Ben S Bernanke: Acquisition of Merrill Lynch by Bank of America
Testimony by Mr Ben S Bernanke, Chairman of the Board of Governors of the US Federal
Reserve System, before the Committee on Oversight and Government Reform, US House of
Representatives, Washington DC, 25 June 2009.
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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 Corporation of Merrill Lynch & Co., Inc. I believe that the Federal Reserve acted
with the highest integrity throughout its discussions with 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.
Background
On September 15, 2008, 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 5, 2008. 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
midOctober, 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.
Discussions regarding the possible Termination of Agreement to acquire 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 Treasury. During these discussions, Bank of America's CEO, Ken
Lewis, told us that the company was considering invoking the Material Adverse Event clause
in the acquisition contract, known as the MAC, 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 the time, the uncertainties created by an invocation of the MAC 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 three 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 the judgment of its management. Third, based on
our staff analysis of the 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 a 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 30, 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 to shore up the
combined company's 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 16, 2009, from January
20, 2009. The package included an additional $20 billion equity investment from the Troubled
Asset Relief Program and a loss-protection arrangement, or ring fence, for a pool of assets
valued at about $118 billion. The ring-fence 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 they
believed was in the best interest of their shareholders and 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 it was this concern that I communicated to Mr. Lewis and
his colleagues.
Disclosures
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 belong squarely with the
company, and the Federal Reserve did not interfere in the company's disclosure decisions.
The Federal Reserve had a legitimate interest in knowing when Bank of America or Merrill
Lynch intended to disclose the losses at Merrill Lynch. Given the fragility of the financial
markets at that time, we were concerned about the potential for a strong, adverse market
reaction to the reports of significant losses at Merrill Lynch. If federal assistance 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 companies'
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 the 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 not only done 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 strengthens and expands supervisory oversight and
includes a broader range of tools to promote financial stability.
I would be pleased to take your questions.