further.

Mr. SOUDER. And do you see yourself or see the Fed in the future

being—I mean, we’ve gone back and forth here. Sometimes we

want an independent Fed, sometimes we say, well, ‘‘you are all the

government, you ought to be sitting down at one table and working

out this strategy.’’ Where do you see the Fed going based on this

experience and getting increasing—I mean, I don’t see in the short

term you are getting less politicalized, because you are in the middle of everything now and everybody is asking you to do this, do

that.

Mr. BERNANKE. In a financial crisis I think the American people

expect their government to work collectively and cooperatively to

try to solve the problem. We’ve worked closely with both the former

Treasury and the current Treasury as well with other agencies,

and that’s relevant to the crisis. We have maintained very strong

independence on monetary policy. That’s critical going forward.

And we expect, of course, as the financial crisis eases, to stand

down on the financial crisis-related policies.

Mr. SOUDER. And agreeing that we were in deep trouble last fall,

how would you—because one of your expertise is deflation, and

sometimes when it’s your expertise you have a tendency to anticipate—in this case I think we’ve proven we have had deflation—but

you in your career projected it was going to happen before, and it

didn’t.

How would you have a guideline that says, ‘‘oh, we’re going to

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?

Mr. BERNANKE. 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 AIG should put that to rest.

I think it’s critically important as we go forward that we find

measures to avoid such a situation in the future, and I very much

would like, again, not to be involved in such activities.

48

Mr. SOUDER. And you’ve outlined the challenge, because some

feel that some failures would have cleansed the system, some believe that 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 we were at the praecipe.

And the question is, is that if it’s going to lead to this much

intervention every time there’s extraordinary discretion in a few individuals to say—I mean, 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.

Mr. BERNANKE. Again, if we have a resolution regime that will

be more appropriate for resolving these firms in a crisis, we can

avoid this problem in the future.

Chairman TOWNS. The gentleman’s time is expired. I now yield

5 minutes to the gentlewoman from California, Congresswoman

Watson.

Ms. WATSON. Thank you, Mr. Chairman. And thank you, Mr.

Bernanke, for coming here.

I’m going to give you a series of events, and I will give you a list

of questions. You can answer them all together.

First, despite the fact that the plan for a merger was announced on September 15, 2008, there was no mention of the $20 billion

capital injection from the government until January 16th. At that

point during the negotiations 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 16th, Merrill Lynch’s projected losses for

the fourth quarter were approximately $15.3 billion, how was the

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?

Mr. BERNANKE. Well, at the time that Merrill Lynch and Bank

of America initially announced their merger agreement in the middle of September—this was before the Congress had passed the

TARP law, and so there had been no—at that time, no capital injection and no expectation of capital injection. Both Merrill Lynch

and Bank of America receives capital in the middle of October during the intense phase of the banking crisis. An additional $20 billion was injected, as you say, on January 16th. 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 TARP in the future.

Ms. WATSON. I’m 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 and 30 calls, of people who have gone

to the bank and they’re not having their loans restructured. And

I’m very curious about where that money went when it went into

the system. It’s like trying to unscramble eggs. But I know the consumers and the owners of property are not being assisted with refinancing their loans.

49

Let me go on. In testimony before the committee on June 11th,

Bank of America’s CEO Ken Lewis claimed that the revelation of

a $12 billion loss at Merrill Lynch on December 14, 2008 caused

him to consider invoking the Material Adverse Effect clause, referred to as MAC, to back out of the deal 9 days after shareholders

had voted to approve the acquisition. However in an e-mail on December 19th, the bank’s supervision officer of the New York Fed,

Tim Clark, stated that Lewis’ claim that they were surprised by

the rapid growth of the losses seems 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

Mr. Lewis was honestly surprised by the acceleration of losses?

Mr. BERNANKE. I have no way of knowing. We did have concerns

about the quality of the due diligence, but I have no direct evidence

that he was in fact informed about the losses.

Ms. WATSON. Well, 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. And 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?

Mr. BERNANKE. I can’t answer that with certainty. We would

have had some information about Merrill Lynch because we were

working with the SEC to supervise it after we began lending to investment banks. But I don’t think that we had knowledge of the

size of losses either. I’m quite sure we did not.

Ms. WATSON. All right. Mr. Chairman, I’m going to try to make

another statement and 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 20th, the president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, described a telephone conversation with you where you expressed the belief that the MAC

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. Lacker that the email was referring to, and do you believe that Mr. Lewis’ claim

that he would invoke the MAC and back out of the deal where

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.

Mr. BERNANKE. I was concerned initially about whether this was

a serious proposal to invoke the MAC, because I did believe that

it would be very detrimental to the Bank of America as well as to

the financial system. I never made any threat to Mr. Lewis regarding removing the board and the management.

One example of where the Federal Reserve removed management

was in the case of AIG, where there was an agreement that the

CEO would be replaced upon the acquisition—upon the consummation of the loan we made to stabilize that company.

Chairman TOWNS. The gentlewoman’s time is expired.

50

Ms. WATSON. Thank you, Mr. Chairman. Thank you Mr.

Bernanke.

Chairman TOWNS. Congressman McHenry from North Carolina.

Mr. MCHENRY. Thank you, Mr. Chairman.

Chairman Bernanke, thank you for your testimony. I know this

is certainly not easy to recall what happened in those very, very

busy days in the fall, and you’ve certainly had a very challenging

tenure with the Federal Reserve. You didn’t come in at easy times.

So thank you for your service to your country.

And 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, is that

correct?

Mr. BERNANKE. That’s correct.

Mr. MCHENRY. And in some testimony, some comments, it was

almost daily or hour-by-hour conversations throughout the fall with

your counterpart there.

Mr. BERNANKE. Daily certainly.

Mr. MCHENRY. Certainly. And with then-New York Fed head

Tim Geithner you also had significant involvement with him on a

very regular basis; is that true?

Mr. BERNANKE. That’s correct.

Mr. MCHENRY. So the combination of the two, in the context of

this event, this controversy that we’re analyzing today, did you

have conversations with those two about Bank of America?

Mr. BERNANKE. I had conversations with Secretary Paulson who,

of course, was the Treasury Secretary at that time. And we talked

about, for example, plans for how we might structure a package to

help Bank of America avoid being destabilized.

At that point, at that time, President Geithner had already been

designated as the Treasury Secretary nominee, and therefore he

recused himself from detailed intervention or involvement in such

transactions. We did give him basic information so that he would

be informed, but he was not involved in the details of the package

that was put together for Bank of America.

Mr. MCHENRY. So he was not directly involved and recused himself because of the confirmation hearings and the potential of going

from the Fed to the Treasury and the conflicts that would pose.

Did you have conversations with Mr. Geithner to keep him informed of what was going on?

Mr. BERNANKE. I did.

Mr. MCHENRY. There was an e-mail from Tim Geithner on December 20th at 8:02 a.m.: ‘‘Are you all over BofA slash ML, and are

you getting what you need from the troops?’’ And this was to Kevin

Warsh.

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 has

basically washed his hands in concern for a potentially tough confirmation hearing. That makes sense. But it seems to me that he

was all over this. Is that your impression?

Mr. BERNANKE. No. My impression is that he was informed about

the general situation. I would assume that when 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

51

knowledge, he was not involved in the detailed negotiations that

developed the package for Bank of America.

Mr. MCHENRY. 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.

And he says: ‘‘Can’t MAC have to close.’’

There’s also notes from Bank of America with the CFO, Mr.

Price, who said: ‘‘Fire BOD. If you do it’’—meaning the MAC—‘‘Tim

G agrees.’’

So it seems that he was very involved, Tim Geithner was very

involved step by step in this process, if not working through third

parties.

Mr. BERNANKE. My only association with Mr. Geithner during

this period was occasional phone calls to update him on the general

developments. I’m not aware of any other involvement.

Mr. MCHENRY. Two additional things just to wrap up. Did you

have conversations about Paulson’s conversation with—did you

have a conversation with Mr. Paulson about his discussions with

Ken Lewis? Because there’s been testimony, and we’ve heard, that

Paulson said very clearly that he would fire Ken Lewis and the

board. And it seems to me in the reading of all this stuff, is that

the government became one. And so perhaps what Mr. Paulson

said was thought of as coming from you. And there could be some

of this, you know, coming about. So—confusion coming about after

the fact.

Mr. KUCINICH [presiding]. The gentleman’s time is expired, but

the witness can answer your question, of course.

Mr. MCHENRY. Could you describe the conversation you had with

Mr. Paulson about his conversation with Mr. Lewis?

Mr. BERNANKE. He reported back to me that Mr. Lewis, as I recall, had decided not to invoke the MAC. And that laid open the

basis for developing the transaction. But, again, I never told anyone to threaten Mr. Lewis.

Mr. MCHENRY. Thank you.

Mr. KUCINICH. I thank the gentleman. The Chair recognizes Mr.

Cummings of Maryland. You may proceed.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

Mr. Bernanke, as I’ve listened to you very carefully, I think I get

it. You were so intertwined in this thing, and, following up on one

of Mr. McHenry’s questions, that it’s hard to see where your participation ended and where Paulson’s began.

And I just take it to your own statement. One of the first things

you say in your background is: ‘‘On September 15th, Bank of America announced an agreement to acquire Merrill Lynch. I did not

play a role in arranging this transaction and no Federal Reserve

assistance was promised or provided in connection with that agreement.’’

Is that accurate? Yes or no.

Mr. BERNANKE. Yes.

Mr. CUMMINGS. All right. Well, then you go on to talk about all

the things you did to—I’m confused. Let’s talk about this whole situation with one of the things you did.

This is your statement. It says: ‘‘In responding to the Bank of

America and these discussions I’’—talking about yourself—‘‘exVerDate 11-MAY-2000 14:36 Apr 19, 2010 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 U:\DOCS\55102.TXT KATIE PsN: KATIE
52

pressed concern that invoking the MAC would entail significant

risk.’’

And then you go on to talk about that: We had Mr. Lewis who

testified before us that he’s been an experienced guy in this whole

banking stuff for many, many years. He took this MAC situation

very seriously.

And then Paulson comes along and you come along, according to

your own testimony, and you say, you know, ‘‘I don’t think that you

are right on this.’’ But basically, it sounds like you did not believe

in the competence of Mr. Lewis. I’m just finding this out today?

Is that right, did you think he was competent? Yes or no.

Mr. BERNANKE. That’s not a yes or no question. I think on this

particular issue, I think that invoking the MAC would have been

a mistake. And I would like to mention, sir, that the first reference

was to the original September deal in which I was not involved in

any way.

Mr. CUMMINGS. Yeah, but you’re all wound up in the rest of it,

all the way down to the end, based on your testimony.

Mr. BERNANKE. Certainly, I was.

Mr. CUMMINGS. So you felt that he was competent—incompetent

with regard to this issue, the MAC, although he was an experienced banker, although he had a fiduciary duty to his shareholders,

to his board—and I know that you are always very concerned about

disclosure, right? That’s a major, is it not?

Mr. BERNANKE. Certainly.

Mr. CUMMINGS. Certainly. And so—but the man who would be

held responsible if his bank went down, you say to him when he

says—when you pull up this material, this MAC, and says, ‘‘do you

know what, I don’t do this, but I’m taking this very seriously, and

I think I better declare a MAC here.’’

So when he declares it, after all his experiences and what have

you, then you come along and say, ‘‘although it’s your duty to disclose certain things, although it’s your duty and you are going to

be the one who’s going to get hit if this thing falls down, I’m going

to put my judgment above your judgment;’’ is that basically right?

Mr. BERNANKE. No, that’s not right. I offered my views based on

my experience as a Federal Reserve chairman and based on the advice I got from staff at the Federal Reserve that invoking the MAC

would not be a good idea for the Bank of America. He himself was

uncertain about what to do. But at all times it was his decision to

make, and he understood that, I believe.

Mr. CUMMINGS. Well, I don’t know whether you saw his testimony, but the man did everything he could not to—we got him to

a point where he basically said he felt threatened, but he tried to

say that he wasn’t threatened. There was not a person in this room

who did not understand that he was threatened. You even used the

word several times in this hearing. You used it, I didn’t, you did.

Mr. BERNANKE. To say that I did not threaten anyone.

Mr. CUMMINGS. No, no, no, no, no. I said that you used the word

that he was ‘‘threatened.’’ I think you may have been referring to

Paulson. And so all I’m saying to you is that I can see how we got

to where we’ve gotten to, where it appears as if we’ve got Paulson

saying—I mean we’ve got Lewis saying that you may have been behind the scenes doing some things. We’ve got you saying that you

53

were behind the scenes doing some things. But at the same time,

you come back and say, ‘‘well, you know, I just gave my opinion,

you know, it’s not—it was up to him.’’

I do not think—and I’m asking you, do you think it was up to

him when Paulson comes to him and says, ‘‘I’m going to fire you

and I’m going to release your board?’’ Is that the way you would

want things to happen in this regard?

Mr. BERNANKE. I don’t know what Paulson said to him.

Mr. KUCINICH. The gentleman’s time is expired.

Mr. BERNANKE. But it was his decision.

Mr. KUCINICH. Excuse me. The gentleman’s time is expired, but

the witness should answer the gentleman’s question.

Mr. BERNANKE. As I said, I don’t know what Mr. Paulson said

to him, but it was always his decision, and I did not threaten him.

Mr. CUMMINGS. Thank you.

Mr. KUCINICH. The Chair recognizes Mr. Bilbray.

Mr. BILBRAY. Thank you, Mr. Chairman.

Mr. Chairman, I know this whole process looks like an inquisition. We’re not here to indict, just to question and to find out—try

to work out the reality here. I think it’s a little more

confrontational than it should be traditionally. Let’s just remember

you are placed in that position of being under oath, and I’m hearing testimony going back and forth, so I’m trying to find out how

two people may perceive something differently, how words may be

changed back and forth.

So let me just ask you, at that time or at this time, did you believe that Merrill Lynch was too big to fail?

Mr. BERNANKE. I thought very likely that if Merrill Lynch failed,

it was after all bigger than Lehman Brothers, that it would create

a very serious problem in the financial markets. I did.

Mr. BILBRAY. So as a manager you pretty well felt Merrill Lynch

needed to be addressed one way or the other to keep it from going

under.

Mr. BERNANKE. I thought letting it fail would pose a serious risk,

although it’s not clear that we could have prevented it from failing.

Mr. BILBRAY. OK. Now, I saw you made a statement here, and

it’s in the record, that when someone said, did you invoke a threat

or something else, that if they invoked the MAC there would be repercussions to management.

And we can pull up the record. I’m almost sure you said, ‘‘no, I

didn’t say it that way, but I did indicate that if they invoked the

MAC, and there was—what was it—they needed assistance afterwards, that if there was—this created a situation where they needed assistance, then there would be a problem. And that the clarification there was that it wasn’t just the MAC, but if they did the

MAC and then needed to come to us for assistance because of that

arrangement, then there would be hell to be paid.’’ That was the

inference of your statement at that time.

Mr. BERNANKE. That was what was in Mr. Lacker’s e-mail about

a conversation between us, but I did not make that statement to

Mr. Lewis. Although I don’t think it’s unreasonable if someone

makes a decision that endangers his company, that he would be accountable for that.

54

Mr. BILBRAY. OK. That’s why I want to clarify, Mr. Chairman,

because today you did make the comment that you felt that way

and you felt comfortable with that. You indicated, I thought you indicated, that you communicated that at that time that—not just

that if they invoked a MAC, but if there was assistance needed

later, after they invoked a MAC, then there would be repercussions.

Mr. BERNANKE. I don’t believe I said that.

Mr. BILBRAY. Mr. Chairman, I would ask that testimony—because we need to clarify that, because I heard something from you

today that sounds very familiar. And that’s why I went back to

that statement about, it wasn’t just about the MAC. It was the

MAC; then if they needed assistance, then that management

should be held responsible.

And I just thought that your statements today kind of reflected

the statement of the 12–20–08 statement. So we can go back into

the record and see that. I’m just trying to help you clarify what you

said today.

Mr. KUCINICH. Is the gentleman submitting something into the

record?

Mr. BILBRAY. Yes, please.

Mr. KUCINICH. Without objection.

[The information referred to follows:]

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

Mr. BILBRAY. Now, when you get into this, you said ‘‘we did not

guarantee BofA anything,’’ and you said, ‘‘there was no dollar

amount referenced.’’ But could you in this conversation, instead of

saying ‘‘we will pay this much out’’ or ‘‘we’ll get out of it,’’ could

there have been any other discussion? Statements like: Look, if

there’s a concern, if there’s a problem here, we’ll take care of it or

we’ll make you whole, you won’t—this deal will not impact you in

the long run, that we’ll cover the difference.

Mr. BERNANKE. We committed to work with them to make sure

they would be a stable company and that they would not collapse

because of this issue.

Mr. BILBRAY. OK. I’m trying to clarify here because we’re going

with testimony. So in other words, you are in a situation where

you’ve got to handle this Merrill Lynch problem anyway. You have

what looks like a merger forming, all at once the BOA starting to

get cold feet, may pull it apart. They’re seeing it from the BOA, I

mean Bank of America, taking on this burden. You see, you are

going to have a burden one way or the other.

Is it safe to say that from a management point of view, it looks

simpler to get them to take this on so you can manage it as a single piece, rather than going back and forth?

Mr. KUCINICH. The gentleman’s time has expired. Do you want

to put that in a question and then Mr. Bernanke can answer?

Mr. BILBRAY. Let me finish with this. You stated today that if

you had it to do all over again, you believe today that you would

do it exactly the same? Later in your testimony——

Mr. KUCINICH. I am going to take it as a question.

Mr. BILBRAY. I will take the question. How do you explain the

fact that today you did add a conditioning clause that you did exactly what you needed to do for what you knew at that time? Does

that leave you a question? With that statement that you made

today, does that leave in the back of your mind that maybe there

are things you know today that you would have done differently?

Mr. KUCINICH. The witness may answer the question.

Mr. BERNANKE. I don’t know of anything material that would

have affected that, given the powers we had and the situation at

the time.

Mr. KUCINICH. I thank the gentleman. The Chair recognizes Mr.

Clay.

Mr. CLAY. Thank you, Mr. Chairman. Thank you, Chairman

Bernanke, for coming today.

You have stated that the Fed acted appropriately regarding

issues of public disclosure. You have further stated that neither

you nor any member of the Federal Reserve ever directed, instructed, or advised Bank of America to withhold from public disclosure any information relating to Merrill Lynch, including the

losses, the compensation packages, or bonuses. And I can believe

that, and I have found you to be a person of integrity of the highest

degree.

Retrospectively, looking at the developments that occurred with

the whole saga of Bank of America-Merrill Lynch, and the Department of Treasury, and looking at the losses investors, both institutional and individuals, absorbed, do you feel that you had some reVerDate 11-MAY-2000 14:36 Apr 19, 2010 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 U:\DOCS\55102.TXT KATIE PsN: KATIE
75

sponsibility to disclose some of this information that you knew was

being withheld?

Mr. BERNANKE. No. The information about the losses was the responsibility of Bank of America to disclose, and it was up to them

with their counsel to determine when that was appropriate. We

were required, we the government were required to disclose the

terms of the deal within a week after it was consummated, and we

did that.

Mr. CLAY. At what point does the welfare of the investor become

as important as the institution invested in?

Mr. BERNANKE. The welfare of the investor is very important.

And my concern was that the system would collapse, that Bank of

America would collapse, which would hardly be a good thing for the

investors.

Mr. CLAY. And that was your responsibility then.

Mr. BERNANKE. My responsibility is to protect the overall financial system. But I have to do that within the boundaries of supervisory practice and law.

Mr. CLAY. And at what point should you disclose information to

the public?

Mr. BERNANKE. With respect to this particular issue, the law is

clear that any action regarding TARP needs to be disclosed within

a week, and we did that.

Mr. CLAY. Do you believe that the people were better served by

being uninformed in making their investment decisions, especially

when official America knew there were misrepresentations in the

financial status of BofA?

Mr. BERNANKE. Well, again, those judgments were up to Bank of

America. Our job was to try and make sure that the system was

stabilized, and that was our primary focus.

Mr. CLAY. Mr. Chairman, why did you think it was necessary for

BofA to acquire Merrill Lynch when Lehman had been allowed to

fail? What was the thinking of saving AIG, Merrill, and Citigroup

when these companies failed to adequately perform and uphold

their fiduciary responsibilities to its stockholders? What made

these three different from Lehman?

Mr. BERNANKE. We made extraordinary efforts to prevent Lehman from failing. We were unsuccessful partly because we couldn’t

find a merger partner. Bank of America was a potential merger

partner. They decided against it, and we didn’t try to coerce them

to do it. We didn’t have the powers to save Lehman, and that’s why

they failed, very much—we were very concerned about it, and our

concerns proved to be justified.

With respect to the other cases, we did everything we could to

avoid a systemic failure because of the risk of the financial system.

AIG, as I mentioned earlier, was possible to address because the

large insurance company provided collateral for a loan that would

allow us to provide liquidity to the Financial Products Division,

which was the source of the problem.

After the Congress passed the TARP legislation, it was then

much more direct and easy to address these problems. If we’d have

had the TARP money in September, we might have been able to

address the Lehman problem.

76

Mr. CLAY. Was it really necessary to salvage AIG? I heard your

explanation, but——

Mr. BERNANKE. I do believe so.

Mr. CLAY [continuing]. They failed. They failed their own investment. They failed themselves.

Mr. BERNANKE. I had no sympathy for AIG, and particularly for

the Financial Products Division. But my concern was that if it

failed that the consequences would have been a worldwide banking

run, a severe financial meltdown, and very unknown but difficult

consequences for the global economy, and I didn’t feel that I could

take that chance.

Mr. CLAY. And I guess we thought the same about American

automakers a few months ago; that they just couldn’t fail, either,

they couldn’t go into bankruptcy. But we know a different story

now.

Thank you, Mr. Chairman, for your responses.

Mr. Chairman, I yield back.

Mr. KUCINICH. I thank the gentleman.

The Chair recognizes Mr. Fortenberry. You may proceed, sir.

Mr. FORTENBERRY. Thank you, Mr. Chairman, and thank you,

Chairman Bernanke, for your appearance here today.

I read your testimony, and it appears to me to be a reasonable

explanation of your role in the Bank of America-Merrill Lynch

merger and the advocacy of certain additional bailout funds. However, while that is the narrow purpose of this hearing, to unpack

whether or not there were any conflicts there, and certainly you

can understand the cynicism in that we have conflicting impressions from you and Mr. Lewis about the nature of this deal, I think

fundamentally what is at issue here, what is the heart of the matter, is the Fed’s future role as a systemic regulator. In that regard,

let me go back to a couple of points that were just touched on.

Do you believe it was in the best interest of this country for Merrill Lynch and Bank of America to be merged and to receive the

bailout funds that they received, first the $25 billion between the

two companies and then later the $20 billion, as Bank of America

expressed concern, or let’s put it another way, waffling about the

potential deal?

Mr. BERNANKE. I think it was critical that we avoided the failure

of those firms and the implications that would have had for our financial system. We did so in a way that protected the taxpayer,

and again I think we did the right thing.

Mr. FORTENBERRY. One thing that concerns me about this,

though, is information that we have from the FDIC Chairman

Sheila Bair, who wrote to you prior to the final bailout moneys

being received by Bank of America. She said there had been

‘‘strong discomfort with this deal at the FDIC for all of the reasons

you and I have discussed.’’

What did you discuss?

Mr. BERNANKE. My recollection was that her concern was not

about taking action to stabilize Bank of America. Her concern was

that the FDIC would have financial exposure as part of the transaction, and she was concerned in particular because the transaction

involved not only a bank but also an investment bank, which was

not in her sphere of responsibility. So it was the details of the

77

transaction, I understand it, that was her concern, not the basic

idea of taking steps to stabilize the company.

Mr. FORTENBERRY. Currently we have a situation, it is my understanding, where 10 major banks control about 50 percent of deposited assets in this country, Bank of America being the largest. Is

this a systemic risk?

Mr. BERNANKE. We have a lot of large banks, and under our current system and particularly in the current circumstances with financial conditions the way they are, the failure of one of those

firms would be very dangerous for the American economy, and that

is why I believe that the centerpiece of financial regulatory reforms

should be steps to get rid of too-big-to-fail, to find measures that

allow a large firm to fail when it is appropriate, but to do so in a

way that doesn’t bring everything else down with it.

Mr. FORTENBERRY. Well, I agree with that assessment, but I

think it is pointing to the need to, in whatever future regulatory

framework that we have, to consider the fact that we have 10

banks controlling a majority of assets in this country, and that systemic risk is very real. Do you agree with that?

Mr. BERNANKE. It’s certainly real now. But I think there are

steps that could reduce the risk associated with those things.

Mr. FORTENBERRY. What could be those steps potentially?

Mr. BERNANKE. Well, for example, greater oversight, capital, and

supervision of those companies. A resolution regime that would——

Mr. FORTENBERRY. That assumes failure.

Mr. BERNANKE. In the case of failure, that is correct. But that

would create more market discipline because lenders to those

banks would know that they wouldn’t necessarily be made whole

in the case of a failure and they would therefore exert more discipline on those companies.

Mr. FORTENBERRY. The point I am driving at, are these too big?

Are these banks too big?

Mr. BERNANKE. I think it is important that banks have no incentive to grow just to become too big to fail. But large banks probably

have some other economic purposes, including global transactions,

networks, and the like. I doubt we can go back to the world with

only very small banks.

Mr. FORTENBERRY. But we are concerned that this level of concentration in the hands of too few is a potential systemic problem.

Mr. BERNANKE. It is a legitimate concern, Congressman, absolutely.

Mr. FORTENBERRY. Mr. Chairman, I would like to yield the remainder of my time to Mr. Burton.

Mr. KUCINICH. The gentleman has the remainder of the time,

about a minute.

Mr. BURTON. Thank you very much.

You indicated that Secretary Paulson’s comment that he made

that threat at the request of Chairman Bernanke was changed

later on by Mr. Paulson. But what he said was, and I think this

ought to be in the record, his prediction of what could happen—

talking about you—his prediction of what could happen to Lewis

and the board was his language—was Paulson’s language, but

based on what he knew to be the Fed’s strong opposition to Bank

of America attempting to renounce the deal.

78

You were the Fed. And he said it was based upon the knowledge

that the Fed’s strong opposition to Bank of America attempting to

renounce the deal was something that he knew to be the case, and

that he was in effect speaking on behalf of what you had said to

him.

Mr. KUCINICH. The gentleman’s time has expired. Chairman

Bernanke, you are directed to answer his question though.

Mr. BERNANKE. We were strongly opposed to that action for the

reasons I have described.

Mr. KUCINICH. Is that your answer?

Mr. BERNANKE. Yes.

Mr. KUCINICH. I thank the gentleman.

The Chair now recognizes Mr. Welch. Thank you.

Mr. WELCH. Thank you, Mr. Chairman.

Mr. Bernanke, I have one comment and two questions. My comment is thank you for your incredible service in very turbulent

times. You have been very sturdy, and I think all of us really appreciate that.

Two questions, one about Mr. Lewis and Bank of America, and

then following up on what Mr. Fortenberry was asking about.

Mr. Lewis was here, and he had a number of different stories on

a single transaction. He told the shareholders that this Merrill deal

was a great deal for them, and persisted in that story even in December after he found out about a $9 billion additional deterioration. And to, frankly, my amazement and shock, he never bothered

to tell the shareholders the news that led him to the next assertion

he made, that was so dire that he might invoke the nuclear option

of the MAC clause. And then he told us basically that—using his

words—he didn’t use the word ‘‘threat,’’ but he said there was

‘‘heavy pressure’’ from the Fed and Treasury to go through with

this deal, with the assurance that the American taxpayer through

the Fed and the Treasury would back up any of the toxic assets

from Merrill. And I’ll just ask one specific question about that.

One of his assertions to the board was that the Treasury and Fed

have confirmed they will provide assistance to the corporation to

restore capital and protect the corporation against the adverse impact of the Merrill Lynch assets. And he went on to say: ‘‘The corporation can rely on the Fed and Treasury to complete and deliver

the promised support by January 20, the date scheduled for the release of earnings by the corporation.’’

In your recollection, is that an accurate statement by Mr. Lewis?

Mr. BERNANKE. We did indicate that we would work with him in

good faith to develop a transaction, develop a package that would

preserve the stability of this company, and we proposed to do that

by January 20th. That is correct.

Mr. WELCH. And that included backing up the toxic assets on

Merrill’s balance sheet?

Mr. BERNANKE. There were no specifics about how we were going

to do it. There were different possible approaches, in the event that

RingFence is apparently not even going to be consummated.

Mr. WELCH. What he was specifically referring to was the news

that they were aware of, that Merrill had far more toxic assets

than had been disclosed to shareholders when they approved the

deal in the early part of December. So is it your recollection that

79

the assurance he gave his board that the Fed and Treasury would

back up the toxic assets on Merrill was accurate?

Mr. BERNANKE. Well, he knew that in the case of Citi, for example, that we had used both capital and a RingFence. So, clearly,

that was one of the options that we were discussing as part of the

transaction.

Mr. WELCH. Why don’t I get to this question that was started by

Mr. Fortenberry. You have wisely stated, in my view, that we need

a new regulatory regime to protect the economy from systemic risk.

And there’s really two approaches that can be taken, and the Congress has to make a judgment which is the better one to go. One

is a super sized regulator or some entity that has the capacity to

monitor the risk of these huge financial conglomerates that when

they go down bring us all with them. That is one approach.

The other approach is to take the view that if an institution is

too big to fail, it is too big to exist. And the virtue of that, frankly,

is that it brings them down to a size where we don’t have to depend on the vigilance of regulators being overcome by the influence

of the financial industry.

So my question to you is, does it make sense for Congress to pursue a policy that says if an institution is too big to fail without

threat to the economy, it is in fact too big to exist and, instead of

regulating it, we should break it up?

Mr. BERNANKE. Well, there are two options. One is to allow large

banks to take steps to protect the economy if in fact one comes to

the brink of failure, which is what Treasury’s proposal, for example, includes. The other possibility is to restrict the size of the

banks.

I think it is legitimate to discuss both options. I would just point

out that very large banks do have an economic function, a global

reach, diversity of activities. But Congress may wish to look at different options. I don’t want to prejudge what you will be deliberating.

Mr. WELCH. Thank you. I yield back.

Mr. KUCINICH. The gentleman yields back. When our colleagues

on the Republican side have others show up, they will be recognized. In return, we recognize Mr. Kanjorski.

Mr. KANJORSKI. Mr. Chairman, thank you for your testimony.

And I have listened to a lot of my colleagues today use words like

‘‘threats,’’ even ‘‘lies,’’ ‘‘lying.’’ The reality is if a judge cautions an

attorney that certain conduct would constitute contempt, it is not

a threat. Is it? That is telling him the power of the court. It is laying out what the rules are. I can’t see how people are jumping to

the conclusion that by either yourself or the Secretary of Treasury

informing a bank officer or a board that there were powers of the

government to take action in a certain way which could constitute

removal of the CEO or the board, that doesn’t constitute a threat.

That is informing them of what the powers are. Isn’t it?

Mr. BERNANKE. As long as the reason for exerting that power is

legitimate; i.e., that the manager took actions that prejudiced his

own company.

Mr. KANJORSKI. And then that would be an issue that later on

could be determined. But, nevertheless, it is not a threat. It is telling the truth.

80

Mr. BERNANKE. Yes, sir.

Mr. KANJORSKI. These are the confines of the power we have,

and we’re willing to use it. And I am glad somebody told them that,

if they did. I don’t know if they did, because—I doubt whether they

seriously did. I listened to Mr. Lewis both here and as a witness,

and I interviewed him individually. And he’s sort of rather happy

with the acquisition that he made and it accounted for 75 percent

of its profits of the Bank of America in the last quarter. So I would

suspect that about 6 months to a year from now he is going to be

telling this tremendous victory of his of acquiring Merrill Lynch.

But all that being said, I don’t know why we are spending our

time to find out what happened between September 15th and January 1st. All we all know is a hell of a lot went over the dam, and

particularly in that spectacular 2-week period after September

15th.

I want you, one, before you leave here to tell this committee and

the American people what kind of jeopardy the American system

and the world system was in so we reiterate that moment, that we

weren’t all a bunch of relaxed confident people walking around

making clear judgments, but we were working—making emergency

judgments, working 20 and 24 hours a day, and not with the clearest heads in the world. Is that correct?

Mr. BERNANKE. Thank you, sir, for that opportunity. September

was an incredibly intense period of financial crisis. Many of the

largest firms in America came under very severe pressure.

The failure of Lehman Brothers and near failure of AIG were important reasons why the world economy went into a nosedive that

lasted for the entire second half or second—fourth quarter of 2008

and the first quarter of 2009.

The Treasury, the Federal Reserve, and other agencies worked

overtime to try to prevent additional failures and additional crises.

Fortunately, the Congress provided the TARP funding in early October. In mid-October, there was an incipient global banking crisis

that involved responses by policymakers around the world, the

U.K., Australia, Japan, Germany, and elsewhere. The United

States was able to join in that effort because of the TARP money.

We averted at that time a global financial meltdown which, in my

opinion, very likely would have created a depression-like environment in the United States far more severe than the recession we

have seen recently.

Mr. KANJORSKI. Thank you very much, Mr. Chairman. And I

gave you your shot; now I am going to come back at you.

Mr. BERNANKE. Sure.

Mr. KANJORSKI. The thing we have to decide is what we are

going to do in the future and how we are going to handle it. And

one of the things in the last several months—and I have been involved in investigations of everything from the Madoff case to other

transactions in the market. But what—studying the inside of our

regulatory authorities, I find that, although they may have the authority, they may have the money to act, they sometimes don’t

know how to act or don’t act properly. And, as a result, they have

all the authority in the world to prevent something from happening, but it happens anyway. And I want to say that charge would

81

lie against the Federal Reserve, and that is where we are hung up

in the course of a dilemma.

The Federal Reserve, as I can see it, had several opportunities

to prevent this economic crisis. One is the long used 14 years of

power to lay down the conditions on mortgage obligations in this

country, that all the way through, about 12 of those 14 years the

Federal Reserve failed to take any action until you came on the

scene and finally did enact a set of standards across the board. If

they had enacted earlier those standards, most of these toxic assets

we talk about wouldn’t be circulating around the world with the

imprimatur that they’re supported and passed on by the U.S. Government.

Two, there are issues with the Federal Reserve that they are now

acquiring additional powers when they failed to use their past powers.

Could you address those two issues.

Mr. BERNANKE. Certainly. And I agree with you——

Mr. KUCINICH. The gentleman’s time has expired, but please answer the question.

Mr. BERNANKE. Congressman Kanjorski, you are right that the

Federal Reserve was late to invoke those consumer protection powers. We have been very aggressive, as you know, for the past couple

of years. I think it is very important if the Fed retains those powers that we strengthen the priority that those have in our decisionmaking and that we strengthened accountability that we report frequently to Congress about what we are doing in these areas. So

that is very important.

In terms of additional powers, I think it is worthwhile pointing

out that if we look, for example, at the Treasury’s proposal to make

the Fed the consolidated supervisor of systemically critical firms,

that it’s not major difference in terms of powers from what we currently have, which is being an umbrella supervisor of all the financial holding companies. Rather, it would be not so much a change

in powers but a change in approach whereby we would take a systemic systemwide approach in how we would regulate those firms

rather than looking at them bank by bank or firm by firm.

So it is not a massive increase in powers. It is really a change

in their strategy.

Mr. KUCINICH. I thank the gentleman for his response. The Chair

recognizes Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman.

Mr. Bernanke, I want to thank you for being here today. I know

that we have had very difficult times, and certainly you and Mr.

Paulson and others we know have worked diligently to try to restore the financial security of the country.

There are divergent opinions, though, of the actions that are

taken and to how we should approach them. I have voted against

every bailout that has come before this Congress, and I have done

that because I felt that the programs that were put before us were

not clearly defined; the scope of the costs or expense was not clearly defined; the ability to hold people accountable was difficult to ascertain in programs that were undefined. And I think that we are

seeing now, as the American public looks at this, there’s a lot of

unintended consequences. There are things that are happening

82

that the American people are saying, ‘‘well, I didn’t quite think

that’s what it’s going to be.’’

I know you are facing a lot of questions today concerning Bank

of America and Merrill Lynch, and they go right to the heart, I

think, of questions concerning the Federal Government’s proper

role in private enterprise. How do we step in appropriately? How

do we not step in?

You know, the Federal Government has very mixed performance

when it comes to the issues of interfering or intervention in private

enterprise. Frequently, this committee has hearings on issues as

basic as our contracting processes with private enterprise. We are

not a very good customer. Many times issues arise where people

wonder whether there’s been abuse of processes, conflicts of interest. So when you then put another layer of us just not being a customer but us being an investor, an entity that is providing a bailout, or even an owner, people have a great deal of concern.

Yesterday, I introduced House Joint Resolution 57, the Preserving Capitalism in America Amendment. It is a proposed amendment to the U.S. Constitution. It came about as a result of my discussion with people back home because several people that I spoke

to said that they did not believe that enough people were taking

a stand to say this is wrong, I don’t believe that this should have

happened in this manner. I know we have difficulty, but I don’t

agree with this structure. I don’t agree that we should own General

Motors.

The Constitutional amendment would limit the ability of the

Federal Government to acquire an ownership interest in a private

corporation. It does give the government the ability to issue loans.

It also allows us to invest in public authorities, public use corporations, and also allows investments by government pension funds.

It turns out that, as I was discussing this with people in my community, that limiting government ownership over private enterprise is not a new idea. We found that at least eight State Constitutions have in some form limited the State’s ability to acquire

stock or equity in a company apparently as a result of the panic

of 1837, which you would know a whole lot more about than I do

as a result of your great historical expertise.

But a number of people have concerns as the Obama administration moves forward, as the bailouts in the financial sector move forward, as our domestic automobile industry becomes publicly owned.

The Constitutional amendment that I dropped yesterday was

dropped with 102 original cosponsors. Nearly a quarter of the

House stepped forward and said, I want to support a Constitutional

amendment because we don’t think it can be done by statute, that

could say: We understand that there are times when action needs

to be taken. We understand when intervention needs to occur. But

we do not believe that ownership is a structure that should be an

available option. We are very concerned about what happens next.

For example, we have a huge ownership interest in General Motors. We don’t in Ford. Let’s say both of them bid on a government

contract. What happens then? Can Ford be assured that they are

going to have the equal treatment when the government’s virtually

bidding for its own contract?

83

I would like your thoughts on the amendment. And if that

amendment was in place, I would like your thoughts as to how you

would have gone about—and how TARP funds would have been

used and some of these other things could have been structured in

a way where we wouldn’t have ended up with ownership but you

would have responded to our financial crisis.

Mr. BERNANKE. Well, I agree with you that limited government

ownership, limited government intervention in the private sector is

frequently a good policy. And in that respect, I think that is a very

good approach.

I should say, though, that in order to make that a viable policy

in our financial sector we need to have a set of rules and regulations that can allow financial firms to fail. And I believe in failure.

You know, failure—capitalism without failure is like religion without sin, somebody said. You need to have failure. But you have to

have failure in a way that is not going to bring down the entire

system. So if you are going to do that, you need to also have rules

and regulations that allow the orderly wind-down, the orderly failure of large financial firms.

Mr. TURNER. Before we conclude, Mr. Chairman, if you’d allow

me. So I don’t believe you are saying, are you, that you think that

the only way you could have intervened is to result in ownership;

that there weren’t structures of loans and other assistance that

could have been provided that wouldn’t have ended up in the Federal Government having an ownership interest? And then of

course, therefore, where we get this conflict of, well, how is the government going to execute its government interest?

Mr. BERNANKE. I have to think about that. But if you look at

banking crises in history, in Japan and Sweden, in the United

States in the 1930’s, and so on, frequently you do have a period of

capital being injected by the government, which essentially is a

temporary ownership. Usually those things are temporary.

But, again, I am not sure what the alternative would be. I would

be happy to think about it. But in order to avoid ever having government ownership again, you need to figure out a way to avoid

having the crisis in the first place, And I think that should be the

first priority.

Mr. TURNER. I appreciate the thoughts, because people are obviously very concerned about this. And this looks like a line that perhaps we should not take.

Thank you so much.

Chairman TOWNS [presiding]. Thank you so much. Yield to the

gentleman from Massachusetts, Mr. Lynch.

Mr. LYNCH. Thank you, Mr. Chairman. Thank you, Mr. Chairman. As someone who voted against the TARP, I just want to comment on your kind remarks in saying that through the wisdom of

Congress we passed the TARP bill. No. 1, as you may remember,

TARP was presented to us as a way to purchase toxic mortgages.

It was never used for that. So what we voted for was never put into

action.

No. 2, several weeks after we did the TARP bill, we also passed

a TARP corrections bill. It was a 400-page bill that we passed to

correct all the mistakes that we made in TARP. So I am not so

84

sure that the wisdom of Congress is necessarily accurately ascribed

in that statement.

I do want to say I agree with Chairman Kanjorski about the context in which you took all this action. The sky was falling, it was

a very difficult time. But I do want to say the reason we are going

over this chronology is because we have granted the Fed enormous

independence, and there is sometimes a tension between the

premise of the taxpayers’ interest and the power of the Fed and the

independence of the Fed, and that is why we are going over this.

There has been a lot of back and forth today. But, basically, what

the facts are is that Merrill got into trouble very early in 2007

when E. Stanley O’Neal was there. It was a very difficult situation.

There was a merger proposal that you supported quite strongly between Bank of America and Merrill Lynch. There was an agreement to enter into that merger. And then at some subsequent time

there were major losses. There were early losses, $8.4 billion that

occurred in 2007. It looked like an additional $12 billion that was

discovered by Mr. Lewis on December 14, 2008. And then he announced his desire or his intention to invoke the MAC. And then

we have a difference of opinion, and that is on one side some folks

are saying that you or Mr. Paulson threatened Mr. Lewis. Other

people say it was simply iron-fisted encouragement to have him

stay in the deal. In any event, he did that. He stayed in the deal.

And there is an interesting e-mail from you, and I just want to go

over this because I am interested in the taxpayers’ position.

It says here—this is from you, Mr. Chairman, to Scott Alvarez.

And it says: ‘‘I had a good conversation with Lewis just now. He

confirms his willingness to drop the MAC—the opposition to the

deal going forward—and to work with the government to develop

whatever support package might be needed for earnings announcement dates around January 20th. We discussed his common equity

issue. We agreed that having a significant amount of TARP capital

in the form of common’’—common equity—‘‘was not an ideal solution given the ownership implications. But we agreed both to think

about possible solutions,’’ parenthesis, ‘‘a government backstop of a

capital raise or a government common with limited control rights.’’

Now, it sounds to me like Ken Lewis is concerned about his job.

And for the American taxpayer to get voting rights in return for

their TARP money, Mr. Lewis would be gone, I believe. Is that the

concern that you believe Mr. Lewis expressed regarding the TARP

being presented with rights, voting rights for the American taxpayer in that deal?

Mr. BERNANKE. I don’t know exactly what his concern was. It

may have also been involved in just concern about government

intervention in his management and in the operations of the company.

Mr. LYNCH. Well, there was a—this discussion, it is what it is.

It indicates that Mr. Lewis is concerned about the taxpayer having

some input here, some control. And it sounds like your—it says:

But we agreed to think about possible solutions to that, a backstop

of capital raise or government taxpayer involvement here with limited control rights. And I am just wondering whether—in this deal

to provide this support, whether the taxpayers are getting the full

85

leverage that they should have gotten given the amount of assistance we put into this company, into this deal.

Mr. BERNANKE. Well, the company is subject both to the restrictions of the TARP and the Treasury’s provisions on executive compensation and the like, and they are also subject to—as has been

discussed, they are subject to the supervisory oversight of the Federal Reserve and the OCC. And we have taken actions, for example, to ask them to add independent directors to their board and

make other appropriate changes to their company.

Mr. LYNCH. Could we have not gotten greater protections for the

American taxpayer in this deal than what we did in terms of—considering that we are saving this company with the American taxpayers’ assistance and we don’t gain the control that I think is

commensurate with that support?

Mr. BERNANKE. Well, the—I am not quite sure. I would have to

go back and look at that e-mail again. At that time the TARP

money was all provided in the form of preferred stock, which is—

on the one hand is not voting but on the other hand is senior to

common equity and, therefore, is safer.

Mr. LYNCH. They get paid first. I understand that. But it is the

lack of—it seems like Mr. Lewis was most concerned with lack of

input or lack of control on the part of the taxpayer. And I think

that would have helped us, you know, in this deal if we had had

greater control on behalf of the American taxpayer.

Mr. Chairman, my time has expired. Again, Mr. Chairman, I

thank you for appearing and helping us with our work. I yield

back.

Chairman TOWNS. Thank you very much. I now yield 5 minutes

to the gentleman from Massachusetts, Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman.

Mr. Bernanke, I want to discuss, if I can, for a second, is this

another way that public money seemed to have flowed to some of

these financial institutions? Back in March 2009, AIG disclosed the

name of certain of the counterparties, people that they had credit

default swaps agreements with, and Bank of America was among

them as well as others. It appears from our records here that there

were losses in the so-called super senior multi-sector credit default

swaps, the portfolio that AIG had, and that it created a liquidity

problem. They had obligations, that if there were problems in that

portfolio they had to put more cash in or more collateral security

for their obligation.

The Federal Reserve Board of New York then provided $85 billion in a loan to AIG. The testimony here was that then that

money was used to buy out the contracts and cancel them. That is

how they took care of that obligation. What was of concern to me

and some others was that the counterparties appeared to have received 100 percent, even though testimony from people at AIG before this committee said that they thought that there were a lot of

contentious reasons to think they did not owe 100 percent, if they

owed anything at all, on those particular obligations, that there

had been serious negotiations about whether they should pay anything to these counterparties and, that if they should pay something, how much less than 100 percent they should pay.

86

When we pressed Mr. Liddy, AIG, for background on that for just

how the negotiations went, why it is they paid 100 percent, his

comment was that he was the wrong person to talk to; that in fact

the Fed had all of those documents and paperwork because they in

fact struck the deal.

So my question to you is, why was 100 percent paid on these various obligations, including the one to Bank of America? And what

was the rationale there? Why weren’t the interests of the—the public money interests protected so that there was a better negotiation

than just forking over 100 percent?

Mr. BERNANKE. Sir, I don’t see on what basis that less than 100

percent could have been paid. They were contractual obligations.

Failure to pay them would have allowed the creditors to force

bankruptcy, which was exactly what we were trying to avoid. This

is precisely why we need a resolution regime which would allow the

resolver to haircut creditors and to abrogate existing contracts. But

under current law you can’t avoid bankruptcy without paying off

the existing contracts.

Mr. TIERNEY. Well, except that the people that were running AIG

said that they thought that there were certainly issues involved in

that they didn’t owe money; that the default may not have occurred, or if it occurred, it didn’t obligate them to pay a full

amount. These people that were running the company, that had

made the contracts, that felt very strongly they had been negotiating on these for a period of time and apparently thought that they

could have struck deals that would have not obligated 100 percent.

These are contractual issues. So it could have been done. And yet,

once they turned that matter over to the Fed, the Fed and their

inferences was, just rolled over and gave 100 percent to Bank of

America, Citibank, other people. And it looks to others from the

outside that we were trying to make those people healthy, unquestionably, by taking public money and putting it in their coffers by

folding on that deal.

So my question to you is, will you produce to this committee copies of all the credit derivative contracts that AIG Financial Products Corp. had with those third-party counterparties, including all

the details of the terms and conditions of the contracts? All documents and correspondence regarding the creation of Maiden Lane

3, the special purpose vehicle that was created by the Fed to do

these transactions, and including the negotiations that went on for

that? And then, all documents and correspondence concerning the

management and overside of Maiden Lane Trust so that we can get

a look at those documents and make an assessment on that?

Mr. BERNANKE. I think we just—in our recent release, I think we

just released a whole set of documents related to those issues. But

if you have specific—we just created a monthly publication that

provides a lot of information about the Maiden Lanes, for example.

If you would send us a letter with a specific request, we will see

what is available.

Mr. TIERNEY. We certainly will. When you say you will see what

is available, I mean, we want everything that is available. And the

question to you is, when we make that request, will you provide it?

Mr. BERNANKE. If I am able to do so, I will.

Mr. TIERNEY. Thank you. I yield back.

87

Chairman TOWNS. Thank you very much. I now yield to the gentleman from Illinois, Mr. Davis.

Mr. DAVIS. Thank you very much, Mr. Chairman. And, Chairman

Bernanke, thank you for being here and for your long patience and

endurance.

Let me just ask you, how involved is the Fed in the day-to-day

management of Bank of America? For example, does the Fed have

veto power on major decisionmaking at Bank of America? And, has

any consideration been given to replacing upper-level management?

Mr. BERNANKE. The Fed is not involved in day-to-day management. That is the responsibility of the board and the management.

We are involved in evaluating the capital, the assets, liquidity, and

the management of the corporation. We have had concerns about

aspects of the management, and we have asked the board in particular to add independent directors, which they are in the process

of doing, and we will continue to be very careful and monitor the

management situation. But we do not take daily decisions. That is

not our job.

Mr. DAVIS. Mr. Chairman, let me ask you, when the government

invested heavily in AIG, Fannie Mae, and Freddie Mac, the management was actually replaced. Why was the fate of Mr. Lewis so

different in this instance?

Mr. BERNANKE. Well, I think in this case that the merger was

undertaken in good faith. It was—at the time looked like a reasonable combination. A lot of firms suffered severe losses in the fourth

quarter. It was one of the worst quarters I think in history in

terms of financial losses.

Our judgment at the time was that he could continue to lead the

company, and we have not addressed that, but obviously we will

continue to evaluate management and the board as we go forward

and make sure that we are comfortable with the leadership of

Bank of America.

Mr. DAVIS. In an e-mail from Mr. Warsh to yourself on December

30th, Mr. Warsh writes, ‘‘Ken Lewis is going to call you to reaffirm

the understanding you have. Ken may also raise his favorite perennial issue; that is, the Richmond supervisory team on the same

page as the board. Richmond staff was on our call today, but prior

to the call it sounds like they may have threatened a little more

than ideal. Need to get rid of dividend and fast. I told price system

will be making joint determinations.’’

My question is, to your knowledge, do you think that Mr. Lewis’

interaction with the supervisory team at the Richmond Fed threatened, coerced in any way Mr. Lewis?

Mr. BERNANKE. Well, the Federal Reserve in general throughout

last year was concerned about Bank of America’s capital and particularly its tangible common equity. And the Federal Reserve

Bank of Richmond, which was the supervisor of Bank of America,

was interested in having Bank of America increase their capital

perhaps by reducing their dividend or through other measures.

At the various points there were some confusions, I think, about

what the position of the Fed was because there were

miscommunications between the Richmond Fed and the Board of

Governors in Washington. And Mr. Lewis, far from being intimidated, was free to call me and ask me for resolution of these issues,

88

and we made sure that everybody was on the same page and got

that cleared up.

Mr. DAVIS. So it would be a normal interaction in terms of——

Mr. BERNANKE. Yes. A normal process.

Mr. DAVIS [continuing]. Than, look, I am having some concerns

with Richmond, and that kind of thing?

Mr. BERNANKE. Yes.

Mr. DAVIS. Mr. Chairman, let me ask you. You have gone on

record as supporting increased transparency in connection with the

Federal Reserve operation. Yet the bailout of Bank of America was

done behind closed doors without investor public knowledge or

input. Could the American people really understand in any way

what happened? I mean, what really happened? Was Mr. Lewis

bullied into going forward with his own bad deal? Or, did Mr.

Lewis recklessly agree to pay too much for Merrill Lynch so that

the Federal Government felt backed into a corner when faced with

the prospect of Lewis backing out of the Merrill deal? And of course

we experience the inevitable bankruptcy of Merrill Lynch.

Could you respond to those?

Mr. BERNANKE. Yes, sir. Today I think has been very productive

in terms of transparency and more information about what happened. Clearly, it was a very difficult period and many complex

problems that were being addressed. But, as I have indicated, I believe that we solved this problem without in any way taking steps

that were either beyond the law or unethical. And I believe we did

the right thing in order to stabilize both companies and the financial system.

Mr. DAVIS. Thank you very much. And thank you, Mr. Chairman.

Chairman TOWNS. The gentleman’s time has expired. Congresswoman Norton for 5 minutes.

Ms. NORTON. Thank you, Mr. Chairman. And we do appreciate

the transparency you are trying to bring to this transaction. I am

not inclined to second-guess the judgment of people in the midst of

trying to deal with a problem arising, problem after problem, in the

midst of a crisis, an unusual crisis at that. I am interested in Bank

of America’s options under the circumstances. Bank of America had

shareholders. We did have a series of rather unusual late-developing facts or factors to come to light in the process of the negotiations for this agreement.

I am wondering if it would not be true that—let me lay the predicate for this by saying you apparently—the Legal Division apparently had an opinion that no Delaware court had been found that

‘‘that have found a MAC or material adverse effect to have occurred

in the context of a merger agreement.’’ Well, one would have to

know the facts surrounding those circumstances. And to suppose

that they could not possibly have been at the same level of intensity as these, because we were in the middle of a national economic

crisis. That aside, I can understand from that one sentence that,

without knowing what the case law was, that there was that conclusion.

But could not Bank of America have negotiated a reduction in

price with Merrill had it invoked the MAC clause? Wouldn’t you

think that would be the logical thing to try to do, given the obligation to the shareholders?

89

Mr. BERNANKE. First, we did review the case law, and I think it

was quite applicable. I am not a lawyer, but the advice I got was

that it bore very directly on the situation that we were looking at,

specifically, that short-term losses, no matter how large, are not

basis for a MAC in this particular case. Only long-term

durationally significant losses in revenue or revenue production are

grounds. And, of course, Merrill Lynch has proved to be a profitable

acquisition for Bank of America.

Ms. NORTON. Then why not negotiate a better price? That wasn’t

the issue that Lewis originally raised. He was talking about just

breaking off the merger. But I think that would have also been

very dangerous, because the markets would have been faced with

the uncertainty of whether or not the deal was going to go through.

Merrill Lynch would probably not be able to survive absent the

support of Bank of America, and so there would have been an immediate problem with Merrill Lynch which would have created

broader problems in the financial markets.

Mr. BERNANKE. I don’t think——

Ms. NORTON. Even if they threatened to do that in the context

of negotiating?

Mr. BERNANKE. Well, you can’t negotiate anything unless you are

willing to go through with your threat, as you know.

Ms. NORTON. It happens every day.

Mr. BERNANKE. And so, therefore, there would have to be a probability in the minds of market participants that in fact Bank of

America would not go through with the merger.

Ms. NORTON. So you think that would have been considered a

bluff?

Mr. BERNANKE. I think that would have been destabilizing as

well. Yes.

Ms. NORTON. And in consummating, though, the merger as it

was originally planned, in effect didn’t the Bank of America shareholders take a good part of the hit of the Merrill losses?

Mr. BERNANKE. Not in our view. As I said, when I talked to Mr.

Lewis about this, I stressed that not only was invoking the MAC

bad for the financial system broadly, but I thought—our opinion

was that it would be bad for Bank of America itself. And, in particular, if invoking the MAC had caused Bank of America either to

fail or to become—have to be saved on some emergency basis by

the government, that clearly would not have been good for the

shareholders of Bank of America. Now of course, in the end he had

to make the judgment of what to do. But that, in my opinion, it

was not obvious at all that invoking the MAC was a good thing for

the Bank of America shareholders.

Ms. NORTON. And you think he made that decision on his own

without undue influence from the government in any way?

Mr. BERNANKE. I believe he did.

Ms. NORTON. Thank you, Mr. Chairman.

Chairman TOWNS. Thank you very much. Mr. Chairman, I know

we have an agreement that we would finish at 1. Would it be possible for you to stay until 1:10? Would that create a problem for

you? And I understand agreement. OK.

Mr. BERNANKE. Yes.

90

Chairman TOWNS. Thank you very much. Let me say to the

Members, what we will do is divide 10 minutes on each side. And

of course—so why don’t we yield 5 minutes to the ranking member

on the committee.

Mr. ISSA. Thank you, Mr. Chairman. I will be brief. I just want

to go through a couple of quick questions.

First of all, it appears as though much of the media thinks the

end justifies the means, meaning that even if there were threats

or if people felt threatened to go through with deals, it is OK because it worked out. Do you agree with that?

Mr. BERNANKE. No, sir. We used only legal and ethical means.

Mr. ISSA. I appreciate that. Do you also agree that at all times

the rule of law and the expectations that are written in both the

letter and the broader meaning of the law should be the guidance

for all transactions done behind closed doors by Federal officials?

Mr. BERNANKE. Yes, sir.

Mr. ISSA. As we choose to find ways to resolve the ambiguity between Ken Lewis, Hank Paulson, yourself, and of course a number

of people whose e-mails have been cited today, are you prepared to

answer in writing—not return here probably—additional questions

that may come up that would help us clear that up?

Mr. BERNANKE. Yes.

Mr. ISSA. Do you at this time believe that, intentionally, Ken

Lewis, Hank Paulson, or any of the people we have cited today in

e-mails intended to lie in their statements?

Mr. BERNANKE. I have no judgment on that.

Mr. ISSA. But you believe in good faith that they think what they

are saying is true, at least as far as you know?

Mr. BERNANKE. As far as I know.

Mr. ISSA. Do you think that Federal regulators should pick winners and losers as they go through trying to figure out in a crisis

like this who gets to own who or who gets bailout money and who

doesn’t?

Mr. BERNANKE. I think all these interventions are very unfortunate, and they are only made necessary by the extreme circumstances.

Mr. ISSA. Earlier, one of the people we mentioned was Mr.

Lacker. In light of his e-mail paraphrasing a longer discussion, do

you intend to speak to him and try to clarify how the difference in

interpretation could have happened?

Mr. BERNANKE. I have done so already, and he didn’t have any

further recollection.

Mr. ISSA. OK. And then I would like to yield to Mr. Burton the

balance of this 5 minutes.

Mr. BURTON. Let me just say that I don’t want to dwell on this,

but one of the biggest problems I have is the government telling

the private sector what to do and how to do it. We had the head

of General Motors literally fired by the government. Now, there

might have been justification for his removal, but I didn’t think the

government ought to be telling somebody who is answerable to the

stockholders what they are supposed to do.

One of the things that concerns me is on December 5th, Bank of

America’s stockholders approved that sale or that purchase and

that merger when they thought it was a $9 billion loss. And then

91

the 14th, they found out it wasn’t $9 billion but $12 billion. And

then, because they decided that they didn’t want to do that, they

contacted you and Mr. Paulson. And whether Mr. Paulson said directly you told him to do it or not to do it, but the inference was

there, that the Fed said if they pull out of this deal, their board

and the CEO is going to be gone.

Mr. Lacker said on the 20th, 2 days before they made the decision to go ahead with it, he said: ‘‘Just had a long talk with Ben.

Says they think that the MAC threat is irrelevant because it is not

credible. Also intends to make it even more clear that if they play

this card and then need assistance, the management is gone.’’ So even though they were going to incur $3 billion more in liabilities, because of the pressure put on by you and Mr. Paulson they

went ahead with that deal because they thought they and their

management was going to be fired.

Now, that is the problem I have. The government is coming in

and saying you are going to do this or else. This is not a socialistic

society. This is a government of free enterprise and of the people

and by the people and for the people. And what bothers me is they

thought they were incurring $9 billion; they found out it was $12

billion. And you told them—you and Mr. Paulson told them: You

are going to do this or else. And I just think this is wrong.

You can make a response, if you’d like.

Mr. BERNANKE. My response, sir, is I never said that to Mr.

Lewis.

Mr. BURTON. You never said this to—Mr. Lacker is wrong?

Mr. BERNANKE. Mr. Lacker, who is an internal person at the

Fed—and, again, those are his words summarizing a much longer

discussion—said a more subtle thing than what you are saying.

What he said was that if they took this decision and if they were

required to be rescued, that if this decision led the markets to attack Bank of America and create a destabilization of the company

and the government had to come in on Sunday night and save

them, that we would take that into account in thinking about management. That is a very different thing. And, also, I did not say

that to Mr. Lewis.

Mr. BURTON. What about your attorney who said that you were

going to put pressure on them? I brought that up in my previous

5 minutes.

Mr. BERNANKE. Well, again, I did say very strongly——

Mr. BURTON. He works for you.

Mr. BERNANKE. I said to Mr. Lewis that we strongly believed

that invoking the MAC was bad not only for the financial system

but for Bank of America. But I didn’t tie it directly to replacing

him or the board.

Chairman TOWNS. I yield 5 minutes to the gentleman from Ohio,

Mr. Kucinich.

Mr. KUCINICH. I thank the gentleman.

Chairman Bernanke, your staff believed that Bank of America

knew about Merrill Lynch’s accelerating losses in mid-November, a

full month before coming to you and weeks before its shareholders

voted to approve the merger. Those fourth quarter losses rose to

over $15 billion out of the pockets of Bank of America’s shareholders. But I want to ask you, did the Fed know about those acceleratVerDate 11-MAY-2000 14:36 Apr 19, 2010 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 U:\DOCS\55102.TXT KATIE PsN: KATIE
92

ing losses before the Fed approved the merger at the end of November?

Mr. BERNANKE. No, I don’t think we did.

Mr. KUCINICH. Well, may I introduce into evidence this e-mail,

which is from Dennis Herbst of the New York Fed to Audrey

Overby of Merrill Lynch. And it is dated Wednesday, September

17th. It says: ‘‘Hope this gets to you, Audrey. Our management’’—

that is the New York Fed—‘‘has asked to continue the flash report

on a daily basis, and I am sure you will share it with the SEC.’’

[The information referred to follows:]

93

94

Mr. KUCINICH. So the Fed was receiving detailed information by

which they could have concluded that the overwhelming losses at

Merrill Lynch were more than problematic and that the Fed could

have done something if they chose to.

Now, are you familiar with this e-mail, or are you saying that

there is no——

Mr. BERNANKE. We are certainly involved in a light way in the

oversight of those—of Merrill Lynch since we began to lend to

them. But we are not their formal supervisor, and our information

about their losses would certainly not be——

Mr. KUCINICH. But, Mr. Chairman, the Fed knew what Bank of

America knew. You were saying earlier with respect to Bank of

America, as a matter of fact you were—you really put on them the

responsibility to notify the SEC. But yet you knew—you knew before the merger was approved.

Mr. BERNANKE. In November? We didn’t know about the $14 billion. I am sure we didn’t know that.

Mr. KUCINICH. But you knew about Merrill Lynch’s condition before you approved the merger. Now, you—did you not? Did you not

know about their financial condition was failing before you approved the merger? If not—if you say no again, that flies in the

face of this e-mail that came from somebody at the New York Fed

who is tracking Merrill Lynch on a daily basis.

Mr. BERNANKE. Well, they are tracking it. But it is difficult to

know what these valuations are. They have to be done by professional asset managers. I was not aware. All I can say is I was not

aware and I don’t think anyone at the Fed was aware of the $14

billion in losses.

Mr. KUCINICH. But there’s an e-mail here saying that the Fed is

following up with the request for daily P&L, profit and loss, relative to Merrill Lynch. Now if—and, Mr. Chairman, I am going to

enter that into the record as well.

Chairman TOWNS. Without objection.

Mr. KUCINICH. When you permitted the merger of this company

that was too big to fail, you knew the company would be a significant player in four of the five critical financial markets; namely,

wholesale payments, foreign exchange, U.S. Government and agency securities, and corporate and municipal securities.

Isn’t it true that the combined entity of Bank of America and

Merrill as a significant player in four or five critical financial markets was a key rationalization for Fed action to bail out the merger?

Mr. BERNANKE. I don’t know. I would have to get back to you on

that.

Mr. KUCINICH. Excuse me?

Mr. BERNANKE. I would have to get back to you on that. I don’t

recall the details.

Mr. KUCINICH. Well, I am going to read a quote from a Fed

memorandum entitled Considerations Regarding Invoking the Systemic Risk Exception for Bank of America Corp. ‘‘An inability of

these organizations to fulfill their obligations in these markets and

the related systems would lead to widespread disruptions in payment and settlement systems in the United States as well as

abroad.’’

95

Now, in our investigation we have not encountered any evidence

that the Fed considered the potential for systemic risk when you

approved the merger of Bank of America and Merrill Lynch, which

only weeks later was too big to fail.

Now, Chairman Bernanke, did you really believe that Ken Lewis’

threat to invoke a MAC was a bargaining chip, as you stated in an

e-mail dated December 21, 2008?

Mr. BERNANKE. I thought initially that it might be. Yes.

Mr. KUCINICH. Did his use of a bargaining chip help him obtain

a deal he would not have otherwise received had he merely asked

for increased assistance from the government?

Mr. BERNANKE. As I also said I think in a later e-mail, after listening to him and having more discussions, I came to the conclusion that he was really uncertain about what to do. We provided

advice, which he ultimately took, and we took steps to prevent the

destabilization of his company and the financial system.

Mr. KUCINICH. Mr. Chairman, I ask you for 1 more minute.

Chairman TOWNS. Yield the gentleman an additional minute.

Mr. KUCINICH. Isn’t it true that you did not believe the Merrill

losses merited special attention from the government?

Let me direct your attention to handwritten notes from your first

meeting with Ken Lewis on December 17, 2008. You reportedly

stated the downside of $50 billion doesn’t sound big for Bank of

America. The $50 billion refers to Merrill assets that Lewis had

wanted protection for from the government. The record clearly

shows you did believe that there would be systemic consequences

if Bank of America took steps to back out of its deal with Merrill

Lynch irrespective of whether it would win in court.

So, did the threat of a MAC, which you believe would have serious consequences, influence your willingness to give Bank of America financial assistance when you didn’t believe it needed to have

it?

Mr. BERNANKE. We had demonstrated with Citigroup, for example, that if we saw a major financial institution about to fail and

to risk the stability of the financial system, we would try to take

steps to stabilize it. So I think we would have done that in any

event.

Mr. KUCINICH. Mr. Chairman, I just want to conclude with this

point. Mr. Bernanke has testified that he was concerned about systemic collapse. We all understand that. He was concerned about

Bank of America’s collapse. We understand that. And he said that

the Bank of America collapse would hardly be a good thing for investors. That was your testimony.

But if the Fed knew that Merrill Lynch was failing before the

shareholders voted, why did you not inform the SEC about this? If

they knew about it, if you knew about it before you approved the

merger, why did you approve the merger?

Mr. BERNANKE. The $14 billion of losses that Mr. Lewis reported

to us, I don’t believe that we—I am sure we didn’t know about that

in November.

Chairman TOWNS. The gentleman’s time has expired. I now yield

5 minutes to Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman. Mr. Jordan is going to be

primary closing. I just want to wrap up a couple things I heard.

96

As you probably know, Neel Kashkari has appeared before this

committee multiple times. And in our questioning of him, the one

thing we found is he didn’t know at that time how much he had

paid for things, he didn’t know what they were worth, he didn’t

know how they valued them, but he was going to get back to us

and never did. I understand he has left the government.

But what that has told me, because it occurred in real time, it

occurred exactly when these things were going on, that on a dayto-day basis you didn’t know what assets were worth, including

these toxic assets; is that roughly correct?

Mr. BERNANKE. It’s very difficult to know what they’re worth.

Mr. ISSA. I appreciate that, and I appreciate your service in trying to do the best you could in this tough situation. But one thing,

and my last question is, when it came to the MAC. You had said

just a moment ago that it only could be invoked if, in fact, you had

forward-looking lesser revenues, that it was not material to the

balance sheet—if I can paraphrase you—but to the income statement. That’s what I heard you say.

Mr. BERNANKE. That’s what I understood the memorandum to

say.

Mr. ISSA. And I appreciate that. But if that’s true, then isn’t it

true that if you have to restate your income prospectively or retrospectively, then by definition the go forward is reduced? In other

words, if you never made as much as you thought you made because the assets materially degraded because they were never

going produce what you had said in the past, then in fact it is a

MAC event. So losses accumulating could well have been a viable

reason to predict that the enterprise value going forward was less?

Wouldn’t you say that was correct based on normal accounting?

Mr. BERNANKE. I shouldn’t drift into securities law which I’m not

an expert. The advice of my attorneys was that the MAC would be

unlikely to succeed. And even if there was a significant probability

of not succeeding, it could have caused a lot of disruption in the

financial markets.

Mr. ISSA. We appreciate your effort here. I am going to turn the

rest over to Mr. Jordan. And thank you for everything you did and

everything you tried to do to help our country.

Mr. JORDAN. Mr. Bernanke, when did you know that you would

not be able to go in and buy the toxic assets, the mortgage-backed

securities? Because if you remember back, I mean the whole package was sold to the U.S. Congress based on what you told Members

of Congress, what Mr. Paulson told Members of Congress.

And I think I asked this question. You’re a sharp guy, MIT graduate, Ph.D. in economics, Mr. Paulson is a smart guy, Mr. Geithner

is a smart guy, you convinced the Congress you could go in, you

could put some value on these assets, you could clean them off the

books, everything would be wonderful after that point.

And yet 10 days after we passed this—and I didn’t vote for it—

but 10 days after you passed it, you bring the nine biggest banks

to Washington, don’t tell them what the meeting is about, and you

completely change strategy.

So when did you know you would not be—did you know before

Congress voted on it, or did you know after Congress voted on it,

97

when you would not be able to go in and purchase these securities

and do what you told us you were going to do?

Mr. BERNANKE. Well, we knew after. One of the reasons, one of

the problems was——

Mr. JORDAN. Here’s what I don’t understand. This was a month

long—I remember the first conference call we listened into as Members of Congress was in September. You had a whole month, and

yet within 10 days the strategy—probably within a few days the

strategy.

So you had a whole month leading up to this convincing the Congress you could do this, and yet within 10 days a complete change;

and yet you’re bringing nine banks to Washington, not telling them

what it’s about, not telling them you’re going to force them to sign

a form, take taxpayer money and completely change strategy.

And you look at, as we went through some of the things here,

the pattern of some might say deception, where the banks come to

Washington not knowing what the meeting is about. Mr. Angulo

does the letter saying we’re going steer Merrill Lynch on how to

disclose to the public what is going on on this merger, what is happening with Merrill Lynch.

I think it’s a reasonable question to say when did you know this,

and if you didn’t know until after October 3rd, what took you so

long to figure it out? You had a month as we were going through

this whole thing, and, frankly, 2 weeks of debate in this Congress.

You remember they sent us home for a few days, come back, and

we passed this after a second vote.

Mr. BERNANKE. I would be happy to answer that question. The

drawback of the asset purchase plan, as we discovered, was that

it took some time, probably some months, to put it into operation.

We thought perhaps that would be possible. But, unfortunately, the

banking situation deteriorated very quickly, and by Columbus Day

we had a global banking crisis. And the only way to stop the crisis

from spreading and creating a huge problem was to inject capital,

to have guarantees and to take the various steps we took.

So this was the only way to do it as quickly as was needed, given

the way the situation changed. So what changed was the financial

situation between October 3rd and October 14th. And we had no

way to do the other approach because it would just take too long.

Mr. JORDAN. Mr. Chairman, I’ve got a few seconds. I’m going to

completely change gears here. Tell me—and if you can go after

this, I appreciate it—the money supply. I mean, I didn’t get a

chance to ask you questions when you were in front of the Budget

Committee, and I apologize. A lot of people, a lot of sharp people,

are very nervous about where we are with the amount of money

out there in the system right now.

Talk to me briefly, if you can, about your concerns there and how

we’re going to deal with what I think a lot of people believe is going

to be real inflationary concerns in the not-too-distant future.

Mr. BERNANKE. The money is not in the system in any real way.

The money is electronic deposits from banks sitting in the Federal

Reserve accounts. They’re not being used, not being loaned, they’re

not circulating. The key issue here is can we unwind this money

creation and low interest rates in time to head off inflation when

the economy begins to recover? We have all the tools we need to

98

do that, we believe we can do that. We will certainly remove that

stimulus in time. And we are committed to price stability, and we

will make sure that it happens.

Chairman TOWNS [presiding]. I thank the gentleman. I yield to

the gentleman from Ohio.

Mr. KUCINICH. For unanimous consent, I ask unanimous consent

to put into the record two sets of documents we received with subpoenas containing the e-mails and excerpts of documents I referred

to today.

Chairman TOWNS. Without objection, so ordered.

[The information referred to follows:]

99

100

101

102

103

104

105

106

107

108

109

110

111

112

Mr. KUCINICH. Thank you.

Chairman TOWNS. I yield 2 minutes to the gentlewoman from

Ohio, Congresswoman Kaptur.

Ms. KAPTUR. I thank the chairman and I thank Chairman

Bernanke for his endurance. We all have to do our jobs. I would

like to insert into the record the information and background on

the relationship between Bank of America, Merrill Lynch and

BlackRock.

Chairman TOWNS. Without objection, so ordered.

Ms. KAPTUR. I thank the chairman. I would like to ask Chairman

Bernanke to submit for the record from the Fed how did Bank of

America end up owning 49 percent of BlackRock?

In 2004 the FBI warned the public and the administration mortgage fraud was headed toward an epidemic level in our country.

The Fed did nothing.

Now, the Fed under your watch, has hired BlackRock, a firm

owned 49 percent by Bank of America, headed by a man who invented the subprime instrument when at First Boston and then

later at BlackRock, who traded billions of dollars of these securities

to Freddie Mac and Fannie Mae over the last decade.

I quote a sentence and will place in the record from Bloomberg

News: Fink’s rocket-like rise when at First Boston was largely a result of his creative work with mortgage-backed securities, slicing

and pooling mortgages and selling them as bonds. And he took his

concept to Freddie Mac where he sold the company’s board on a billion package.

That was just the beginning of it. Chairman Bernanke, what material can you provide this committee and to the record that will

explain how the Fed will avoid conflicts of interest in self-dealing

by that firm and its CEO in the execution of contracts you have

signed with BlackRock?

Mr. BERNANKE. We’ll provide you with the contracts and with a

letter explaining how it works.

Ms. KAPTUR. I thank you.

Some lawyers have said systemic fraud or controlled fraud have

characterized the mortgage securitization process. Will you permit

the FBI access to the mortgage instruments being managed by

BlackRock as the Fed contracts are executed and fulfilled?

Mr. BERNANKE. If there’s a reason for the FBI to investigate and

the FBI has a right to investigate, we would not stand in the way

of an appropriate investigation.

Ms. KAPTUR. Thank you.

How many contracts has the Fed signed with BlackRock to handle Freddie Mac paper and Fannie Mae mortgage securities under

your purview, and how much will BlackRock be paid for those services?

Mr. BERNANKE. We’ve hired four asset managers to manage our

mortgage-backed securities portfolio. BlackRock is one of them. I

don’t know how much we’re paying them.

Ms. KAPTUR. Will BlackRock be handling Freddie Mac paper?

Mr. BERNANKE. They’ll be managing GSE guaranteed paper, so

that would include Freddie, Fannie and Ginnie.

Ms. KAPTUR. I would seriously urge your staff to go back and

look at the operations of BlackRock and Mr. Fink’s operations at

113

First Boston before he founded BlackRock in relation to what they

transacted with Freddie Mac and when they did that.

Chairman TOWNS. The gentlewoman’s time has expired.

Ms. KAPTUR. Thank you very much, Mr. Chairman and Mr.

Bernanke.

Chairman TOWNS. Thank you. Thank you very much.

Let me thank the chairman for his time, of course, today. At the

outset of this hearing I said that it’s time to shine some light on

the events surrounding Bank of America’s acquisition of Merrill

Lynch. At this point I would say we got a peek, not much, but we

don’t have full sunshine yet.

I would make three observations before we close:

No. 1, there are significant inconsistencies between what we

have been told today, what we were told 2 weeks ago by Ken

Lewis, and what the Fed’s internal e-mails seem to say. It is still

unclear whether Bank of America was forced by the Federal Government to go through with the Merrill deal, or whether Ken Lewis

pulled off what may have been the greatest financial shakedown in

a long, long time.

As a result of this hearing we have learned that the SEC and

the FDIC played a role in this transaction as well. But as I indicated, we’re going wherever the road leads us. So therefore let me

say that we’re going to talk to the SEC and we’re going to talk to

the FDIC. We’re going to talk to former Treasury Secretary Hank

Paulson. He has agreed to appear before the committee in July,

and I look forward to that hearing.

But we also need to hear from the FDIC and the SEC so that

we can better understand what happened during the dark days of

last December. So we will be hearing from them as well.

So, Mr. Chairman, let me thank you again for your time. And I

might have taken you 2 minutes over, but I’m sorry about that, I

apologize. Thank you very much. Therefore now the committee is

adjourned.

[Whereupon, at 1:18 p.m., the subcommittees were adjourned.]

[Additional information submitted for the hearing record follows:]

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

Æ