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. * * * 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

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