Federal Reserve Chairman Ben Bernanke told a House committee that while he warned Bank of America (BAC) CEO Ken Lewis against pulling out of the acquisition of Merrill Lynch late in 2008, he didn't threaten punitive action it the bank's management tried to back out of the deal.
"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 invoke a "material adverse event" clause in the acquisition contract, Bernanke told the Committee on Oversight and Government Reform on June 25. "Moreover, I did not instruct anyone to indicate to Bank of America that the Federal Reserve would take any particular action under those circumstances."
Bernanke—making his first public comments since the House committee launched an investigation earlier this year—also insisted that neither he nor "any member of the Federal Reserve" told Bank of America to withhold public disclosure of Merrill's mounting losses while the deal was pending. "These disclosure obligations belong squarely with the company, and the Federal Reserve did not interfere in the company's disclosure decisions," the Fed chairman said.
Earlier this month, Lewis told the committee that his job was threatened after he suggested that Bank of America might back out of the deal. Lewis testified that then-Treasury Secretary Henry Paulson and Bernanke pressured him and urged him not to disclose Merrill's worsening finances.
Bank of America received $45 billion in federal bailout funds, $20 billion of which was linked to the Merrill acquisition.
During the hearing, which lasted more than three hours, some lawmakers were combative, peppering Bernanke with questions and pressing for answers, at times interrupting and asking questions more than once. Bernanke calmly laid out the history of the deal, but at several points responded to questions by saying he did not recall what had happened.
The Fed chairman said in his opening statement that he warned Lewis against invoking the adverse events clause because it could have triggered a "broader systemic crisis that could well have destabilized Bank of America as well as Merrill Lynch." In addition, Bernanke said he told Lewis that seeking to back out could raise questions about Bank of America's due diligence, and that becoming involved in costly litigation with Merrill would probably not succeed and could reduce Merrill's value as an asset.
The committee's ranking member, Representative Darrell Issa (R-Calif.), said the committee has received "conflicting reports under oath" about what happened, adding: "I for one personally doubt all of these can be explained away."
Representative Jason Chaffetz (R-Utah) suggested that the Fed's efforts to keep the deal alive constituted a threat—an idea that Bernanke denied.
"I never said anything about firing the board and the management," Bernanke answered. "We advised him that we didn't think it was a good idea from the perspective of Bank of America."
Chaffetz retorted, "With all due respect, I'm just not buying that…I think that's a threat, and I think it's reasonable for the CEO and the board to take it as a threat."
On the other hand, Representative Paul Kanjorski (D-Pa.) said he doesn't see Bernanke's language as a threat, and compared it to a judge explaining to an attorney what actions would count as contempt. "I'm glad somebody told them that, if they did," he said.
"We don't have full sunshine yet," the committee chairman, Representative Edolphus Towns (D-N.Y.), said at the end of the hearing. He noted "significant inconsistencies" between the testimonies of Bernanke and Lewis.
Towns said Paulson agreed to appear before the committee in July.
The Associated Press contributed to this report.
Craig is a reporter for BusinessWeek in Washington, D.C. Mintz is news editor for BusinessWeek.com in New York.
Track and share business topics across the Web.