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Joint Hearing Of The House Committee On Oversight And Government Reform And The Subcommittee On Domestic Policy - "Bank Of America And Merrill Lynch: How Did A Private Deal Turn Into A Federal Bailout? Part II"

Joint Hearing Of The House Committee On Oversight And Government Reform And The Subcommittee On Domestic Policy - "Bank Of America And Merrill Lynch: How Did A Private Deal Turn Into A Federal Bailout? Part II"

Co-Chaired By: Rep. Edolphus Towns (D-Ny); Rep. Dennis Kucinich (D-Oh)

Witness: Federal Reserve Chairman Ben Bernanke

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REP. 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 the 15th, 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 the 16th, 2009, the world discovered that Merrill Lynch had experienced a $15 billion fourth quarter 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 tax 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 the 5th, 2008, there was no public disclosure of any problems with the transaction. However, Bank of America's CEO, Ken Lewis, has testified that just nine 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 him 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's motives in threatening to back out of the Merrill 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 cause 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 remains shrouded in secrecy. It's 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 is 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 to be discreet.

I'm not going to prejudge the issues. At this point, we are not even close to finishing this investigation. Bank of America CEO Ken Lewis gave us his story. Now it's Fed Chairman Bernanke's turn to give his side of the story. Next it will 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 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 five minutes to our ranking member on the full committee, Mr. Darrell Issa of California, for his statement.

REP. DARRELL E. ISSA (R-CA): 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 the -- those getting us out participated in 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, 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 or what the intent was, whether or not what we often called 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's 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 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'm 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 systemic 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.

REP. TOWNS: Thank you very much.

I thank the ranking member for his statement and thank him for his words, as well, kind words. This time I yield to the ranking member of the Subcommittee on Domestic Policy of course, for five minutes, the gentleman from Cleveland who has done a fantastic job.

Congressman Kucinich.

REP. 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 effect clause, the 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 losses.

Staff and officials at the Fed looked more closely at the basis for Lewis's assertions and determined, and this is a quote, that they were, quote, "somewhat suspect," unquote. The Fed found, in contradiction to Ken Lewis's 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 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's 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's 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 analysis 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.

The Fed's decision-making 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.

REP. TOWNS: Thank the gentleman from Ohio. We will now yield five minutes to the ranking member of the Domestic Policy Subcommittee, Congressman Jordan of Ohio.

REP. JIM JORDAN (R-OH): Thank you, Mr. Chairman. I have a brief statement here.

Thank you for holding today's hearing on the government's involvement in the -- Bank of America's deal to purchase Merrill Lynch. I appreciate Chairman Bernanke's appearance before the committee today. His testimony's 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'm 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 the 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 of 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 the 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 hearing -- or reports. Thank you.

REP. TOWNS: Without objection, so ordered.

Mr. Bernanke, it's a long-standing policy that we swear all our witnesses in. Would you please stand and raise your right hand?

Do you solemnly swear the truth, the whole truth and nothing but the truth? If so, answer in the affirmative.

MR. BERNANKE: (Off mike).

REP. TOWNS: Let the record reflect that the witness answered in the affirmative.

Mr. Bernanke, we would like for you to summarize your statement in five 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.

MR. BERNANKE: Thank you. Chairman Towns, Ranking Member Issa and other members of the committee -- (pause to adjust mike) -- how about now?



MR. : Yes.

MR. BERNANKE: Okay. 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 by Merrill Lynch.

REP. TOWNS: You know -- is it on, staff? Help me, because we can't hear him. (Pause.) Pull it closer. Just pull it closer to you.

MR. BERNANKE: We want the light on.

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

REP. TOWNS: You know, still -- and we're still having trouble. We have some senior citizens up here. (Laughter.) We're having trouble hearing you, yeah. Is there any way you can turn the volume up on it?

STAFF: We've got a replacement down below, too, that they can pull out.

REP. TOWNS: Another one? Yeah. There's another one on the floor, a backup on the floor?

Staff? (Pause.) Yeah. (Technical adjustments.) Yeah, it sounds better.

MR. BERNANKE: How's that?

REP./MR. : Very good.

REP. TOWNS: Better. Very better.

REP. KUCINICH: Thank you, Mr. Chair.

REP. TOWNS: Thank you very much, Mr. Chair.

MR. BERNANKE: I'd like the full extent of my time, if I may. (Soft laughter.)

REP./MR. : (Off mike.) (Soft laughter.)

MR. BERNANKE: (Chuckles.)

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 15th, 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 1st, 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 17th, 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 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 that time, the uncertainties created by an invocation of the MAC might have triggered a broader systemic crisis -- (pause) -- 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 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 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 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 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 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 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 the 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 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 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 the 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 the 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 16th, 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 strengthens and expands supervisory oversight and includes a broader range of tools to promote financial stability.

I'd be pleased to take your questions. Thank you.

REP. 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 Merrill's -- the Merrill deal?

MR. BERNANKE: I did not.

REP. 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.

REP. 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.

REP. 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 of 2008 to provide Bank of America with enough money to fill the hole created by the 12 billion (dollars) loss at Merrill Lynch.

In December of 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 assure the viability of the company in case of a financial crisis.

REP. 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'll 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; it -- and its shareholders. Its second function has to do with oversight regulation. In that capacity, I'm 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 would assure 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 involve -- continually throughout the process, and which -- I personally spoke to both John Dugan and Sheila Bair to make sure they were well informed about the situation.

REP. TOWNS: So you're saying that you were forthcoming?

MR. BERNANKE: I was indeed, as appropriate, with the other agencies.

REP. 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 the 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.

REP. TOWNS: Ken Lewis told the committee two 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? What did he say?

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 a 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.

REP. TOWNS: My time has expired. I yield to the ranking member from California for five minutes.

REP. 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 in which John Dugan participated in. And we provided him with all of the information that I was aware of at that time.

REP. ISSA: Okay. The -- 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'd like to make two points. First, as I --

REP. ISSA: Well, let me just give you the details to make it accurate. Quote: "Just had a long talk with Ben, parenthesis, (Bernanke). Says that they think the MAC threat is irrelevant because it's not credible. Also intends to make it even more clear that if they play that card and they need assistance, management is gone."

Now, is he misunderstanding what -- the conversation he had with you, in those quotations?

MR. BERNANKE: I don't recollect everything that was said in that conversation. I'd just like to make, again, two points, if I may.

REP. ISSA: Just -- I'd like to have your -- do you believe that he is incorrect, according to your recollection? Because he's saying, in a nutshell, you planned to make a threat. Now, you may not have done it, but he's saying you planned. Is he lying or is --

MR. BERNANKE: I don't recollect the details of that conversation.

I'd 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 at Bank of America.

REP. ISSA: Did you think that -- did you think pulling the trigger on the MAC was a bargaining chip?

MR. BERNANKE: May I make my second point? (No ?).

REP. ISSA: Briefly. I have very limited time.

MR. BERNANKE: Briefly. I'd 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 if he were to invoke the MAC and that 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 that.

REP. ISSA: Well, let's go through the MAC. You know, 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's true.

REP. ISSA: Okay. So let me just 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's what we all saw publicly and privately here.

So why is it that between September and December, one would think that it was a complete absence of fair due diligence to discover that a company you're 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're watching collapses of hundred-year-old businesses?

MR. BERNANKE: Well, we did raise the question of whether or not Bank of America should have discovered those losses earlier, but that wasn't the relevant questions for us in terms of maintaining the stability of the financial system going forward.

REP. ISSA: Okay, but we're not talking about the stability of the financial systems. You said that you had three good reasons that B of A 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 couldn't have predicted -- in two months of due diligence, by a company trying to get high-dollar or, in this case, high stock exchange -- in the transaction.

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're saying that basically in one of your three points that they'd be viewed as inept. Well, if I understand correctly, day after day after day, 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're looking at evoking 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.

REP. ISSA: Thank you, Mr. Chairman.

REP. TOWNS: The gentleman's time has expired. I now yield five minutes to the gentleman from Ohio, Congressman Kucinich.

REP. KUCINICH: Chairman Bernanke, our investigation reveals that staff at the Fed quickly came to the conclusion that Ken Lewis's representations to the government, in the meeting of December 17, 2008, were, as one put it, somewhat suspect.

At the appropriate time, I'm 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's 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 decided 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, and I quote, "Spoke with folks, with BOA folks, this morning, mostly Joe Price, CFO. Did not instill a ton of confidence that they have got a comprehensive handle on the situation," unquote.

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, quote, "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," unquote.

Chairman Bernanke, did you agree with your senior staff and colleagues at the Fed who had drawn those unflattering conclusions about Ken Lewis's management at Bank of America?

MR. BERNANKE: The staff and the principals of the Fed had serious concerns and questions about --

REP. KUCINICH: Did YOU have serious concerns?

MR. BERNANKE: I did have concerns and questions, but, you know, that wasn't the issue --

REP. KUCINICH: About the -- about the characteristics of the --

MR. BERNANKE: I did have concerns, yes.

REP. 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 at Bank of America.

However, it's not evident that you yourself had an interest in increasing accountability to 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'd 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.

REP. KUCINICH: Was there -- was that a yes or a no?

MR. BERNANKE: The answer's yes. We have done that.

REP. KUCINICH: Okay. Did you require more severe economic -- or 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 -- not the standard ones, but the ones associated with extraordinary actions under TARP.

REP. KUCINICH: Did you require -- did you require any limitation on various types of corporate expenses at Bank of America other than those it had already imposed on itself?

MR. BERNANKE: Not that I recall.

REP. 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.

REP. KUCINICH: You -- do you know for sure?

MR. BERNANKE: I'll get back to you, but it's my belief that we did.

REP. KUCINICH: We need to know that.

Now, Chairman Bernanke, isn't it true that there was a high-level concern at the Fed about neglecting the opportunity to press for greater accountability in Bank of America's corporate management?

Let me direct your attention to an e-mail sent to you by Eric Rosengren, president of the Boston Fed. Says, "Dear Ben, I'm concerned if -- we too quickly moved to a ring fence strategy, particularly if we believe that existing management are 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's instructive to look at the example of the Royal Bank of Scotland, the U.K.; replaced senior management.

The bank is maintaining operations without significant disruptions. I would not want to discard this option prematurely." That's 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, Chairman?

MR. BERNANKE: Congressman, the supervisory process is not a one- time thing; it's an ongoing process. And in our ongoing supervisory process, we have made demands of the Bank of America in terms of their board and management --

REP. 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.

REP. KUCINICH: Thank you, Mr. Chairman.

REP. TOWNS: Thank you very much.

I now yield to the gentleman from Indiana, Mr. Burton.

REP. DAN BURTON (R-IN): Is Mr. Lewis lying?

MR. BERNANKE: With respect to what, sir?

REP. 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.

REP. BURTON: Well, what did you say? I mean, you know, sometimes there's 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. I expressed those concerns, which is appropriate, but it was always his decision whether or not to go ahead and take that decision.

REP. 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's modified that statement. I did not tell him -- I did not tell Mr. Paulson --

REP. BURTON: What did you tell him?

MR. BERNANKE: I didn't tell him anything like that. We had --

REP. BURTON: Well, what did you tell him? You say you didn't tell him anything like that. What did you tell him?

MR. BERNANKE: Mr. Paulson and I had frequent conversations on a variety of matters, given our common concerns about the financial system. All I can say is I'm sure that I never told him to convey such a message to Ken Lewis.

REP. BURTON: Mr. Paulson says -- in a letter from New York Attorney General Andrew Cuomo to Congress, Cuomo reports that Paulson told him that Paulson made the threat at the request of Bernanke. That's not correct?


REP. BURTON: Did you say he -- you said 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.

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

MR. BERNANKE: He's summarizing a long conversation. I don't recall exactly what was said.

REP. BURTON: Jeff's had a long talk with Ben; says they think the MAC threat is irrelevant because it's not credible; also intends to make it even more clear that if they play the card -- 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.

REP. BURTON: Now, you know, one of the things -- I was chairman of this committee for six 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'm sure I can't remember. But I think it's 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.

REP. BURTON: Why did you keep the SEC in the dark?

MR. BERNANKE: 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 Comptroller of the Currency, who were well informed.

REP. 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 official asked: Have we conveyed anything to the SEC regarding the Bank of America situation? They know something's up. How much, if anything, has been shared with the SEC?

Mr. Alvarez 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 that 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.

REP. BURTON: Does this Mr. Alvarez work for you?

MR. BERNANKE: He does.

REP. 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 and --

REP. BURTON: Well, are you his boss?

MR. BERNANKE: I'm sorry?

REP. BURTON: Are you his boss? Mr. Alvarez?

MR. BERNANKE: Yes. I am.

REP. 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's the ones that we kept closest in communication.

REP. TOWNS: The gentleman's time has expired.

Mr. Foster, from Illinois.

REPRESENTATIVE BILL FOSTER (D-IL): Thank you for appearing here, Chairman Bernanke. I appreciate it, and I'm sure everyone here --

The microphone, is this working? Okay.

Just for clarity --

REP. TOWNS: See if your mike is on.

REP. FOSTER: Yeah, is this -- is this working here?

(Cross talk.)

I'll speak loudly.

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.


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's not -- that's not appropriate under supervisory practice. And we have not done that.

REP. FOSTER: Okay. And 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 their own company, for systemic reasons alone.


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.


So it was the indirect benefit to the shareholders, from not having the whole system collapse, that he was optimizing for.

MR. BERNANKE: Correct.


And now, if you accept that the federal recapitalization of both Merrill and Bank of America were probably inevitable, do you think that the net effect of the merger just represented a reshuffling around of the total funds that we'd eventually have to commit? Or do you think it's a more complicated situation than that?

MR. BERNANKE: No. I think the combination strengthened the two companies. And in 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.

REP. FOSTER: Okay. Well, thanks again.

I yield back the remainder of my time.

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

REP. 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 dealing with Bank of America.

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 at -- what that something you and Mr. Paulson decided needed to happen? Or 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.

REP. JORDAN: Okay. Mr. Lewis, in his testimony a few weeks ago, he said the meeting -- he described the meeting as the four of you on one side, the nine CEOs of the banks on the other. 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 personally. I said, "Did anyone express any reservations at that meeting about accepting taxpayer money?" He said, yes, one of the other CEOs, in fact, did express reservation. 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, that meeting?

MR. BERNANKE: I think the time was less than an hour, yes.

REP. 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.

REP. 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 less than two weeks prior to that?

MR. BERNANKE: I was not in contact with the nine CEOs. I think the Treasury was in contact with them.

REP. JORDAN: Do you believe that Mr. Paulson let them know what the meeting was about?

MR. BERNANKE: I don't know.

REP. JORDAN: Okay. But the recollection of how I described the meeting, how Mr. Lewis described the meeting, that's, 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 the -- 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 in the interest of the financial system for them to do so.


MR. BERNANKE: And they -- they signed the forms.

REP. 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 two months ahead, to December, and we have the e-mail that -- and letter that both Mr. Issa and Mr. Burton had brought up, the letter that Mr. Cuomo, 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, says that -- think the MAC (sort of is ?) irrelevant because not credible; also intends to make it even more clear that if they play that card and they need assistance, management is going -- gone. Excuse me.

And then the third one I would point out, too, is the e-mail from Mr. Angulo of the New York Fed, which deals with the disclosure concern -- also this is in December of last year, where he says: I think I'll ask Merrill Lynch -- a current estimate of the fourth quarter -- and he makes the statement, "If I get a sense that Merrill Lynch is leaning toward an early January filing, I'll try to steer them toward a later filing."

I mean, I guess what I'm trying to point out is, you have all this -- 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 decision-making, 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, they did not --

REP. JORDAN: Yeah, well, but they already had -- I mean, need assistance -- they already had assistance. You made them take it on October 13th.

MR. BERNANKE: No, no --

REP. JORDAN: 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 on October 13th --

MR. BERNANKE: No, I mean if they had invoked the MAC against our advice, and then they had had to be rescued in a Sunday afternoon operation at great cost and risk, that would hardly be a commendation for the management's quality.

REP. TOWNS: The gentleman's time has expired.

REP. JORDAN: Thank you.

REP. TOWNS: The gentlewoman from California, Congresswoman Speier.

REP. JACKIE SPEIER (D-CA): Thank you, Mr. Chairman.

Mr. Bernanke, what went into your decision to allow Lehmans 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 every -- 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 allow -- to prevent the failure. If we could have done so, we would have done so.

REP. 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 that financial company was experiencing. So it was a very different situation.

REP. 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.

REP. SPEIER: Let me ask you about the process that you went through in determining to give Bank of America 15 billion (dollars) 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.

REP. SPEIER: Who came up with that number?

MR. BERNANKE: I'm not certain. It was probably Treasury, but I'm not certain.

REP. SPEIER: You're not certain who came up with the number?


REP. 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.

REP. SPEIER: And you didn't have conversations with Mr. Paulson about this?

MR. BERNANKE: I don't recall.

REP. SPEIER: As I look at it, it appears that if you take the 15 billion (dollars) that B of A got in October, the 15 billion (dollars) that Merrill got, the $20 billion that was given to the B of A in January, that pretty much pays for what the B of A paid for Merrill. So did the American people basically subsidize the purchase of Merrill Lynch to B of A?

MR. BERNANKE: No, the American people made a capital investment, on which they're currently getting dividends and which I expect they'll be fully repaid.

REP. 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: The -- depends what kind of company it is. This was a bank, and therefore the most pressing communication(s) were with the bank regulators, the FDIC and the OCC, which we did inform. And I personally informed both Mr. Dugan 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.

REP. SPEIER: It 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?

REP. 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.

REP. SPEIER: Well, we're all one government, aren't we?

MR. BERNANKE: Well, we all have our spheres of responsibility, as well.

REP. SPEIER: So you didn't believe you had a responsibility to inform the SEC.

MR. BERNANKE: Well, we were dealing with a(n) emergency situation, and our focus was on the agencies that were most relevant to the situation. And that was the banking regulators. So that's who we focused on.

REP. SPEIER: But some of these e-mails would suggest that there was a -- 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 the government. We're 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'm -- I think it's appropriate for them to know, broadly speaking, what was going on.

REP. SPEIER: Do you believe that the 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 United States government, earlier than January 20th?

MR. BERNANKE: That was Bank of America's decision. And their counsel --

REP. SPEIER: I'm just asking you.

MR. BERNANKE: I'm not a lawyer. I can't tell you.

REP. 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 one week, which we did.

REP. SPEIER: So you don't think you had any --

MR. BERNANKE: We followed the law exactly.

REP. 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 public policy objectives that were very important.

REP. SPEIER: I yield back. Thank you.

REP. TOWNS: The gentlewoman's time has expired.

I yield to the gentleman from Utah, Congressman Chaffetz.

REPRESENTATIVE JASON CHAFFETZ (R-UT): Thank you, Mr. Chairman. I appreciate it.

And thank you, 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 --

REP. CHAFFETZ: Well, thank you.

MR. BERNANKE: You're welcome.

The Treasury, with its ownership, obviously has some influence. But it has not used that influence to affect --

REP. CHAFFETZ: But it could.

MR. BERNANKE: I suppose it could, yes.

The supervisors at the Federal Reserve can make changes or recommend changes in management, if we believe that the management --

REP. CHAFFETZ: Okay, let me move on. My time is short. I appreciate it.

So on this December 17th meeting, you're meeting in person. You have there the CEO, Lewis, who is there expressing that he might invoke the MAC. And then in your written testimony today, on page two, it says, quote, "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 number two, 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're 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.

REP. CHAFFETZ: But if you're questioning somebody's judgment and you are in the supervisory role with the authority to let them, how is that not a threat?

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 examples. If the markets --

REP. CHAFFETZ: So you think that was a threat? Your belief on what the threat would be for the market, but how could that not be a threat directly to Mr. Lewis and its board of directors? If you're 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.

REP. CHAFFETZ: With all due respect, I'm just not buying that. You're in charge. You have the ability to affect their outcome, to fire them, to let them go. You're 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 from 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 had 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.

REP. CHAFFETZ: I'm going to move on. I want to go to page four of your testimony here. It says in mid-paragraph and 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 number 18, we get this quote from Art Angelo, I believe, Mr. Jordan referenced this earlier, quote, "I'll ask Merrill Lynch's current estimate of fourth quarter losses versus market expectations and when Merrill Lynch intends to file an 8(K). If I get a sense that Merrill Lynch is leaning towards an early January filing, I'll try to steer him towards 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. Angelo did not attempt to make them change it.

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

REP. CHAFFETZ: But the intent is still there, right?

MR. BERNANKE: But he did not take the action.

REP. 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.

REP. CHAFFETZ: Thank you, Mr. Chairman.

REP. TOWNS: Thank you very much. The gentleman from Virginia, Mr. Connolly.

REPRESENTATIVE GERALD CONNOLLY (D-VA): Thank you, Mr. Chairman, and welcome, Chairman Bernanke.

Mr. Bernanke, I guess I come out at 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 hole to it that they hadn't realized in doing their due diligence?

MR. BERNANKE: On December 17th.

REP. CONNOLLY: I can't hear you, sir.

MR. BERNANKE: On December 17th when he called Secretary Paulson.

REP. CONNOLLY: On December 17th?


REP. 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 the 14th of December and that we have no direct evidence to the contrary.

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

MR. BERNANKE: We did have concerns about it. Yes.

REP. CONNOLLY: Did you take it as a threat? 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 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.

REP. 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 -- the responsibility of the management of Bank of America and their counsel and we left that decision to them completely.

REP. 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 position of an 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 because or to put anything in writing because they didn't want at that point this to come out in the public fora because of adverse reactions in the market.

MR. BERNANKE: I never conveyed any such thought.

REP. CONNOLLY: When asked, well, let me read to you if I may the minutes of the December 22nd, 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 does that reference to and what is the nature of the commitment he's referring to?

MR. BERNANKE: Well, as I've mentioned before, we did inform the Treasury and the Fed and 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.

REP. CONNOLLY: I'm going to have to sneak this 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, 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 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 of which I was concerned about, but subsequently, I thought that as I said that Mr. Lewis was genuinely uncertain about how to proceed.

REP. 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 of a moderately sized bank with the hobnailed 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 and I thank the chairman and I thank Chairman Bernanke.

REP. TOWNS: Thank you, gentleman. I yield now five minutes to the gentleman from Tennessee, Congressman Duncan.

REPRESENTATIVE JOHN DUNCAN (R-TN): Thank you. Thank you very much, Mr. Chairman.

Chairman Bernanke, many articles and columns have described the actions taken by the Fed in regard to Bank of America and Merrill Lynch deal 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 bigger 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 resolving 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.

REP. 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 have involved in AIG and Bear Stearns is about $100 billion.

REP. DUNCAN: And in other actions that you've taken? I've seen figures as high -- 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. But the good portion of the remainder is short-term, collateralized loans to financial institutions, which are very safe and help to provide liquidity support to financial systems.

So none of that I would characterize as a bailout other than the monies that were involved in AIG and Bear Stearns situations, which we got involved in with great regret and I hope that the system will be changed so that it won't be necessary in the future.

REP. DUNCAN: But Congress Daily said this morning that Fed officials purposely declined to consult with other federal financial regulators and one e-mail expressed concern, quote, "knows something is up." The Wall Street Journal reported that you and Mr. Paulson attended two weekly meetings with the Financial Stability Oversight Board and refused or declined to disclose the seriousness of the problems that were being faced by Bank of America and Merrill Lynch at that time.

What would you say to the majority of this Congress 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 these 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're happy to work with Congress and if they have further concerns about any of our programs, we're more than happy to work with you to make sure that you're comfortable, that they are well managed and are serving a public purpose.

REP. 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 the GAO is auditing, not only the operational aspects of our programs and 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.

REP. DUNCAN: Thanks.

REP. TOWNS: Thank the gentleman from Tennessee. Thank you very much.

I now yield five minutes to the gentle woman from Ohio, Marcy Kaptur.

REPRESENTATIVE MARCY KAPTUR (D-OH): 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 that still continues in regions 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 the near majority share of Bank of America.

Recently, and 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 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.

REP. 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.

REP. KAPTUR: Do you know what other instruments BlackRock and its subsidiaries sold to the federal government over the last ten years?

MR. BERNANKE: No, I don't.

The first tranche was a billion dollars. Do you know what year that occurred in?

MR. BERNANKE: I do not.

REP. 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 fire walls between the portion of the company that's working for us and the portion of the company that's engaging in other market activities.

REP. KAPTUR: Do you know what other instruments BlackRock and its subsidiaries sold to the federal government over the last 10 years?

MR. BERNANKE: No, I don't.

REP. 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 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.

REP. 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 -- (off mike) -- based on the website 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 these different types of information, some of which is confidential or proprietary, and releases all that it believes is appropriate. But I will go back and talk to them and make sure they're looking at all those issues.

REP. KAPTUR: Yes. Well, I'll tell you, you know, the housing crisis is at the heart of this economic crisis. And if we're 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 --

STAFF (?): (Off mike.)

REP. KAPTUR: -- 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 would be properly administered in a way that would 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.

REP. TOWNS: The gentlewoman's time has expired.

Congressman Souder from Indiana.

REP. MARK SOUDER (R-IN): Thank you.

I think that there was some prediction as you want into office that it was going to be a relatively activist Fed, and I think that -- I think that you've certainly 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 -- a 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 at the Fed? Obviously, we --

REP. TOWNS: Could the gentleman talk directly to the microphone? We're having difficulty hearing you.

REP. SOUDER: -- (inaudible) -- several other times in -- whether it be the Asian flu or various mini-crisis, that would you have, had you been Fed chairman, taken this aggressive a role?

MR. BERNANKE: The past two years has been the worst financial crisis since the 1930s. It has threatened the stability of the global financial system and the global economy. Extraordinary actions have had to be taken. We've learned a great deal from them. And as I said in my testimony, I hope the 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.

REP. SOUDER: And how do you see yourself extricating at this point, given the fact that you've been fairly politicalized. You're -- Treasury is directly political. You have quasi-political entities that you're working with now directly, 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're 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 non- standard programs. We saw just a couple weeks ago that 10 banks repaid their TARP money. And as we go forward, we'll expect to see more withdrawal of programs and support as the economy normalizes and financial system normalizes.

REP. SOUDER: Do you see yourself -- because in this particular case, part of the problem was, is that Bank of America moved into the non-bank 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 a non-bank sector. How do you see the Fed in the future dealing with this non-bank 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.

REP. 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're 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 -- I mean, I don't see in the short term you getting less politicalized, because you're in the middle of everything now and everybody's asking you to do this, do that.

MR. BERNANKE: In the 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 then we expect, of course, as the financial crisis eases, to stand down on the financial-crisis-related policies.

REP. 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've had deflation, but you in your career have 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'd very much like, again, not to be involved in such activities.

REP. SOUDER: And you've outlined the challenge, because some felt 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 when we were at the precipee (sic). And the question is that, if it's going to lead to this much intervention every time there's extraordinary discretion in a few individuals to say this is -- 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.

REP. TOWNS: The gentleman's time has expired.

I now yield five minutes to the gentlewoman from California, Congresswoman Watson.

REP. DIANE WATSON (D-CA): Thank you, Mr. Chairman. And thank you, Mr. Bernanke, for coming here.

I'm going to give you a series of events, and I'll 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 15th of 2008, there was no mention of the $20 billion capital injection from the government until January the 16th. At what 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 is this -- 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 received capital in the middle of October during the intense phase of the banking crisis. An additional $20 billion was injected, as you say, in January 16th. That was based on a review of what the supervisors and the other experts at the Federal Reserve believed would be sufficient to reassure the market that Bank of America would be stable going forward.

They've 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.

REP. WATSON: I'm sure this might be the experience in other members' office -- offices. I represent a district out in Los Angeles. And we get calls every day, up to 10 and 30 -- to 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 in 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.

Let me go on. In testimony before the committee on June 11th, Bank of America CEO Ken Lewis claimed that the revelation of a $12 billion loss at Merrill Lynch on December 14th of 2008 caused him to consider invoking the material adverse effect clause, or referred to as MAC, to back out of the deal nine days after shareholders had voted to approve the acquisition.

However, in an e-mail on December the 19th, the bank supervision officer of the New York Fed, Tim Clark, stated that Lewis's 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, and 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.

REP. 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.

REP. 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 the 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 e-mail was referring to? And do you believe that Mr. Lewis's claim that he would invoke the MAC and back out of the deal were 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 and --

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 a management was in the case of AIG, where we -- 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.

REP. TOWNS: The gentlewoman's time has expired.

REP. WATSON: Thank you, Mr. Chairman.

REP. TOWNS: Right.

REP. WATSON: Thank you, Mr. Bernanke.

REP. TOWNS: Thank you, ma'am.

Congressman McHenry from North Carolina.

REP. PATRICK MCHENRY (R-NC): 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 of the fall. And you've certainly had a very challenging tenure with the Federal Reserve. You didn't come in in easy times. So thank you for your service to your country.

And yeah, I -- during your testimony in front of Financial Services, which I'm on, and 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.

REP. MCHENRY: And some testimony, some comments, it was almost daily or hour-by-hour conversations throughout the fall with your counterpart there?

MR. BERNANKE: Daily, certainly.

REP. 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.

REP. MCHENRY: Yes. So the combination of the two, in 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 much 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 him 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.

REP. MCHENRY: Okay. We -- so he wasn't -- not directly involved and recused himself because of confirmation hearings and the potential of going from the Fed to the Treasury and the conflicts that would pose.

You know, did you have conversations with Mr. Geithner to give -- you know, keep him informed of what was going on?


REP. MCHENRY: Okay. There is an e-mail from Tim Geithner on December 20th at 8:02 in the morning. "Are you are all over B of A/ML? And are you getting what you need from the troops?" And this was to Kevin Warsh.

Now this e-mail sort raises to me that while Mr. Geithner was concerned -- and we have another chain here that says that he's basically washed his hands in concern for a tough -- potentially tough confirmation hearing. 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 what 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 knowledge, he was not involved in the detailed negotiations that developed the package for Bank of America.

REP. MCHENRY: Okay. You know, 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 development. I'm not aware of any other involvement.

REP. MCHENRY: Two additional things just to wrap up. Did you have conversations about Paulson's conversation; 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 out.

So confusion coming about after the fact.

REP. KUCINICH: The gentleman's time has expired, but the witness can answer your question, of course.

REP. 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.

REP. MCHENRY: Thank you. Thank you.

REP. KUCINICH: I thank the gentleman. The chair recognizes Mr. Cummings of Maryland. You may proceed.

REPRESENTATIVE ELIJAH CUMMINGS (D-MD): Thank you very much, Mr. Chairman.

Mr. Bernanke, as I've listened to you very carefully, I think I get it. I think I get it. You are 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 you 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 a play in arranging this transaction and no Federal Reserve assistance was promised or provided in connection with that agreement."

Is that accurate? Yes or no?


REP. CUMMINGS: All right. Well, then you go on to talk about all the things you did do. 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 the discussion, I, talking about yourself, expressed 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're 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'd like to mention, sir, that the first reference was to the original September deal with which I was not involved in any way.

REP. CUMMINGS: Yeah. But you were all lined up in the rest of it, all the way down to the end based on your testimony.

MR. BERNANKE: Certainly, I was.

REP. CUMMINGS: Now, so you felt that he was competent 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 major, isn't it?

MR. BERNANKE: Certainly.

REP. CUMMINGS: Certainly. But the man who would be held responsible if his bank went down, you say to him when he says - when he pulls up this material, this MAC and says, 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 of his experience and what have you, then you come along and says although it's your duty to disclose certain things, it's your duty and you're going to be the one who is 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 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 in all times, it was his decision to make and he understood that, I believe.

REP. 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 the 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.

REP. CUMMINGS: No, no, no, no. I said that you used the word that he was threatened and I think you may be 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 got Paulson, we got Lewis saying that you may have been behind the scenes doing some things. We've got you saying that you were behind the scenes doing some things and then, but at the same time, you come back and say, well, you know, I just made my opinion, 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.

REP. KUCINICH: The gentleman's time has expired. The gentleman's time has 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.

REP. CUMMINGS: Thank you.

REP. KUCINICH: The chair recognizes Mr. Bilbray.


Mr. Chairman, you know, I know this whole process looks like an inquisition. We're not here to indict just to your question and to find out, try to work out the reality here and I think it's a little more confrontational than it should be, traditionally. So let's just remember that 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.

REP. BILBRAY: So, you know, as a manager, you pretty well felt know what's 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.

REP. BILBRAY: Okay. 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 creative situation where they needed assistance, then there would be a problem."

And the clarification there was the fact that it wasn't just the MAC, but it's 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'd be accountable for that.

REP. BILBRAY: Okay, that's what I want to clarify, Mr. Chairman, because today you did make the comment that you felt that way and you felt comfortable with that. And you indicated -- I thought you indicated that you communicated that at that time, that if there -- not just that if they invoked the MAC, but if there was assistance needed later, after they invoked the MAC, then there would be repercussions.

MR. BERNANKE: I don't believe I ever said that.

REP. BILBRAY: Okay. So we're going to -- Mr. Chairman, I'd ask that that testimony -- because we need to clarify that, because I heard something from you today that sounded 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 there needed assistance, then there would be -- 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 get back into the record and see that. I'm just trying to help you clarify --

REP. KUCINICH: Is the gentleman submitting something for the record?

REP. BILBRAY: Yes, please.

REP. KUCINICH: Without objection.

REP. BILBRAY: Now, when you get into this, you said, "We did not guarantee BIA (sic/means B of A) anything." And you said there was no dollar amount referenced. But could have 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 that 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; this deal will not impact you in the long run, that we'll cover the difference"?

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.

REP. BILBRAY: Okay. So that's what I'm trying to clarify here, because we're going with testimony -- (inaudible). So, in other words, you're in a situation where you've got to handle this Merrill Lynch problem anyways. You have what looks like a merger forming. (All at once ?), BIA (sic/means B of A) is starting to get cold feet and may pull it apart. They're seeing it from the BIA (sic/means B of A) -- I mean, Bank of America taking on this burden. You see -- you're going to have the burden one way or the other.

Is it safe to say that it's a lot -- 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?

REP. KUCINICH: The gentleman's time has expired.

Do you want to put that in a question, and then Mr. Bernanke can answer? Your time has expired.

REP. BILBRAY: Let me just finish with -- let me finish with this. You stated today that if you had it all to do over again, you believe today that you'd do it exactly the same. Later in your testimony --

REP. KUCINICH: I'm going to take it as a question and ask the gentleman --

REP. BILBRAY: I will take the question. The fact that you -- 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's things you know today that you would have done differently?

REP. 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.

REP. KUCINICH: I thank the gentleman.

The chair recognizes Mr. Clay.

REP. WILLIAM LACY CLAY (D-MO): Thank you, Mr. Chairman.

Thank you, Chairman Bernanke, for coming today.

You have stated --

REP. KUCINICH: Would the gentleman speak directly into that microphone? Thank you.

REP. CLAY: 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 package, packages of bonuses. And I can believe that, and I have found you to be a person of integrity and of the highest degree.

Retrospectively, looking at the developments that occurred with the whole saga of B of A, 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 responsibility 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.

REP. 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.

REP. CLAY: And that was your responsibility then was to --

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.

REP. 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.

REP. 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 B of A?

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.

REP. CLAY: Mr. Chairman, why did you think it was necessary for B of A to acquire Merrill Lynch when Lehman had been allowed to fail? What was the thinking of saving AIG, Merrill and Citigroup when these companies had failed to adequately perform and uphold their fiduciary responsibility 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 -- you know, 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 to 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 had the TARP money in September, we might have been able to address the Lehman problem.

REP. CLAY: Was it really necessary to salvage AIG? I mean, I heard your explanation, but, you know --

MR. BERNANKE: I do believe so.

REP. CLAY: -- they failed. Their failed their own investors. They failed themselves.

MR. BERNANKE: I had no sympathy for AIG, and particularly for the Financial Products Division. But my concern was that if they 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.

REP. CLAY: And I guess we thought the same about American automakers a few months ago, that they just couldn't fail either and 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.

REP. KUCINICH: I thank the gentleman.

The chair recognizes Mr. Fortenberry. You may proceed, sir.

REP. JEFF FORTENBERRY (R-NE): 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's 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've got 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.

REP. 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 monies being received by Bank of America. She said, "Dear Ben, 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 is 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 that the details of the transaction, I understand it, that were her concern, not the basic idea of taking steps to stabilize the company.

REP. FORTENBERRY: Currently we have a situation, it's 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 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's why I believe that the centerpiece of financial regulatory reform should be steps to get rid of "too big to fail," to find measures that allow a large firm to fail when it's appropriate, but to do so in a way that doesn't bring everything else down with it.

REP. FORTENBERRY: Well, I agree with that assessment, but I think it's 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 banks.

REP. FORTENBERRY: What will be those steps, potentially?

MR. BERNANKE: Well, for example, greater oversight, capital and supervision of those companies, a resolution regime that would --

REP. FORTENBERRY: That assumes failure.

MR. BERNANKE: In the case of failure, that's 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.

REP. FORTENBERRY: The point I'm driving at -- are these too big, these banks too big?

MR. BERNANKE: I think it's important that banks have no incentive to grow just to become too big to fail. The large banks probably have some other economic purposes, including global transactions networks and the like. I doubt we can go back to a world with only very small banks.

REP. FORTENBERRY: But we are concerned that this level of concentration in the hands of too few is a potential systemic problem.

MR. BERNANKE: It's a legitimate concern, Congressman, absolutely.

REP. FORTENBERRY: I'd like to -- Mr. Chairman, I'd like to yield the remainder of my time to Mr. Burton from Indiana.

REP. KUCINICH: The gentleman has the reminder of the time, which is about a minute.

REP. BURTON: Well, 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.

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. BERNANKE: We were --

REP. 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.

REP. KUCINICH: Is that your answer?


REP. KUCINICH: Okay. I thank the gentleman.

The chair now recognizes Mr. Welch. Thank you.

REP. PETER WELCH (D-VT): 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've been very steady, 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 that was so dire that he might invoke the nuclear operation 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 (NARAL ?).

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 his company. And we proposed to do that by January 20th. That's correct.

REP. 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 ring fence is apparently not even going to be consummated.

REP. WELCH: All right, but what he was specifically referring to was the news that they were aware of, that Merrill had far more in 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 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 ring fence. So clearly that was one of the options that we were discussing as part of the transaction.

REP. WELCH: Okay, I want to get to this question that was started by Mr. Fortenberry. You've wisely stated, in my view, that we do 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 supersize 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's one approach.

The other approach is to take the view that if an institution is too big to fail, it's 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 but to take steps that will protect the economy if, in fact, one comes to the brink of failure, which is what Treasury's proposal, for example, concludes. The other possibility is to restrict the size of banks.

I think it's 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.

REP. WELCH: Okay, thank you.

I yield back.

REP. KUCINICH: The gentleman yields back.

When our colleagues on the Republican side have others show up, they'll be recognized. And we'll turn -- we recognize Mr. Kanjorski.

REP. PAUL KANJORSKI (D-PA): Mr. Chairman, thank you for your testimony. And I've 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's not a threat, is it? That's telling him the power of the court. It's 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 of a certain way which could constitute removal of the CEO or the board, that doesn't constitute a threat. That's 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.

REP. KANJORSKI: And then that could -- that would be an issue that later on could be determined. But nevertheless, it's not a threat. It's telling the truth.

MR. BERNANKE: Yes, sir.

REP. KANJORSKI: This is what -- these are the confines of the power we have and we're willing to use it.

I'm glad somebody told them that, if they did. I don't know that they did, because -- I doubt whether they seriously did.

I listened to Mr. Lewis, both here 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 his profits for the Bank of America in the last quarter.

So I would suspect that about six months to a year from now, he's going to be touting this tremendous victory of his of acquiring Merrill Lynch.

But all that being said, what we really -- I don't know why we're spending our time to find out what happened between the 15th of September and January 5th -- 1st. All we all know is a hell of a lot went over the dam, and particularly in that spectacular two-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's 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 -- 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, additional crisis.

Fortunately, the Congress provided the TARP funding in early October. In mid-October, there was a 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've seen recently.

REP. KANJORSKI: All right. Thank you very much, Mr. Chairman. And I gave you a shot; now I'm going to come back at you, okay? (Chuckles.)


REP. KANJORSKI: The thing we have to decide is what we're going to do in the future and how we're going to handle it.

And one of the things -- in the last several months that I've 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 to -- happen, but it happens anyway. And I want to say that charge would lie against the Federal Reserve, and that's where we're hung up in the course of a dilemma.

The Federal Reserve, as I can see, had several opportunities to prevent this economic crisis.

One is the -- (word inaudible) -- 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 United States government.

Two, there are issues with the Federal Reserve that they are now acquiring additional powers, when they have failed to use their past powers. Could you address those two issues?

MR. BERNANKE: Certainly. And I agree with you that --

REP. TOWNS: The gentleman's time's expired, but please answer the question.

MR. BERNANKE: Congressman Kanjorski, you're 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's very important, if the Fed retains those powers, that we strengthen the priority that those have in our decision-making and that we have strengthened accountability, that we report frequently to Congress about what we're doing on these areas. So that's very important.

In terms of additional powers, I think it's worthwhile pointing out that if you look, for example, at the Treasury's proposal to make the Fed the consolidated supervisor of systemically critical firms, that it's not a major difference in terms of powers from what we currently have, which is being 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 will take a systemic, system-wide approach in how we would regulate those firms, rather than looking at them bank by bank or firm by firm.

So it's not a massive increase in powers. It's really a change in their strategy.

REP. TOWNS: I thank the gentleman for his response. The chair recognizes Mr. Turner.

REP. MICHAEL TURNER (R-OH): 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've 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're seeing now, as the American public looks at this, there's a lot of unintended consequences. There are things that are happening that the American people are saying, well, I didn't quite think that that's what it's going to be.

I know you're 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?

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're 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 -- a entity that's 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 United States 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 the 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.

The -- 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 co-sponsors.

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're 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're going to have the -- equal treatment when the government's virtually bidding for its own contract?

I'd like your thoughts on the amendment, and if that amendment was in place, I'd 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, certainly 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's 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. 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's not going to bring down the entire system.

So if you're 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.

REP. TURNER: Before -- (inaudible) -- Mr. Chairman, if you'd allow me.

So I don't believe you're 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, of course, therefore, where we get this conflict of -- well, how is the government going to execute its ownership interest?

MR. BERNANKE: I have to think about that. But if you look at banking crises in history -- Japan and Sweden and the U.S. in the '30s 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 only temporary, but again, I'm not sure what the alternative would be. I'd 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.

REP. TOWNS: I'm sorry, the gentleman's time --

(Cross talk.)

REP. TURNER: Well I appreciate -- (inaudible) -- because people are obviously very concerned about this, and this looks like a line that perhaps we should not be --

Thank you so much.

REP. TOWNS: Thank you very much.

Yield to the gentleman from Massachusetts, Mr. Lynch.

REP. STEPHEN LYNCH (D-MA): Thank you, Mr. Chairman.

And thank you, Mr. Chairman.

Just -- 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.

Number one, as you may remember, TARP was presented to us as a way to purchase toxic mortgages. Never -- it was never used for that. So what we voted for was never put into action.

Number two, 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'm not so sure that 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're going over this chronology is because we have granted the Fed enormous independence, and there is sometimes a tension between the primacy of the taxpayers' interest and the power of the Fed and the independence of the Fed. And that's why we're going over this.

There's been a lot of back-and-forth today, but basically what the facts are is that Merrill got into trouble very early in '07, 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 '07. It looked like an additional 12 billion (dollars) that was discovered by Mr. Lewis on December 14th, 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 the 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's an interesting e-mail from you, and I just want to go over this, because I'm 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 announcements 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 was concerned about his job.

And for the American taxpayer to get voting rights in return for the 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 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.

REP. LYNCH: Well, 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 -- it says, but we agree to think about possible solutions to that, a backstop of capital raised or government taxpayer involvement here with limited control rights.

And I'm just wondering whether in this deal, to provide this support, whether the taxpayer is getting the full 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're also subject to, as we discussed, they're 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.

REP. LYNCH: Could we have not gotten greater protection for the American taxpayer on this deal than what we did in terms of considering that we're saving this company with the American taxpayer's assistance, and we don't gain the control that I think is commensurate with that support?

MR. BERNANKE: Well, I'm not quite sure I -- I'd 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.

REP. LYNCH: We get paid first. I understand that. But it's 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 is expired.

Again, Mr. Chairman, I thank you for appearing and helping us with our work.

I yield back.

REP. TOWNS: Thank you very much.

I now yield five minutes to the gentleman from Massachusetts, Mr. Tierney.

REP. JOHN TIERNEY (D-MA): Thank you, Mr. Chairman.

Mr. Bernanke, I want to discuss, if I can for a second, just another way that public money seems to have flowed to some of these financial institutions. Back in March of 2009, AIG disclosed the name of certain of the counterparties, people that they had credit-default swap 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's how they took care of that obligation. What was of concern to me and some others was that the counterparties appear to have received 100 percent of that, even though testimony from people at AIG before this committee said that they thought that there were a lot of contentious reasons to think that they did not owe 100 percent, if they were 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.

When we pressed Mr. Liddy at 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 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.

REP. TIERNEY: Well, except that the people that were running AIG said that they thought that there were certainly issues involved in that, that they didn't owe the money under the contracts, that default may not have occurred. Or if it had occurred, it didn't obligate them to pay a full amount. These were 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 not have obligated 100 percent. These are contractual issues so, you know, it could have been done.

And yet, once they turned that matter over to the Fed, the Fed, in their (interest there ?), 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 Corporation had with those third-party counterparties, including all the details, terms and conditions of the contracts, all documents and correspondence regarding the creation of Maiden Lane III, the special purpose vehicle that was created by the Fed to do these transactions, including the negotiations that went on for that, and then all documents and correspondence concerning the management and oversight 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've 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 letter with specific requests, we'll see what's available.

REP. TIERNEY: We certainly will. Well, you say you'll see what's available. I mean, we want everything that's available. And the question to you is, when we make that request, will you provide it?

MR. BERNANKE: If I'm able to do so, I will.

REP. TIERNEY: Thank you.

Yield back, Mr. Chairman.

REP. TOWNS: Thank you very much.

I now yield to the gentleman from Illinois Mr. Davis.

REP. DANNY DAVIS (D-IL): Thank you very much, Mr. Chairman.

And Chairman Bernanke, thank you for being here and 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 decision-making 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's 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'll continue to be very careful and monitor the management situation. But we do not take daily decisions. That's not our job.

REP. DAVIS: Mr. Chairman, let me ask you, when the government invested heavily in AIG, Fannie Mae and Freddie Mac 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, you know addressed that. Obviously, we'll continue to evaluate management and the board as we go forward and make sure that we're comfortable with the leadership at Bank of America.

REP. DAVIS: In an e-mail from Mr. Warsh to yourself on December the 30th, Mr. Warsh writes, and I quote, "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 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, our 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, 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 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. And we made sure that everybody was on the same page and got that cleared up.

REP. DAVIS: So it would be a normal interaction in terms of --

MR. BERNANKE: Yes, a normal process. Yes.

REP. DAVIS: -- saying, look, I'm having some concerns with Richmond and that kind of thing.


REP. DAVIS: Mr. Chairman, let me ask you, you've gone on record as supporting increased transparency in connection with Federal Reserve Board operations, 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? Of course, we experienced 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.

REP. DAVIS: Thank you very much.

And thank you, Mr. Chairman.

REP. TOWNS: Right. The gentleman's time has expired.

Congresswoman Norton for five minutes.

DEL. ELEANOR HOLMES NORTON (D-DC): Thank you, Mr. Chairman. And we do appreciate the transparency you're trying to bring to this transaction.

I am not inclined to second-guess the judgment of people who are in the midst of trying to deal with the 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 shareholders. We did have a series of rather -- (chuckles) -- unusual late-developing facts or factors to come to -- to light in the process of the negotiations for this agreement.

I'm wondering, is -- if it would not be true that -- let me lay the predicate for this by saying you apparently -- legal division apparently had an opinion that no Delaware court had been found that -- I'm quoting now -- "that it 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 ones 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?

MR. BERNANKE: First, we did review the case law. And I think it was quite applicable. I'm 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.

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 also have 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. So there would have been an immediate problem with Merrill Lynch, which would have create broader problems in the financial markets.

I don't think --

DEL. NORTON: Even if they threaten to do that in the context of negotiating?

MR. BERNANKE: Well, you can't negotiate unless you're willing to go through with your threat -- as you know. 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.

DEL. NORTON: So you think that would have been considered a blow?

MR. BERNANKE: I think that would have been destabilizing as well, yes.

DEL. NORTON: 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 the Bank of America itself. And in particular, if the invoking the MAC had caused Bank of America either to fail or to become -- have to be saved at 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.

DEL. 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.

REP. TOWNS: Thank you very much.

Mr. Chairman, I know we have an agreement that we would finish at 1:00. Would it be possible for you to stay till 1:10? Would that create a problem for you? And I understand agreement. (Laughs.)


REP. TOWNS: Okay. Thank you -- thank you very much.

Let me just say to the members: What we will do is divide 10 minutes on each side and of course -- at this point. So why don't we yield five minutes to the chairman -- the ranking member on the committee.

REP. DARRELL ISSA (R-CA): Thank you, Mr. Chairman. I'll 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's okay because it worked out.

Do you agree with that?

MR. BERNANKE: No, sir. We used only legal and ethical means.

REP. ISSA: Okay. I appreciate that.

Do you also agree that at all times the rule of law and the expectations that are written into 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.

REP. 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?


REP. ISSA: Do you at this time believe that intentionally, Ken Lewis, Hank Paulson or any of the people that we've cited today in e- mails intended to lie in their statements?

MR. BERNANKE: I have no judgment on that.

REP. ISSA: But you believe in good faith that they think what they're saying is true -- at least as far as you know.

MR. BERNANKE: As far as I know.

REP. 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 and who gets bailout money and who doesn't?

MR. BERNANKE: I think all these interventions are very unfortunate and they're only made necessary by the extreme circumstances.

REP. 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've done so already and he didn't have any further recollection.

REP. ISSA: Okay. Then I'd like to yield to Mr. Burton the balance of this five minutes.

REP. DAN BURTON (R-IN): 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's answerable to the stockholders what they're supposed to do.

One of the things that concerns me is on December the 5th, Bank of America stockholders approved that sale -- or that purchase and that merger when they thought it was a $9 billion loss. Then on the 14th, they found out it wasn't 9 billion (dollars), but 12 billion (dollars).

And then because they decided 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 pulled out of this deal, their board and the CEO's going to be gone.

Mr. Lackey (sic/Lacker) said on the 20th, two 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's 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 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's the problem I have. The government is coming in and saying "You're 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're going to do this or else. And I just think that's wrong.

You can make a response if you'd like.

MR. BERNANKE: My response, sir, is that I never said that to Mr. Lewis.

REP. BURTON: You never said this to Mr. -- Mr. Lacker's wrong in what he said?

MR. BERNANKE: Mr. Lacker, who's 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're saying.

What he said was that if they took this decision and if they required to be rescued -- 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's a very different thing.

And also, I did not say that to Mr. Lewis.

REP. BURTON: What about your attorney who said that you were going to put pressure on them? I brought that up in my previous five minutes.

MR. BERNANKE: Well again, I did say very strongly --

REP. 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.

REP. TOWNS: I yield five minutes to the gentleman from Ohio, Mr. Kucinich.

REP. DENNIS KUCINICH (D-OH): 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 coming before to you and weeks before its shareholders voted to approve the merger. Those fourth quarter losses rose to over 15 billion (dollars) out of the pockets of Bank of America shareholders.

But I want to ask you: Did the Fed know about those accelerating losses before the Fed approved the merger at the end of November?

MR. BERNANKE: No, I don't think we did.

REP. KUCINICH: Well, may I introduce into evidence this e-mail, which is from Dennis Herbst of the New York Fed, to Audrey Overby (sp) of Merrill Lynch. And it's 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'm sure you'll share it with the SEC."

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? Are you saying that there's no --

MR. BERNANKE: We are certainly involved in a light way in the oversight 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 be not --

REP. 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 really put on them the responsibility to notify the SEC. But yet, you knew -- you did -- before the merger was approved.

MR. BERNANKE: In September -- I mean, in November? We didn't know about the 14 billion (dollars). I'm sure we didn't know that.

REP. KUCINICH: But you knew about Merrill Lynch's position before you approved the merger, 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's tracking Merrill Lynch on a daily basis.

MR. BERNANKE: Well, they're tracking it, but it's 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 else in the Fed was aware of the $14 billion in losses.

REP. KUCINICH: There's another e-mail here saying that the Fed has followed up with a request for daily P&L -- profit and loss -- relative to Merrill Lynch.

Now, if -- and Mr. Chairman, I'm going to enter that into the record as well.

REP. TOWNS: Without objection.

REP. 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 of five critical financial markets was a key rationalization for Fed action to bail out the merger?

MR. BERNANKE: I don't know. I'd have to get back to you on that.

REP. KUCINICH: Excuse me?

MR. BERNANKE: I'd have to get back to you on that. I don't recall the details.

REP. KUCINICH: Well, I'm going to read a quote from a Fed memorandum entitled, "Considerations Regarding Invoking the Systemic Risk Exception for Bank of America Corporation".

And the quote is, "an inability of these organizations to fulfill their obligations in these markets and related systems would lead to widespread disruptions in payment and settlement systems in the U.S. as well as abroad."

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's threat to invoke MAC was a bargaining chip, as you've stated in an e- mail dated December 21st, 2008?

MR. BERNANKE: I thought initially that it might be, yes.

REP. KUCINICH: But 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: But, 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.

REP. KUCINICH: Mr. Chairman, I ask you for one more minute.

REP. TOWNS: I yield the gentleman an additional minute.

REP. 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 hand-written notes from your first meeting with Ken Lewis on December 17th, 2008.

You reportedly stated, "The downside of 50 billion (dollars) doesn't sound big for Bank of America." The 50 billion (dollars) refers to Merrill assets that Lewis had won a 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 went into 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.

REP. KUCINICH: Mr. Chairman, I just want to conclude with this point. You know, Mr. Bernanke has testified that he was concerned about systemic collapse. We all understand that. He's 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? Yeah, 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'm sure we didn't know about that in November.

REP. TOWNS: The gentleman's time has expired. And I yield five minutes to --

REP. ISSA: Thank you, Mr. Chairman. We're going to be -- Mr. Jordan is going to be primary closing. I just want to wrap up a couple things I heard.

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's left the government.

But what that told me -- because it occurred in real time. It occurred exactly when these things were going on -- that on a day-to- 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 that they're worth.

REP. ISSA: I appreciate that, and I appreciate your service in trying to do the best you could in this tough situation. But one thing -- 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: And that's what I understood the memorandum to say.

REP. ISSA: And I appreciate that. But if that's true, then isn't it true that if you have 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 to 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.

REP. ISSA: We appreciate your effort here. I'm 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. BERNANKE: Thank you.

REP. 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, the whole package was sold to the United States Congress based on what you told members of Congress, what Mr. Paulson told members of Congress.

And, frankly, I asked this question -- and Mr. Issa brought up Mr. Kashkari, but I asked this question of him: 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 in these assets, you could clear them off the books, everything would be wonderful after that point.

And yet 10 days after we passed this -- I mean, I didn't vote for it, but 10 days after we passed it, you bring the nine biggest banks to Washington, don't tell them what the meeting is about, and you've completely changed 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, 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 that the --

REP. JORDAN: Here's what I want to understand. This was a month-long -- because 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 to take taxpayer money, completely changed 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. Angula (sp) does the letter saying we're going to steer Merrill Lynch on how they disclose to the public what's going on in this merger, what's happening with Merrill Lynch.

I think it's a reasonable question. So when did you know this? And if you didn't know under 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, two weeks of debate in this Congress. Do you remember they sent us home for a few days, come back and we passed it, or it was up for a second vote.

MR. BERNANKE: I would be happy to answer -- 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 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.

REP. JORDAN: Mr. Chairman, I've obviously 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 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.

REP. JORDAN: Thank you.

REP. TOWNS: I thank the gentleman. I yield to the gentleman from Ohio.

REP. 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 refer to today.

REP. TOWNS: Without objection, so ordered.

REP. KUCINICH: Thank you.

I yield two minutes to the gentlewoman from Ohio, Congresswoman Kaptur.

REP. 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 information and background on the relationship between Bank of America, Merrill Lynch and BlackRock. And I would like --

REP. TOWNS: Without objection, so ordered.

REP. KAPTUR: I thank the chairman. And 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-dollar 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 and self-dealing by their 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.

REP. KAPTUR: I thank you. Some lawyers have said systemic fraud or control 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 is 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.

REP. 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.

REP. KAPTUR: Will BlackRock be handling Freddie Mac paper?

MR. BERNANKE: They'll be managing GSE-guaranteed papers that would include Freddie, Fannie and Ginnie.

REP. KAPTUR: I would seriously urge your staff to go back and look at the operations of BlackRock and Mr. Fink's operations at First Boston before he founded BlackRock, in relation to what they transacted with Freddie Mac and when they did that.

REP. TOWNS: The gentlewoman's time has expired.

REP. KAPTUR: Thank you very much, Mr. Chairman and Mr. Bernanke.

REP. 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. Number one, there are significant inconsistencies between what we have been told today, what we were told two 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 play 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 two minutes over, but I'm sorry about that. I apologize. Thank you very much.

MR. BERNANKE: Thank you.

REP. TOWNS: Therefore, now the committee -- (sounds gavel) -- is adjourned. (Sounds gavel.)

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