[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
 BANK OF AMERICA AND MERRILL LYNCH: HOW DID A PRIVATE DEAL TURN INTO A 
                        FEDERAL BAILOUT? PART II

=======================================================================


                             JOINT HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                                and the

                    SUBCOMMITTEE ON DOMESTIC POLICY

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 25, 2009

                               __________

                           Serial No. 111-41

                               __________

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


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts       MARK E. SOUDER, Indiana
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      LYNN A. WESTMORELAND, Georgia
JIM COOPER, Tennessee                PATRICK T. McHENRY, North Carolina
GERALD E. CONNOLLY, Virginia         BRIAN P. BILBRAY, California
MIKE QUIGLEY, Illinois               JIM JORDAN, Ohio
MARCY KAPTUR, Ohio                   JEFF FLAKE, Arizona
ELEANOR HOLMES NORTON, District of   JEFF FORTENBERRY, Nebraska
    Columbia                         JASON CHAFFETZ, Utah
PATRICK J. KENNEDY, Rhode Island     AARON SCHOCK, Illinois
DANNY K. DAVIS, Illinois             ------ ------
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
------ ------

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director

                    Subcommittee on Domestic Policy

                   DENNIS J. KUCINICH, Ohio, Chairman
ELIJAH E. CUMMINGS, Maryland         JIM JORDAN, Ohio
JOHN F. TIERNEY, Massachusetts       MARK E. SOUDER, Indiana
DIANE E. WATSON, California          DAN BURTON, Indiana
JIM COOPER, Tennessee                MICHAEL R. TURNER, Ohio
PATRICK J. KENNEDY, Rhode Island     JEFF FORTENBERRY, Nebraska
PETER WELCH, Vermont                 AARON SCHOCK, Illinois
BILL FOSTER, Illinois
MARCY KAPTUR, Ohio
                    Jaron R. Bourke, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 25, 2009....................................     1
Statement of:
    Bernanke, Ben S., chairman, Federal Reserve Board............    16
Letters, statements, etc., submitted for the record by:
    Bernanke, Ben S., chairman, Federal Reserve Board, prepared 
      statement of...............................................    21
    Bilbray, Hon. Brian P., a Representative in Congress from the 
      State of California, e-mail dated December 21, 2008........    55
    Issa, Hon. Darrell E., a Representative in Congress from the 
      State of California, prepared statement of.................    10
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio:
        E-mail dated September 17, 2008..........................    93
        Prepared statement of....................................    14
        Various e-mails..........................................    99
    Towns, Chairman Edolphus, a Representative in Congress from 
      the State of New York, prepared statement of...............     4


 BANK OF AMERICA AND MERRILL LYNCH: HOW DID A PRIVATE DEAL TURN INTO A 
                        FEDERAL BAILOUT? PART II

                              ----------                              


                        THURSDAY, JUNE 25, 2009

        House of Representatives, Committee on Oversight 
            and Government Reform joint with the 
            Subcommittee on Domestic Policy,
                                                    Washington, DC.
    The committee and subcommittee met, pursuant to notice, at 
10 a.m., in room 2154, Rayburn House Office Building, Hon. 
Edolphus Towns (chairman of the committee) presiding.
    Present: Representatives Towns, Kanjorski, Maloney, 
Cummings, Kucinich, Tierney, Clay, Watson, Lynch, Connolly, 
Quigley, Kaptur, Norton, Davis, Cuellar, Welch, Foster, Speier, 
Issa, Burton, Souder, Duncan, Turner, McHenry, Bilbray, Jordan, 
Fortenberry, Chaffetz, and Schock.
    Staff present: John Arlington, chief counsel--
investigations; Brian Eiler, investigative counsel; Jean Gosa, 
clerk; Adam Hodge, deputy press secretary; Carla Hultberg, 
chief clerk; Marc Johnson and Ophelia Rivas, assistant clerks; 
Mike McCarthy, deputy staff director; Jesse McCollum, senior 
advisor; Jenny Rosenberg, director of communications; Joanne 
Royce and Christopher Staszak, senior investigative counsels; 
Christopher Sanders, professional staff member; Ron Stroman, 
staff director; Jaron R. Bourke, staff director, Subcommittee 
on Domestic Policy; Lawrence Brady, minority staff director; 
John Cuaderes, minority deputy staff director; Jennifer 
Safavian, minority chief counsel for oversight and 
investigations; Dan Blankenberg, minority director of outreach 
and senior advisor; Adam Fromm, minority chief clerk and Member 
liaison; Kurt Bardella, minority press secretary; Seamus Kraft 
and Benjamin Cole, minority deputy press secretaries; 
Christopher Hixon, minority senior counsel; and Brien Beattie, 
minority professional staff member.
    Chairman Towns. The committee will come to order.
    Today we are continuing our investigation of Bank of 
America's acquisition of Merrill Lynch. This was a most unusual 
transaction.
    On September 15, 2008, Bank of America announced that it 
was purchasing Merrill Lynch, creating one of the Nation's 
largest financial institutions. At the time it was a merger 
negotiated between two private parties designed for the 
exclusive benefit of private shareholders and paid for 
exclusively with private money.
    Four months later, on January 16, 2009, the world 
discovered that Merrill Lynch had experienced a $15 billion 
fourth quarter loss. Most importantly, we discovered that the 
merger had taken place only after the Federal Government had 
committed to give Bank of America $20 billion in taxpayer 
money.
    In short, Bank of America's acquisition of Merrill Lynch 
began in September 2008 as a private business deal, and was 
completed in January 2009 with a $20 billion taxpayer bailout.
    What happened in the interim has been shrouded in secrecy. 
But the broad outline is this: When Bank of America urged its 
shareholders to approve the acquisition of Merrill Lynch on 
December 5, 2008, there was no public disclosure of any 
problems with the transaction. However, Bank of America's CEO 
Ken Lewis has testified that just 9 days after the shareholder 
vote, he discovered a $12 billion loss at Merrill Lynch. Mr. 
Lewis said he told then Treasury Secretary Hank Paulson that he 
was strongly considering backing out of the deal. According to 
Lewis, Paulson ultimately told them that if he didn't go 
through with the acquisition he and the board would be fired.
    Internal e-mails we have obtained from the Federal Reserve 
indicate officials there were very skeptical about Mr. Lewis' 
motives in threatening to back out of the Merrill Lynch deal. 
Fed Chairman Ben Bernanke thought Lewis was using the Merrill 
losses as a bargaining chip to obtain Federal funds. FDIC 
Chairwoman Sheila Bair was opposed to providing assistance 
saying, ``My board does not want to do this.''
    In essence, Ken Lewis claimed that, ``The government made 
me do it.'' But was Bank of America forced to go through with 
the deal, or was this just an old-fashioned shakedown?
    These questions are particularly important, given the 
administration's new proposal to give broad new powers to the 
Federal Reserve. I believe that before Congress acts on the 
President's financial services reform proposal, we need to have 
a thorough understanding of what caused the current financial 
crisis and how the Federal Government responded.
    Unfortunately, much of what the Fed, the Treasury, and 
other agencies did in these transactions remain shrouded in 
secrecy. It is time to yank the shroud off the Fed and shine 
some light on these events.
    The Bank of America-Merrill Lynch deal is a case in point. 
New e-mails we have obtained from the Fed indicate that Fed 
officials may have attempted to keep other agencies in the dark 
about what was going on. A Fed e-mail discusses not telling the 
Office of the Comptroller of the Currency what was happening. 
Others discuss how to minimize the amount of information given 
to the SEC. In a remarkable exchange, Fed officials note that 
an SEC official can be counted on to be discreet.
    I am not going to prejudge the issues. At this point we are 
not even close to finishing this investigation. Bank of 
America's CEO Ken Lewis gave us his story. Now it is Fed 
Chairman Bernanke's turn to give his side of the story. Next, 
it would be former Treasury Secretary Hank Paulson to give his 
side. We need to get all the facts out on the table before we 
are in a position to say what happened and when it happened. 
But I promise you this, we will follow this investigation 
wherever the road leads, and we will do our best to make sure 
the facts get out on the table where everyone can see them, by 
subpoena, if necessary.
    Let me stop and thank Chairman Bernanke for coming today to 
this hearing, and I look forward to your testimony.
    I now yield 5 minutes to our ranking member on the full 
committee, Mr. Darrell Issa of California, for his statement.
    [The prepared statement of Chairman Edolphus Towns 
follows:]

[GRAPHIC] [TIFF OMITTED] 55102.001

[GRAPHIC] [TIFF OMITTED] 55102.002

[GRAPHIC] [TIFF OMITTED] 55102.003

[GRAPHIC] [TIFF OMITTED] 55102.004

    Mr. Issa. Thank you, Mr. Chairman, for holding this second 
hearing in a series today. Our work together on a bipartisan 
basis should in fact be a model for all the Members of 
Congress.
    Today, Chairman Bernanke is here as part of this process 
not because of one side or the other, but because we came to a 
consensus that for all the good work in a financial crisis, 
Oversight still needed to discover what was or wasn't done, was 
it consistent with the kind of behavior behind closed doors 
that we would like to always know is going on even when 
appropriately government shares information only discreetly 
with other government agencies.
    Additionally, yours and my role as reformers is critical in 
a process in which the President's financial reform system or 
proposal has included broad and sweeping increases in Chairman 
Bernanke or his successor's powers.
    Additionally, former Secretary Paulson, acting in good 
faith and in concert, in fact deserves his opportunity to tell 
us about the events.
    Let there be no doubt, Mr. Chairman, all of us on the dais 
are aware that, 24/7, leaders of the Fed, the Treasury, the 
FDIC, the OCC, and the SEC all worked diligently to get us out 
of a financial crisis that was many years in the making, in 
almost every case not something in which those getting us out 
participated in a direct way, and in fact was done in the best 
interests of the American people. And I want to thank Chairman 
Bernanke for his effort and his major role in that effort, 
which is still ongoing today.
    Through the committee's investigation, we have learned the 
Federal Government, led by both Chairman Bernanke and then 
Secretary Paulson, and made certain threats against Ken Lewis 
during a time in which he was in fact considering pulling out 
or renegotiating the Merrill Lynch merger. There have been 
conflicting reports under oath by Ken Lewis and by Secretary 
Paulson about what occurred. To his credit, Chairman Bernanke 
has been quick to give us written responses, both publicly and 
privately, that today we would hope lead to a thorough 
understanding of whether in fact there is a vast 
misunderstanding of what a threat was, what the intent was, 
whether or not what we often call and I have called a cover-up 
was in fact simply appropriately determining why an agency 
should be not informed. I for one personally doubt that all of 
these can be explained away, but it is very possible that today 
hindsight will show us that if we all had to do it again, we 
would do it differently.
    I think it is important today that we give Chairman 
Bernanke a full and complete opportunity to talk about the 
environment in which he was working, his desires and reasons 
for doing what he did, and where the discussions that he might 
or should or could perhaps replace the board and the CEO of 
Bank of America may have in fact been blown out of proportion, 
may have been misunderstood. I for one, though, am looking at 
Main Street America, the stockholders who in some cases got 
less than they would have gotten through other means. This 
includes Chrysler, General Motors, and of course Bank of 
America and Merrill Lynch.
    I am also deeply concerned that, going forward, if the 
systemic risk proposal by the President, which would give vast 
authority over any entity, bank or otherwise, that represents a 
potential 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.
    [The prepared statement of Hon. Darrell E. Issa follows:]

    [GRAPHIC] [TIFF OMITTED] 55102.005
    
    [GRAPHIC] [TIFF OMITTED] 55102.006
    
    Chairman Towns. Thank you very much. I thank the ranking 
member for his statement and thank him for his kind words as 
well.
    At this time I yield to the ranking member of the 
Subcommittee on Domestic Policy for 5 minutes and of course the 
gentleman from Cleveland who has done a fantastic job, 
Congressman Kucinich.
    Mr. Kucinich. Thank you very much, Mr. Chairman, and 
Chairman Bernanke.
    Contrary to the popularly held belief that the government 
went too far in the Bank of America-Merrill Lynch deal, our 
investigation reveals that what is remarkable is what the 
government did not do.
    In two meetings in December 2008, Bank of America's Ken 
Lewis asserted that he had only recently become aware of the 
deteriorating situation at Merrill Lynch. He asserted that he 
believed he could justify invoking the Material Adverse Event 
Clause [MAC], to back out of the deal. And he asserted that he 
needed considerable help from the government, including $13 
billion more in new cash, as well as protection from Merrill 
Lynch's losses.
    Staff and officials at the Fed looked more closely at the 
basis for Lewis' assertions, and determined ``that they were 
somewhat suspect.'' The Fed found, in contradiction to Ken 
Lewis' representations, that Bank of America failed to do 
adequate due diligence in acquiring Merrill Lynch. The Fed 
found that Bank of America had known about accelerating losses 
at Merrill Lynch since mid-November, when shareholders could 
have used that information to decide on a ratification of the 
merger. And senior officials at the Fed believed that Bank of 
America could be in violation of securities laws for failing to 
inform shareholders about the Merrill Lynch losses known in 
mid-November. Furthermore, they believed that Ken Lewis' threat 
of invoking a MAC was a bargaining chip and was not credible; 
that Bank of America was experiencing its own losses 
independent of Merrill Lynch, and needed to be bailed out 
itself, and that there were serious doubts about the competence 
of Bank of America's management.
    Yet in spite of the Fed's doubts felt about Ken Lewis' 
management of Bank of America, the Fed's leadership 
orchestrated an aid package that attached no meaningful 
conditions to the money. The Fed required no changes whatsoever 
in Bank of America's deficient corporate leadership. The Fed 
even gave Bank of America more money than what Ken Lewis had 
originally asked for.
    The disconnection between the Fed's analyses of what went 
wrong at Bank of America and what the Fed was willing to do 
about it is significant for all of us and is the subject of 
today's hearing.
    If the Bank of America-Merrill Lynch merger posed a 
systemic risk in December 2008, the post-rescue merger entity 
continues to pose a systemic risk or potential systemic risk in 
2009. If bad decisions by corporate management can have 
systemic consequences, then the Fed's remedy in the Bank of 
America-Merrill Lynch case amplifies the risk posed by poor 
corporate leadership, because it signals that incompetence 
practiced by the management of a very large financial 
institution will be subsidized, not punished, by government 
regulators.
    The Fed's decisionmaking process in the Bank of America-
Merrill Lynch merger makes the case for a significant increase 
in accountability at the Fed. Its regulation of systemic risk 
needs to be subject to congressional oversight. Its 
interventions in markets to recover from the current financial 
crisis need to be audited by the Government Accountability 
Office, as I proposed in a bill and in an amendment adopted 
unanimously by this committee.
    We can't afford to make the Fed a super regulator, as some 
have proposed, without also increasing its transparency in 
meaningful ways, as this committee has proposed through the 
Kucinich amendment.
    I want to thank the chairman for the opportunity to work 
with you on this hearing, and I look forward to Mr. Bernanke's 
testimony. And I want to thank you, sir, for being here today. 
Thank you.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]
[GRAPHIC] [TIFF OMITTED] 55102.007

[GRAPHIC] [TIFF OMITTED] 55102.008

    Chairman Towns. I thank the gentleman from Ohio.
    We will now yield 5 minutes to the ranking member of the 
Domestic Policy Subcommittee, Congressman Jordan of Ohio.
    Mr. Jordan. Thank you, Mr. Chairman. I have a brief 
statement here.
    Thank you for holding today's hearing on the government's 
involvement to purchase Merrill Lynch. I appreciate Chairman 
Bernanke's appearance before the committee today. His testimony 
is important to bring further transparency to the role of the 
Federal Government in the Bank of America-Merrill Lynch 
transaction and the overall financial crisis.
    I am troubled by the information and documents that the 
committee's investigation has uncovered. They show that Mr. 
Bernanke and Mr. Paulson threatened to fire Ken Lewis and his 
board of directors in order to force the Bank of America to 
acquire Merrill Lynch.
    I recognize that these actions took place in a time of 
significant economic challenges and uncertainty, but there must 
be limits to government action even in a time of crisis, and 
those limits must be respected. We must also keep in mind that 
this pressure was exerted after many of the Nation's banks were 
forced to accept taxpayer money through the TARP program. We 
know that in October 2008, Mr. Paulson, Mr. Bernanke, Mr. 
Geithner, and Ms. Bair brought the CEOs of the largest private 
banks in America to the Treasury Department and demanded that 
they accept a partial nationalization of their banks. I look 
forward to learning more about Mr. Bernanke's role in this 
process as well.
    Thank you again, Mr. Chairman. I would ask for unanimous 
consent to include in the record majority and minority reports 
and all documents referenced in those reports.
    Chairman Towns. Without objection, so ordered.
    Mr. Bernanke, it is a longstanding policy that we swear all 
of our witnesses in. Please stand and raise your right hand.
    [Witness sworn.]
    Chairman Towns. Let the record reflect that the witness 
answered in the affirmative.
    Mr. Bernanke, we would like for you to summarize your 
statement in 5 minutes, which will allow the Members to raise 
questions with you. And of course, we have a light there. When 
it starts out, it starts out on green and then it goes into 
yellow and then it goes into red. Red means stop. So we thank 
you for that.
    Thank you very much. You may begin.

 STATEMENT OF BEN S. BERNANKE, CHAIRMAN, FEDERAL RESERVE BOARD

    Mr. Bernanke. Chairman Towns, Ranking Member Issa, and 
other members of the committee, I appreciate the opportunity to 
discuss the Federal Reserve's role in the acquisition by the 
Bank of America of Merrill Lynch.
    Chairman Towns. Is the mic on, staff? Help me, because we 
can't hear him.
    Mr. Bernanke. I believe that the Federal Reserve acted with 
the highest integrity throughout its discussion.
    Chairman Towns. We are still having trouble. We have some 
senior citizens up here, and we are having trouble hearing you. 
Is there any way to turn the volume up on it? There is a backup 
mic on the floor, staff. Better. Thank you very much.
    Mr. Bernanke. I would like the full extent of my time, if I 
may.
    I believe that the Federal Reserve acted with the highest 
integrity throughout its discussions with the Bank of America 
regarding that company's acquisition of Merrill Lynch. I will 
attempt in this testimony to respond to some of the questions 
that have been raised.
    On September 15, 2008, the Bank of America announced an 
agreement to acquire Merrill Lynch. I did not play a role in 
arranging this transaction, and no Federal Reserve assistance 
was promised or provided in connection with that agreement.
    As with similar transactions, the transaction was reviewed 
and approved by the Federal Reserve under the Bank Holding 
Company Act in November 2008. It was subsequently approved by 
the shareholders of Bank of America and Merrill Lynch on 
December 5th. The acquisition was scheduled to be closed on 
January 1, 2009.
    As you know, the period encompassing Bank of America's 
decision to acquire Merrill Lynch through the consummation of 
the merger was one of extreme stress in financial markets. The 
government-sponsored enterprises, Fannie Mae and Freddie Mac, 
were taken into conservatorship a week before the Bank of 
America deal was announced. That same week, Lehman Brothers 
failed and American International Group was prevented from 
failing only by extraordinary government action. Later that 
month, Wachovia faced intense liquidity pressures which 
threatened its viability and resulted in its acquisition by 
Wells Fargo.
    In mid-October, an aggressive international response was 
required to avert a global banking meltdown. In November, the 
possible destabilization of Citigroup was prevented by 
government action.
    In short, the period was one of extraordinary risk for the 
financial system and the global economy, as well as for Bank of 
America and Merrill Lynch.
    On December 17, 2008, senior management of Bank of America 
informed the Federal Reserve for the first time that, because 
of significant losses at Merrill Lynch for the fourth quarter 
of 2008, Bank of America was considering not closing the 
Merrill Lynch acquisition. This information led to a series of 
meetings and discussions among Bank of America, the regulatory 
agencies, and the Treasury.
    During these discussions, Bank of America's CEO Ken Lewis 
told us that the company was considering invoking the Material 
Adverse Event Clause [MAC] in the acquisition contract, in an 
attempt to rescind its agreement to acquire Merrill Lynch.
    In responding to Bank of America in these discussions, I 
expressed concern that invoking the MAC would entail 
significant risks not only for the financial system as a whole 
but also for Bank of America itself for three reasons.
    First, in light of the extreme fragility of the financial 
system at that time, the uncertainties created by an invocation 
of the MAC might have triggered a broader systemic crisis that 
could well have destabilized Bank of America as well as Merrill 
Lynch.
    Second, an attempt to invoke the MAC after 3 months of 
review, preparation, and public remarks by the management of 
Bank of America about the benefits of the acquisition would 
cast doubt in the minds of financial market participants, 
including the investors, creditors, and customers of Bank of 
America, about the due diligence and analysis done by the 
company, its capability to consummate significant acquisitions, 
its overall risk management processes, and its judgment of its 
management.
    Third, based on our staff analysis of legal issues, we 
believed that it was highly unlikely that Bank of America would 
be successful in terminating the contract by invoking the MAC. 
Rather, an attempt to invoke the MAC would likely involve 
extended and costly litigation with Merrill Lynch that with 
significant probability would result in Bank of America being 
required either to pay substantial damages or to acquire a firm 
whose value would have been greatly reduced or destroyed by the 
strong negative market reaction to the announcement.
    For these reasons, I believed that, rather than invoking 
the MAC, Bank of America's best option and the best option for 
the system was to work with the Federal Reserve and the 
Treasury to develop a contingency plan to ensure that the 
company would remain stable should the completion of the 
acquisition and the announcement of losses lead to financial 
stress, particularly a sudden pullback of funding of the type 
that had been experienced by Wachovia, Lehman, and other firms.
    Ultimately, on December 30th, the Bank of America board 
determined to go forward with the acquisition. The staff of the 
Federal Reserve worked diligently with Treasury, other 
regulators, and Bank of America to put in place a package that 
would help shore up the combined companies' financial position 
and reduce the risk of market disruption. The plan was 
completed in time to be announced simultaneously with Bank of 
America's public earnings announcement which had been moved 
forward to January 16th from January 20th. The package included 
an additional $20 billion equity investment from the Troubled 
Asset Relief Program and a loss protection arrangement, or 
RingFence, for a pool of assets valued at about $118 billion. 
The RingFence arrangement has not been consummated, and Bank of 
America now believes that, in light of the general improvement 
in the markets, this protection is no longer needed.
    Importantly, the decision to go forward with the merger 
rightly remained in the hands of Bank of America's board and 
management, and they were obligated to make the choice that 
they believed was in the best interest of the shareholders and 
the company. I did not tell Bank of America's management that 
the Federal Reserve would take action against the board or 
management if they decided to proceed with the MAC. Moreover, I 
did not instruct anyone to indicate to Bank of America that the 
Federal Reserve would take any particular action under those 
circumstances. I agreed with the view of others that the 
invocation of the MAC clause in this case involved significant 
risk for Bank of America as well as for Merrill Lynch and the 
financial system as a whole, and it was this concern that I 
communicated to Mr. Lewis and his colleagues.
    The Federal Reserve also acted appropriately regarding 
issues of public disclosure. As I wrote in a letter to this 
committee, neither I nor any member of the Federal Reserve ever 
directed, instructed, or advised Bank of America to withhold 
from public disclosure any information relating to Merrill 
Lynch, including its losses, compensation packages, or bonuses, 
or any other related matter. These disclosure obligations 
belonged squarely with the company, and the Federal Reserve did 
not interfere with the company's disclosure decisions.
    The Federal Reserve had a legitimate interest in knowing 
when Bank of America or Merrill Lynch intended to disclose 
those losses at Merrill Lynch. Given the fragility of the 
financial markets at that time, we were concerned about the 
potential for a strong adverse market reaction to the reports 
of significant losses at Merrill Lynch. If Federal Reserve 
assistance to stabilize these companies were to be effective, 
the necessary facilities would have to be in place as of the 
disclosure date. Thus, our planning was importantly influenced 
by the company's planned disclosure schedule, but the decisions 
and responsibilities regarding public disclosure always 
remained, as it should, with the companies themselves.
    A related question is whether there should have been 
earlier disclosure of the aid provided by the U.S. Government 
to Bank of America. Importantly, there was no commitment on the 
part of the Government regarding the size or structure of the 
transaction until very late in the process.
    Although we had indicated to Bank of America in December 
that the Government would provide assistance, if necessary, to 
keep the company from being destabilized, as it had done in 
other cases during this time of extraordinary stress in 
financial markets, those December discussions were followed in 
January by significant and intense negotiations involving Bank 
of America, the Federal Reserve, the Treasury, the Federal 
Deposit Insurance Corporation, and the Office of the 
Comptroller of the Currency regarding many key aspects of the 
assistance transaction, including the type of assistance to be 
provided, the size of the protection, the assets to be covered, 
the terms for payments, the fees, and the length of the 
facility. The agreement in principle on these items was 
reflected in a term sheet that was not finalized until just 
before its public release on January 16, 2009. The Federal 
Reserve Board and the Treasury completely and appropriately 
disclosed the information as required by the Congress in the 
Emergency Economic Stabilization Act of 2008.
    In retrospect, I believe that our actions in this episode, 
including the development of an assistance package that 
facilitated the consummation of Bank of America's acquisition 
of Merrill Lynch, were done not only with the highest integrity 
but have strengthened both companies while enhancing the 
stability of the financial markets and protecting the 
taxpayers. These actions were taken under highly unusual 
circumstances in the face of grave threats to our financial 
system and our economy. To avoid such situations in the future, 
it is critical that the administration, the Congress, and the 
regulatory agencies work together to develop a new framework 
that strengthens and expands supervisory oversight and includes 
a broader range of tools to promote financial stability.
    I would be pleased to take your questions. Thank you.
    [The prepared statement of Mr. Bernanke follows:]
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    Chairman Towns. Thank you very much for your testimony. I 
will begin with questions. And then, of course, we will allow 
each Member to have questions.
    Chairman Bernanke, did you instruct Hank Paulson to tell 
Ken Lewis that he and his board would be fired if they backed 
out of the Merrill deal?
    Mr. Bernanke. I did not.
    Chairman Towns. Well, I understand that Mr. Paulson told 
Mr. Cuomo that you did. I just want to share that with you.
    Mr. Bernanke. I did not instruct Mr. Paulson or anyone else 
to convey such a threat or message to Mr. Lewis.
    Chairman Towns. Did you personally tell Mr. Lewis that you 
would fire him or remove the Bank of America board if Mr. Lewis 
backed out of the Merrill Lynch deal?
    Mr. Bernanke. I did not.
    Chairman Towns. Ken Lewis testified under oath here and 
also told his board of directors that you and Mr. Paulson made 
verbal commitments to him in December 2008 to provide Bank of 
America with enough money to fill the hole created by the $12 
billion loss created by Merrill Lynch.
    In December 2008, did you promise Mr. Lewis that you would 
provide Bank of America with enough capital to fill the $12 
billion hole created by the losses at Merrill Lynch?
    Mr. Bernanke. I did not promise any specific amount of 
money. What was committed was the commitment of the government 
to work in good faith with Bank of America to develop a 
contingency plan that would ensure the viability of the company 
in case of a financial crisis.
    Chairman Towns. Chairman Bernanke, in an e-mail the 
committee recently obtained under subpoena a top employee of 
the New York Federal Reserve communicates with your general 
counsel regarding questions the SEC had about the Bank of 
America bailout.
    Can you explain why Bank of America would complain about 
someone talking to the SEC and why it appears that Federal 
Reserve employees were not completely forthcoming with the SEC 
about what was going on at Bank of America?
    Mr. Bernanke. Chairman, I can't speak for Bank of America, 
but I will explain the Federal Reserve's position.
    First of all, the Federal Reserve throughout this process 
has worked closely and collaboratively with the other 
regulatory agencies. As you know, the SEC has two specific 
functions. One relates to disclosure. And the Federal Reserve 
had no issues relating to disclosure. Those were issues for 
Bank of America and its shareholders.
    Its second function has to do with oversight regulation. In 
that capacity, I am sure the SEC already knew about the losses 
at Merrill Lynch. From our perspective, the issue was that we 
needed to work with Bank of America to develop a package that 
assured the viability of the company in case of financial 
instability. The Bank of America's regulators besides ourselves 
were the Office of the Comptroller of the Currency and the 
Federal Deposit Insurance Corporation, whom we involved 
continually throughout the process and which I personally spoke 
to both John Dugan and Sheila Bair to make sure they were 
informed about the situation.
    Chairman Towns. So you are saying you were forthcoming?
    Mr. Bernanke. I was, indeed, as appropriate with the other 
agencies.
    Chairman Towns. In another e-mail we obtained recently, the 
head of the FDIC says to you there is strong discomfort with 
the Bank of America bailout package, and that the FDIC board 
does not want to do this.
    Mr. Bernanke, what were the concerns at the FDIC about the 
Bank of America's bailout? And why did you and the Treasury 
Department go through with the bailout despite the concerns 
that the FDIC had?
    Mr. Bernanke. My recollection of the FDIC's concerns were 
not with the issues of trying to prevent instability. Their 
concern was the FDIC's own financial exposure to the deal. They 
noted that Merrill Lynch was not a bank and, therefore, they 
wanted to be sure to restrict whatever financial resources they 
committed to be relevant to the bank rather than to the 
acquired company. So they had concerns about the structure of 
the deal as it related to their own financial exposure, but in 
the end of course they did agree to contribute to the 
arrangement that the government put together.
    Chairman Towns. Ken Lewis told the committee 2 weeks ago 
that he called you and asked you to put in writing the verbal 
commitment he said you and Hank Paulson made to him regarding a 
government bailout of the Merrill Lynch deal. What did he say 
to you exactly during that phone call?
    Mr. Bernanke. He wanted to know if we could provide a 
written description of the commitment that he could use with 
his board. We were unable to provide such written description 
because we did not have any deal. We didn't have a transaction 
completed at that point, and so there was nothing specific that 
we could commit to. All we had was a good-faith agreement to 
work together to find some arrangement that would help avoid 
destabilization of the Bank of America.
    Chairman Towns. My time has expired. I yield to the ranking 
member from California.
    Mr. Issa. Thank you, Mr. Chairman.
    Following up on the chairman's line of questioning, you 
said you kept the OCC informed and had personal conversations. 
Can you explain from your own information you provided to us 
why Brian Peters of the Federal Reserve Bank in New York would 
say: ``Given the presence of the OCC on the call, I think we 
should not discuss or reference the call with Ken Lewis and 
Paulson?''
    Mr. Bernanke. I don't know precisely what motivated that. 
All I can tell you is that on the 21st we had two conference 
calls which I participated in and which John Dugan participated 
in, and we provided him with all the information that I was 
aware of at that time.
    Mr. Issa. The e-mail that we received from Jeffrey Lacker, 
Federal Reserve Bank of Richmond, that indicates that in fact 
they felt there was pressure related to the MAC, how do you 
explain that? Is that just another independent person that 
misunderstood?
    Mr. Bernanke. Well, I don't recall the details of that 
conversation, but I would like to make two points. First, as I 
was----
    Mr. Issa. Let me just give you the details to make it 
accurate. ``Just had a long talk with Ben (Bernanke). Says that 
they think the MAC threat is irrelevant because it is not 
credible. Also intends to make it even more clearer that if 
they play that card and they need assistance, management is 
gone.''
    Now, is he misunderstanding the conversation he had with 
you in those quotations?
    Mr. Bernanke. I don't recollect everything that was said in 
that conversation. I would just like to make again two points, 
if I may.
    Mr. Issa. I would like to have your recollection. Do you 
believe that he is incorrect, according to your recollection? 
Because he is saying in a nutshell you planned to make a 
threat. Now, you may not have done it, but he is saying you 
planned. Is he lying?
    Mr. Bernanke. I don't recollect the details of that 
conversation. I would like to say two things, if I may. First, 
that as you point out, I never did make a threat. I never did 
raise this issue with Ken Lewis/Bank of America.
    Mr. Issa. Did you think that pulling the trigger on the MAC 
was a bargaining chip?
    Mr. Bernanke. May I make my second point?
    Mr. Issa. Briefly.
    Mr. Bernanke. I would just like to point out that what Mr. 
Lacker referred to was not--he didn't say that if Lewis were to 
invoke the MAC that he would be fired. He said that if he 
invoked the MAC and he required assistance, then there would be 
consequences. I think if somebody makes a decision that results 
in their company failing and being rescued by the government, I 
think there should be consequences for it.
    Mr. Issa. Let's go through the MAC. You threw money in 
almost on a daily basis without informing Congress that you 
planned to do it because events were moving that quickly that 
you discovered, and officers and directors of company after 
company, AIG, Wachovia, you name it, made these discoveries and 
came to you and you became aware of it on a daily basis. Isn't 
that true?
    Mr. Bernanke. We learned about some of these problems at a 
very late date. That is true.
    Mr. Issa. Let me put this in perspective. The Fed, the 
Treasury, the SEC, the FDIC, they were unable to predict on a 
day-by-day basis who was going to be next. That is what we all 
saw publicly and privately here. So why is it that between 
September and December, one would think it is an absence of 
fair due diligence to discover that a company that you are 
seeking to acquire, that we held hearings on because of Stan 
O'Neal's alleged mismanagement of that company, had 
deteriorated quickly and that they had not anticipated toxic 
assets going bad quickly? Why would that be unreasonable to 
assume in a deal in the environment in which day after day 
after day you are watching collapses of 100-year-old 
businesses?
    Mr. Bernanke. Well, we did raise the question of whether or 
not the Bank of America should have discovered those losses 
earlier. But that wasn't the relevant question for us in terms 
of maintaining the stability of the financial system going 
forward.
    Mr. Issa. But we are not talking about the stability of the 
financial systems. You said that you had three good reasons 
that BofA should not pull out. And one of them was that their 
credibility would be adversely affected and the whole market 
would be adversely affected if they could not have predicted in 
2 months of due diligence by a company trying to get high 
dollar, in this case high stock exchange, in the transactions. 
So you have an arm's-length transaction in which people are 
trying to tell you only what they need to tell you to get the 
highest stock. And you are saying that, basically, in one of 
your three points that they would be viewed as inept.
    Well, if I understand correctly, day after day after day's 
regulators were discovering, oh--``blank''--another one's 
dropping and the market is seizing up.
    In that environment, wouldn't it have been just as easy to 
say, you are looking at invoking the MAC? What are you trying 
to get to? Is your 80 cents to $1 exchange rate of stock--is it 
in fact materially different? And would you still go through 
with the deal but just at a slightly different amount?
    Wouldn't that be the ordinary effect, rather than to say, 
directly and indirectly, a number of people clearly 
communicated, including Paulson, that they would in fact have 
to go through with this deal or else?
    Mr. Bernanke. It was my view and the view of our staff that 
if they tried to invoke the MAC, that the market would 
understand that the chances of their actually consummating; 
that is, of the MAC being successful, was quite low. As a 
result, both Merrill Lynch and Bank of America would probably 
be affected by a financial crisis at that moment. And that was 
our concern.
    Mr. Issa. Thank you, Mr. Chairman.
    Chairman Towns. The gentleman's time has expired. I now 
yield 5 minutes to the gentleman from Ohio, Congressman 
Kucinich.
    Mr. Kucinich. Chairman Bernanke, our investigation reveals 
that staff at the Fed quickly came to the conclusion that Ken 
Lewis' representations to the government in the meeting of 
December 17, 2008, were, as one put it, somewhat suspect. At 
the appropriate time I am going to insert into the record a 
number of documents that show that senior staff and officials 
at the Fed believed, in contradiction to Ken Lewis' 
representations, that Bank of America failed to do adequate due 
diligence in acquiring Merrill Lynch. The Fed found that Bank 
of America had known about accelerating losses at Merrill since 
mid-November, when shareholders could have used that 
information to decide on ratification of the merger. Your 
colleague, Governor Warsh, doubted the competence of Bank of 
America's top management to address the problems at Merrill and 
at Bank of America, writing to you, ``Spoke with BOA folks this 
morning, mostly Joe Price, CFO, did not instill a ton of 
confidence that they have a comprehensive handle on this 
situation.''
    And the senior lawyer at the Fed believed that Bank of 
America could be in violation of securities laws for failing to 
inform shareholders about the Merrill losses known in mid-
November. And this is writing to you. ``Lewis should have been 
aware of the problem at Merrill Lynch earlier, perhaps as early 
as mid-November and not caught by surprise. That could cause 
other problems for him around the disclosures BA made for the 
shareholder vote.''
    Chairman Bernanke, did you agree with your senior staff and 
colleagues at the Fed who had drawn those unflattering 
conclusions about Ken Lewis' management of Bank of America?
    Mr. Bernanke. The staff and the principals at the Fed had 
serious concerns and questions about----
    Mr. Kucinich. Did you have serious concerns?
    Mr. Bernanke. I did have concerns and questions. But----
    Mr. Kucinich. About the characteristics of the management?
    Mr. Bernanke. I did have concerns. Yes.
    Mr. Kucinich. Our investigation also finds that there was 
considerable interest at the staff level in the Fed to attach 
meaningful conditions to whatever aid package you gave Bank of 
America because of doubts about the quality of management of 
Bank of America. However, it is not evident, that you, 
yourself, had an interest in increasing accountability of Bank 
of America's management.
    In talking points prepared by your staff for a conversation 
you would have with Bank of America, a number of restrictions 
were seriously proposed to accompany any Federal aid to Bank of 
America. I would like to go through some of these suggested 
conditions, and assess whether you in fact imposed those 
conditions on Bank of America.
    Did you require any changes in Bank of America's top 
management in view of the considerable evidence amassed by your 
staff that Ken Lewis had not done adequate due diligence and 
may have committed securities fraud?
    Mr. Bernanke. Subsequently to the transaction, we have 
asked and required Bank of America to look at its top 
management, and they have made changes in their board.
    Mr. Kucinich. Was that a yes or a no?
    Mr. Bernanke. The answer is, yes, we have done that.
    Mr. Kucinich. OK. Did you require more severe executive 
compensation limitations for Bank of America than had been 
required under the TARP program in which the conditions were 
deliberately not intended to be onerous so as to maximize 
participation by banks that did not need financial assistance?
    Mr. Bernanke. I believe the executive compensation 
restrictions that were imposed were those--the standard ones 
but the ones associated with extraordinary actions on the TARP.
    Mr. Kucinich. Did you require any limitation on various 
types of corporate expenses with Bank of America, other than 
those it had already imposed on itself?
    Mr. Bernanke. Not that I recall.
    Mr. Kucinich. Did you require a government foreclosure 
policy, such as was imposed by the FDIC in the case of IndyMac.
    Mr. Bernanke. Yes. I believe we did. I believe we did.
    Mr. Kucinich. Do you know for sure?
    Mr. Bernanke. I will get back to you, but it is my belief 
that we did.
    Mr. Kucinich. We need to know that.
    Now, Chairman Bernanke, isn't it true that there was a 
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. It says, ``Dear 
Ben, I am concerned if we too quickly move to a RingFence 
strategy, particularly if we believe that existing management 
is a significant source of the problem and that they do not 
have a good grasp of the extent of their problems and 
appropriate strategies to resolve them. I think it is 
instructive to look at the example of the Royal Bank of 
Scotland, the U.K., replace senior management. The bank is 
maintaining operations without significant disruptions. I would 
not want to discard this option prematurely.'' That is a quote.
    Chairman Bernanke, Ken Lewis came to you with a story that 
the Fed didn't believe. You were getting advice from your staff 
and from peers that considerable concessions should be required 
of Bank of America because of concern about the quality of top 
management, and yet you decided to give the aid away without 
any meaningful changes to Bank of America's corporate 
management or its compensation policies.
    How do you explain that, Mr. Chairman.
    Mr. Bernanke. Congressman, the supervisory process is not a 
one time thing. It is an ongoing process. And in our ongoing 
supervisory process we have made demands of the Bank of America 
in terms of their management.
    Mr. Kucinich. So you give them the money first and then you 
start supervising?
    Mr. Bernanke. Well, we have the ability to insist on these 
changes at any point.
    Mr. Kucinich. Thank you, Mr. Chairman.
    Chairman Towns. Thank you very much. I now yield to the 
gentleman from Indiana, Mr. Burton.
    Mr. Burton. Is Mr. Lewis lying?
    Mr. Bernanke. With respect to what, sir?
    Mr. Burton. I said is Mr. Lewis lying when he tells this 
committee that you put pressure on him along with Mr. Paulson?
    Mr. Bernanke. All I know is that I never said that I would 
replace the board and management if he invoked the MAC.
    Mr. Burton. What did you say? Sometimes there is an 
implication without a direct order.
    Mr. Bernanke. I expressed concerns about the effects of 
invoking the MAC both on the financial system and on the Bank 
of America itself, expressed those concerns, which is 
appropriate. But it was always his decision whether or not to 
go ahead and take that decision.
    Mr. Burton. Did Mr. Paulson lie when he told Mr. Cuomo that 
he was acting under your suggestions or orders to tell them 
that the board would be fired if they didn't comply?
    Mr. Bernanke. I believe he has modified that statement. I 
did not tell Mr. Paulson----
    Mr. Burton. What did you tell him?
    Mr. Bernanke. I didn't tell him anything like that.
    Mr. Burton. What did you tell him? You say you didn't tell 
him anything like that.
    Mr. Bernanke. Mr. Paulson and I had conversation on a 
variety of matters. All I can say is I am sure that I never 
told him to convey such a message to Ken Lewis.
    Mr. Burton. Mr. Paulson says in a letter from New York 
Attorney General Andrew Cuomo to Congress, told him that 
Paulson made the threat at the request of Bernanke. That is not 
correct?
    Mr. Bernanke. No.
    Mr. Burton. Did you say he modified his statement? How did 
he modify his statement? We don't have any information.
    Mr. Bernanke. He issued a statement to the effect that he 
did not receive that information from me, that he made 
inferences but he did not--as far as I know, he modified his 
statement on that particular issue.
    Mr. Burton. How about Mr. Lacker? Is he lying?
    Mr. Bernanke. He is summarizing a long conversation. I 
don't recall exactly what was said.
    Mr. Burton. ``Just had a long talk with Ben. Says they 
think the MAC threat is irrelevant because it is not credible. 
Also intends to make it even more clear that if they play that 
card and then need assistance, management is gone.'' You didn't 
say anything like that?
    Mr. Bernanke. I don't know if I did or not.
    Mr. Burton. You know one of the things, I was chairman of 
this committee for 6 years and we did a lot of investigating. 
One of the things that I learned was in order to keep people 
from perjuring themselves they couldn't remember anything.
    Are you sure you can't remember?
    Mr. Bernanke. I am sure I can't remember. But I think it is 
important to note that whatever conversation I had with Mr. 
Lacker, who is a Federal Reserve official, that I did not--in 
subsequent conversations with Mr. Lewis did not make that 
threat.
    Mr. Burton. Why did you keep the SEC in the dark?
    Mr. Bernanke. I did not keep the SEC in the dark. We were 
working carefully and closely with our other regulatory 
agencies. The agencies that were most relevant for the Bank of 
America discussion were those that were involved in regulating 
the Bank of America and in the transaction. That would have 
been the Treasury, the Federal Deposit Insurance Corporation 
and the Office of the Comptroller of the Currency, who were 
well-informed.
    Mr. Burton. Well, according to the New York Attorney 
General, Mr. Cuomo, Hank Paulson said that he intentionally 
kept the SEC out of the loop about your efforts to police the 
Bank of America merger with Merrill Lynch. This seems to be 
backed up by the following exchange between your General 
Counsel Scott Alvarez and a New York Fed official: ``The New 
York Fed officials asked have we conveyed anything to the SEC 
regarding the Bank of America situation? They know something is 
up. How much, if anything, has been shared with the SEC?'' Mr. 
Alvarez has replied, ``I have not discussed this with the SEC. 
Bank of America has complained that someone did talk to the SEC 
with the result that the SEC called late last week to say that 
they heard the Bank of America was negotiating a Citi type deal 
with the U.S. Government and to ask Bank of America to explain 
the unexpectedly high losses at Merrill Lynch.''
    You didn't direct any of those?
    Mr. Bernanke. I did not.
    Mr. Burton. Does Mr. Alvarez work for you?
    Mr. Bernanke. He does.
    Mr. Burton. He does? He did this on his own?
    Mr. Bernanke. Again, I would emphasize that the issues at 
hand did not directly involve the SEC. They involved the OCC--
--
    Mr. Burton. Are you his boss?
    Mr. Bernanke. I'm sorry.
    Mr. Burton. Are you his boss?
    Mr. Bernanke. Yes.
    Mr. Burton. Mr. Alvarez.
    Mr. Bernanke. I am.
    Mr. Burton. Would he do something like this, make this kind 
of a statement that could cause these kinds of problems without 
your authority?
    Mr. Bernanke. I didn't have any knowledge of this 
particular exchange. And again, the rationale for it, as I 
understand now, having discussed it with him, is that the 
agencies that were relevant to our transaction were the FDIC, 
the OCC, and the Treasury. That is the ones that we kept 
closest in communication.
    Chairman Towns. The gentleman's time has expired. Mr. 
Foster from Illinois.
    Mr. Foster. Thank you for appearing here, Chairman 
Bernanke. I appreciate it and I am sure everyone here does.
    Just for clarity, at any point in these negotiations did 
you or anyone you know of point out to Mr. Lewis that the 
government agencies had the power to remove him and/or the Bank 
of America board?
    Mr. Bernanke. I did not.
    Mr. Foster. Now, without any specific reference to the case 
at hand, do you believe that there are circumstances in which 
the CEO of a systemically important firm might be expected to 
have his shareholders take a bullet to protect the overall 
health of the economy in a crisis situation?
    Mr. Bernanke. No. That is not appropriate under supervisory 
practice, and we have not done that.
    Mr. Foster. So do you believe that there is any need for 
any additional legal clarity about the duties of a CEO to the 
shareholders, to the regulators, and to the overall economy in 
times of systemic crisis?
    Mr. Bernanke. Well, that might be something for Congress to 
consider, but I think the rules as they currently stand are 
quite clear that you can't force somebody to take actions 
against the interest of that company for systemic reasons 
alone.
    Mr. Foster. So you did not sense at any time in this that 
there were ambiguities that would be better if they had been 
made explicit in law?
    Mr. Bernanke. It was always clear in our thinking and in 
our advice to Mr. Lewis that it was not just an issue with the 
financial system but also an issue of Bank of America 
specifically that was at risk and that he should take that into 
consideration when he made his decision.
    Mr. Foster. So it was the indirect benefits to the 
shareholders from not having the whole system collapse that he 
was optimizing for?
    Mr. Bernanke. Correct.
    Mr. Foster. Now, if you accepted that Federal 
recapitalization of both Merrill and Bank of America were 
probably inevitable, do you think that the net effect of the 
merger was just representative of the reshuffling around of the 
total funds that we would eventually have to commit or do you 
think it is a more complicated situation than that?
    Mr. Bernanke. No, I think the combination strengthened the 
two companies and particular what we learned during the crisis 
was that the investment banking model was not very stable, that 
it was subject to funding problems. By combining Bank of 
America, with a large retail deposit base, it was possible to 
solve some of those funding problems to some extent.
    Mr. Foster. Thanks again. I yield back the balance of my 
time.
    Chairman Towns. I yield to the gentleman from Ohio, Mr. 
Jordan.
    Mr. Jordan. Thank you, Mr. Chairman. Chairman Bernanke, let 
me go back to what I think sort of starts this pattern of 
pressure on behalf of the government, pattern of intimidation. 
I want to go back to the October 13th initial meeting that my 
understanding is you, Mr. Paulson, Ms. Bair, Mr. Geithner had 
the nine biggest banks come here to Washington. Was that 
meeting something that you and Mr. Paulson decided needed to 
happen? Was that your call, his call? How did that happen?
    Mr. Bernanke. My recollection is Mr. Paulson's decision. 
But we all participated in that meeting.
    Mr. Jordan. Mr. Lewis in his testimony a few weeks ago he 
said the meeting--he described the meeting with the four of you 
on one side, the nine CEOs of the banks on another. They were 
given a form to sign where they had to write in the amount of 
TARP money, bailout money that they felt that was needed or 
that you suggested. The impression he left with this committee 
was that they had to comply. In fact, I asked him permanently. 
Did anyone express any reservations at that meeting about 
accepting taxpayer money? He said, yes, one of the other CEOs 
in fact did express reservations. Nevertheless, they signed 
that. He also indicated that the entire meeting took less than 
an hour.
    Is that an accurate description of what took place in that 
meeting?
    Mr. Bernanke. I think the time was less than an hour. Yes.
    Mr. Jordan. And he also said when I asked him did he know 
what the meeting was going to be about when he came here to 
Washington, he informed the committee that he had no idea it 
was going to be about signing a form being forced to accept 
TARP money.
    Is that accurate?
    Mr. Bernanke. I don't know.
    Mr. Jordan. Well, let me ask it this way. Did you inform 
the nine CEOs of the banks who were called to Washington that 
the meeting was going to be about them taking TARP money from 
the legislation that had just enabled that to happen that 
frankly had just been passed 2 weeks prior to that?
    Mr. Bernanke. I was not in contact with the nine CEOs. I 
think the Treasury was in contact with them.
    Mr. Jordan. Do you believe that Mr. Paulson let them know 
what the meeting was about?
    Mr. Bernanke. I do not know.
    Mr. Jordan. But the recollection of how I described the 
meeting and how Mr. Lewis described the meeting, that is in 
fact what took place that day? Less than an hour, nine CEOs 
given a form they had to sign saying they were going to take a 
certain amount of government money.
    Mr. Bernanke. Mr. Paulson strongly urged them to take 
capital and argued that, given what was going on in the world 
at that time, which was a global financial crisis, that it was 
very much in their interest and the interest of the financial 
system for them to do so, and they signed the forms.
    Mr. Jordan. Again, Mr. Lewis felt like they had to sign 
that form, had to comply, based on the testimony he gave this 
committee. Then we jump forward 2 months ahead to December, and 
we have the e-mail and letter that both Mr. Issa and Mr. Burton 
had brought up. The letter that Mr. Cuomo a New York AG sent to 
Members of Congress, where he said, Secretary Paulson has 
informed us that he made the threat dealing with the Merrill 
Lynch acquisition at the request of Chairman Bernanke.
    We also have the e-mail from Mr. Lacker, the Richmond Fed 
chairman talking about, just had a long talk with Mr. Bernanke, 
who says that I think the MAC threat is irrelevant because it 
is not credible, also tends to make it even more clear that if 
they play that card and they need assistance management is 
gone.
    And then the third one I would point out, too, is the e-
mail from Mr. Angulo at the New York Fed which deals with the 
disclosure concern. Also this is in December of last year where 
he says: ``I think I will ask Merrill Lynch a current estimate 
of the fourth quarter.''
    And he makes a statement: ``If I get a sense that Merrill 
Lynch is leaning toward an early January filing, I will try to 
steer them toward a later filing.''
    I mean, I guess what I am trying to point out is you have 
all this pattern here and--which, as I asked Mr. Lewis when he 
was here, if what took place at the October 13th had an impact 
on his decisionmaking, his thought process, as he moves through 
this dealings in December with you and with Treasury relative 
to the Merrill Lynch acquisition.
    Do you see how a reasonable person could reach the 
conclusion that there, in fact, was this pattern of pressure 
from the government?
    Mr. Bernanke. No, not if you're sufficiently informed. As I 
said, I did not tell Mr. Paulson to convey any threats. The e-
mail from Mr. Lacker was a summary of a long conversation. It 
very explicitly said that problems with the management would be 
related to their needing assistance in an emergency situation. 
And as I said----
    Mr. Jordan. Need assistance? They already had assistance. 
You made him take it on October 13th. So I don't see how those 
two clauses--you made that point when Mr. Issa was questioning 
you. They already had assistance. You made them take $15 
billion October 13th.
    Mr. Bernanke. No, they revoked the MAC, against our advice, 
and then they had to be rescued on a Sunday afternoon operation 
at great cost and risk. That would hardly be an accommodation 
for the management's quality.
    Chairman Towns. The gentleman's time has expired.
    Mr. Jordan. Thank you.
    Chairman Towns. The gentlewoman from California, 
Congresswoman Speier.
    Ms. Speier. Thank you, Mr. Chairman.
    Mr. Bernanke, what went into your decision to allow Lehman 
to fail?
    Mr. Bernanke. It bears very much on this discussion. The 
problem was that we were unable to save it within legal means. 
We had made every attempt to do so, but we had no legal 
authority to inject capital at that time, and we had no legal 
authority to compel Mr. Lewis, for that matter, to buy Lehman, 
and therefore we had no way to prevent a failure. If we could 
have done so, we would have done so.
    Ms. Speier. Well you did, in fact, save AIG that same 
weekend.
    Mr. Bernanke. The conditions were quite different, because 
there the financial products division was part of a much larger 
insurance company which could provide the collateral for a loan 
to replace the loss of liquidity that financial company was 
experiencing. So it was a very different situation.
    Ms. Speier. So if you had TARP funds at the time, you would 
have saved Lehman Brothers as well.
    Mr. Bernanke. I believe we would have at least given that a 
try.
    Ms. Speier. Let me ask you about the process that you went 
through in determining to give Bank of America $15 billion in 
October. Why that number, how did you come up with that number?
    Mr. Bernanke. I did not develop that number. I'm sure it 
was related to the size of the firm and its capital ratios.
    Ms. Speier. Who came up with that number?
    Mr. Bernanke. I'm not certain. It was probably Treasury, 
but I'm not certain.
    Ms. Speier. You are not certain who came up with the 
number?
    Mr. Bernanke. No.
    Ms. Speier. And so the $10 billion that was given to 
Merrill Lynch at a subsequent point in time, you don't know who 
came up with that number either?
    Mr. Bernanke. This was TARP money and this was the 
Treasury's responsibility.
    Ms. Speier. And you didn't have conversations with Mr. 
Paulson about this?
    Mr. Bernanke. I don't recall.
    Ms. Speier. As I look at it, it appears that if you take 
the $15 billion that BofA got in October, the $15 billion that 
Merrill got, the $20 billion that was given to BofA in January, 
that pretty much pays for what the BofA paid for Merrill. So 
did the American people basically subsidize the purchase of 
Merrill Lynch to Bank of America?
    Mr. Bernanke. No. The American people made a capital 
investment, on which they are currently getting dividends, and 
which I expect they'll be fully repaid.
    Ms. Speier. The obligation to inform the OCC and SEC, do 
you believe you have an obligation to inform them about any 
erratic conditions of companies that you come in contact with?
    Mr. Bernanke. It depends what kind of company it is. This 
was a bank, and therefore the most pressing communication were 
with the bank regulators, the FDIC and the OCC, which we did 
inform. And I personally informed both Mr. Duggan and Ms. Bair 
about the situation, and we had them on conference calls to 
discuss the situation in some detail. The SEC is not directly a 
supervisor of Bank of America.
    Ms. Speier. May not be a supervisor, but certainly the way 
they engage in their business relative to stock is of interest 
to the SEC, is it not?
    Mr. Bernanke. Repeat the question, please.
    Ms. Speier. Doesn't the SEC have a role in evaluating the 
bank as it relates to its investor relations.
    Mr. Bernanke. Yes, but that's the Bank of America's 
responsibility, not ours.
    Ms. Speier. Well, we're all one government, aren't we?
    Mr. Bernanke. Well, we all have our spheres of 
responsibility as well.
    Ms. Speier. So you didn't believe you had a responsibility 
to inform the SEC.
    Mr. Bernanke. Well, we were dealing with an emergency 
situation, and our focus was on the agencies that were most 
relevant to the situation. That was the banking regulators, so 
that's who we focused on.
    Ms. Speier. But some of these e-mails would suggest that 
there was an active interest in not telling the SEC certain 
things, and that they were finding out through other means. I 
mean, this is a government. We are all part of the government. 
It's really our responsibility to work together. So it appears 
that someone was trying to hide the ball, and I'm just trying 
to understand why.
    Mr. Bernanke. There was just no priority to go to the SEC, 
but we did disclose to them what was going on. And I think it's 
appropriate for them to know, broadly speaking, what was going 
on.
    Ms. Speier. Do you believe that Bank of America had a 
responsibility to inform its shareholders and the American 
people that it was going to get another injection of $20 
billion from the U.S. Government?
    Mr. Bernanke. That was----
    Ms. Speier. Earlier than January 20th?
    Mr. Bernanke. That was Bank of America's decision and their 
counsel.
    Ms. Speier. I'm just asking you.
    Mr. Bernanke. I'm not a lawyer. I can't tell you.
    Ms. Speier. Do you think you had a responsibility as the 
head of the Fed to tell the American people that we were going 
to inject another $20 billion into the Bank of America earlier 
than January 20th?
    Mr. Bernanke. My responsibilities are very explicitly set 
out by the Emergency Economic Stabilization Act, which says 
that after the completion of a deal we must report within 1 
week, which we did.
    Ms. Speier. So you don't think you had any further 
responsibility.
    Mr. Bernanke. We followed the law exactly.
    Ms. Speier. In hindsight--you know, hindsight is always 20/
20--is there anything that you would do differently?
    Mr. Bernanke. I think it was a very successful transaction. 
It helped stabilize the financial markets. It put the two 
companies back on a healthy path. It protected our economy, and 
it was a good deal for taxpayers. I think I have nothing that I 
regret about the whole transaction. I think it was, in fact, a 
very successful operation overall and it achieved the public 
policy objectives that were very important.
    Ms. Speier. I yield back.
    Chairman Towns. The gentlewoman's time is expired. I yield 
to the gentleman from Utah, Congressman Chaffetz.
    Mr. Chaffetz. Thank you, Mr. Chairman. I appreciate it.
    And thank you, Mr. Chairman, for being here. A question. 
For those recipients of the TARP money, do you have the power 
and authority to replace the board or its president?
    Mr. Bernanke. That's a good question. The Treasury with its 
ownership----
    Mr. Chaffetz. Thank you.
    Mr. Bernanke. You're welcome. The Treasury with its 
ownership, obviously, has some influence, but it has not used 
that influence.
    Mr. Chaffetz. But it could.
    Mr. Bernanke. I suppose it could, yes. The supervisors of 
the Federal Reserve can make changes or recommend changes in 
management if we believe that the management----
    Mr. Chaffetz. Let me move on. My time is short. I 
appreciate it.
    So on this December 17th meeting you are meeting in person, 
you have their chairman--or the CEO, Lewis, who is there 
expressing that he might invoke the MAC.
    And then in your written testimony today on page 2, it 
says, ``in responding to Bank of America in these discussions I 
expressed concern that invoking the MAC would entail 
significant risks.''
    Going down to your point you made on No. 2, mid-sentence it 
said, because you had concerns and you expressed this back, it 
cast doubt in the minds of the financial market participants, 
including investors, creditors and customers about the due 
diligence and analysis done by the company, its capability to 
consummate significant acquisitions, its overall risk 
management processes and judgment of its management.
    How is that not a threat? If you have the power and 
authority to release the board of directors and fire the CEO 
and you are questioning their judgment and you are saying if 
you don't go through with this deal, how is that not a threat?
    Mr. Bernanke. I never said anything about firing the board 
and the management.
    Mr. Chaffetz. But if you are questioning somebody's 
judgment and you are in the supervisory role with the authority 
to let them go, how is that not a threat?
    Mr. Bernanke. I was focusing particularly--and this was 
based on supervisory advice--on the reaction of the 
marketplace. What you have to understand is that during this 
period the markets were extraordinarily fragile, and very 
quickly money could pull away from a bank and put it into 
serious trouble, very quickly. That's what happened to 
Wachovia, for example.
    Mr. Chaffetz. So you think that was a threat--your belief 
on what the threat would be from the market. But how could that 
not be a threat directly to Mr. Lewis and its board of 
directors, if you are questioning their judgment?
    Mr. Bernanke. We advised him that we didn't think it was a 
good idea from the perspective of Bank of America for him to 
take that action. However, if he had taken it, it was his 
option to take it. And if he had taken it and there had been no 
adverse consequences, we would not have had much basis for 
responding to that.
    Mr. Chaffetz. With all due respect, I'm just not buying 
that. You are in charge, you have the ability to affect their 
outcome, to fire them, to let them go. You are telling them 
that if they don't come to the same conclusion as you do that 
they would obviously--everybody in the room, everybody in the 
marketplace, would know that their judgment was miscalculated.
    I think that's a threat, and I think it's reasonable for 
the CEO and the board of directors to take that as a threat. I 
don't see any other conclusion. If we were sitting across the 
table, you controlled my destiny, that's one of the 
consequences.
    Mr. Bernanke. Well, we don't control his destiny 
unconditionally. We would have to make a case that he made 
decisions that were damaging to the company. And if he had made 
that decision and the company had prospered, there would be no 
basis whatsoever for any action.
    Mr. Chaffetz. All right. I'm going to move on.
    I want to go to page 4 of your testimony here. It says in 
the second--in the kind of mid-paragraph, this is from your 
testimony today--``neither I nor any member of the Federal 
Reserve ever directed, instructed or advised Bank of America to 
withhold from public disclosure any information related to 
Merrill Lynch.''
    And yet in an e-mail of December 22nd, e-mail No. 18, we 
get this quote from Art Angulo. I believe Mr. Jordan referenced 
this earlier. ``I'll ask Merrill Lynch's current estimate of 
fourth quarter losses versus market expectations and whether 
and when Merrill Lynch intends to file an 8(k). If I get a 
sense that Merrill Lynch is leaning toward an early January 
filing, I'll try to steer him toward a later filing.''
    That is so inconsistent with the comment that you made. Do 
you see that they're consistent or is there an inconsistency 
here?
    Mr. Bernanke. Well, I didn't see that e-mail exchange until 
after I had written my letter. But having looked now at the 
exchange, I note that if you look at the subsequent e-mails, 
that in fact Merrill Lynch had taken its disclosure decision 
and Mr. Angulo did not attempt to make them change it.
    So in the event, he did not make any attempt to effect the 
disclosure.
    Mr. Chaffetz. But the intent is still there right?
    Mr. Bernanke. But he did not take the action.
    Mr. Chaffetz. Do you feel in any way, shape or form that 
you adversely affected or threatened Mr. Lewis or the board of 
directors?
    Mr. Bernanke. I do not.
    Mr. Chaffetz. Thank you, Mr. Chairman.
    Chairman Towns. Thank you very much. The gentleman from 
Virginia, Mr. Connolly.
    Mr. Connolly. Thank you, Mr. Chairman. And welcome Chairman 
Bernanke.
    Mr. Bernanke, I guess I come at it just a little bit 
differently than my friend from Utah. I guess I'm interested in 
who was really threatening whom. At what point did you learn 
from Mr. Lewis that the deal with Merrill Lynch, oops, had a 
$12 billion hold to it that they hadn't realized in doing their 
due diligence?
    Mr. Bernanke. On December 17th.
    Mr. Connolly. I can't hear you, sir.
    Mr. Bernanke. On December 17th when he called Secretary 
Paulson.
    Mr. Connolly. On December 17th?
    Mr. Bernanke. Yes.
    Mr. Connolly. And when in retrospect, to your knowledge, 
did they learn they had a $12 billion problem?
    Mr. Bernanke. They claimed they had not known any earlier 
than December 14th, and we have no direct evidence to the 
contrary.
    Mr. Connolly. Were you concerned about the lack of due 
diligence on their part?
    Mr. Bernanke. We did have concerns about it, yes.
    Mr. Connolly. Did you take it as a threat or do you think--
well, did you take it as a threat or did other senior Federal 
officials perhaps discuss it as a threat, implied or otherwise, 
that Mr. Lewis, far from being a victim here, was actually 
manipulating the Federal Government that we're going to back 
out of this deal because of that $12 billion problem we didn't 
catch, unless in exchange we get some assurance from you the 
TARP money will help us cover that little $12 billion problem?
    Mr. Bernanke. I was concerned about that when I first heard 
about this, that there might be some attempt to get government 
support or government subsidy on that basis. After some 
meetings with Mr. Lewis my impression became that he was 
genuinely undecided about what to do and rather uncertain about 
how to go forward. So that impression faded after some time, 
but I was worried about that at the beginning.
    Mr. Connolly. Was there any discussion about, at that time 
when you learned about it, Chairman Bernanke, the need to 
disclose this to the public and to the shareholders of Bank of 
America?
    Mr. Bernanke. We leave the disclosures to the 
responsibility of the management of Bank of America and their 
counsel. And we left that decision to them completely.
    Mr. Connolly. You are aware of the fact that under oath Mr. 
Lewis said that there was no deliberate attempt to keep this 
from the public, that people were just trying to work out the 
details. When in fact, subsequently, this committee is in 
possession of an e-mail from him dated, I believe, December 
22nd, that in conversations with both the Fed and with 
Treasury, strong reaction on the part of the Federal officials 
not to disclose or to put anything in writing because they 
didn't want at that point this to come out in the public forum 
because of adverse reactions in the market.
    Mr. Bernanke. I never conveyed any such thought.
    Mr. Connolly. When asked--well, let me read to you, if I 
may, an excerpt from the minutes of the December 22nd BOA board 
hearing or meeting.
    ``He,'' Mr. Lewis, ``reported that in addition to the 
previously described conversations he had spoken again with Mr. 
Bernanke, who stated that he,'' Mr. Bernanke, ``had spoken to 
other Federal regulators, and we are informed of the commitment 
of the corporation by the Fed and Treasury that all concur with 
the commitment of the Federal regulators,'' obviously to BOA.
    Could you comment on that? What is that in reference to and 
what is the nature of the commitment he's referring to?
    Mr. Bernanke. Well, as I mentioned before, we did inform--
the Treasury and the Fed informed the FDIC and the OCC about 
the situation, and about the Fed and Treasury's commitment to 
work in good faith with the Bank of America to find a 
transaction, a package, that would avoid destabilization of the 
company in the event of a financial crisis. I can say that the 
other agencies certainly were in sympathy with the idea of 
trying to stabilize the company. But at that point there had 
not been any specific transaction laid on the table, and so 
there was no agreement on a specific shape and structure of the 
transaction.
    Mr. Connolly. I'm going to have to sneak this in in a 
mouthful. If you would respond, Chairman Bernanke, because my 
time is about to be up.
    When and how did you learn that Mr. Lewis had threatened 
not once--threatened not once, but twice, to invoke the MAC and 
back out of the Merrill Lynch deal? And to what extent were you 
concerned, and did you have conversations with Secretary 
Paulson that would sort of unravel a lot of things and 
therefore we had to accelerate the TARP funding for BOA? And 
did you take it, or, to your knowledge, did Secretary Paulson 
take it as an implied threat that if I don't get that, I'm 
going to go public and let everybody know we're pulling out of 
the deal?
    Mr. Bernanke. When I first heard about it on December 17th, 
I took that as a possibility which I was concerned about, but 
subsequently I thought that, as I said, that Mr. Lewis was 
genuinely uncertain about how to proceed.
    Mr. Connolly. Mr. Chairman, my time is up. But I just want 
to say on the record, while some want this narrative to be this 
poor CEO, you know, moderately-sized bank with the hob-nailed 
boot of government on his neck forcing him to do things he 
didn't want to do, I believe the narrative lends itself to a 
very different interpretation of a wily CEO of a major 
corporation gaming the system because he could recognize an 
opportunity when he saw it, and it was a $15 billion to $20 
billion opportunity.
    My time is up. I thank the Chair and I thank Chairman 
Bernanke.
    Chairman Towns. I thank the gentleman. I yield now 5 
minutes to the gentleman from Tennessee, Congressman Duncan.
    Mr. Duncan. Thank you very much, Mr. Chairman.
    Chairman Bernanke, many articles and columns had described 
the actions taken by the Fed in regard to the Bank of America-
Merrill Lynch dealing and other dealings of that time period as 
being--following too-big-to-fail policies.
    Would you describe your activities in that time period in 
that way, and do you think there needs to be more control or a 
little closer oversight by the Fed and other Federal regulators 
of the biggest banks and financial firms?
    Mr. Bernanke. Yes, I do to the last part. Too-big-to-fail 
is not a policy, it's a major problem. We were faced on 
numerous occasions in the last year with large firms whose 
failure, like Lehman, would significantly disrupt the world 
financial system and the world economy. We had no good options 
to deal with those companies.
    It's extraordinarily important, as I've said for some time, 
that as Congress reforms the financial regulatory system that 
we develop a resolution regime for solving failing systemically 
critical firms, that we increase the oversight of those firms, 
and that we take steps to make sure that too-big-to-fail will 
not be a problem in the future. So I agree very strongly with 
that.
    Mr. Duncan. And let me ask you, I've read many articles 
over these last few months and I've seen all different sorts of 
figures as to how much money in total the Fed has loaned, 
pledged, paid in all the different bailouts. Would you tell us 
what you believe the total amount to be that the Fed has 
committed over these last few months?
    Mr. Bernanke. In terms of bailouts, the amount of money we 
had involved in AIG and Bear Stearns is about $100 billion.
    Mr. Duncan. And in other actions that you've taken, I've 
seen figures as high as--I've seen figures like $2.2 trillion.
    Mr. Bernanke. Our balance sheet is $2.2 trillion, but more 
than half of that is U.S. Government bonds and government-
guaranteed mortgage-backed securities, which have no risk and 
which are supporting the mortgage markets of the United States. 
A good portion of the remainder is short-term collateralized 
loans to financial institutions which are very safe and help 
provide liquidity to support the financial system.
    So none of that I would characterize as a bailout, other 
than the moneys that were involved in the AIG and Bear Stearns 
situations, which we got involved in with great regret, and I 
hope that the system will be changed so that there it will 
never be necessary in the future.
    Mr. Duncan. But Congress Daily says this morning that Fed 
officials purposefully declined to consult with other financial 
regulators, and one e-mail expressed concern the SEC employee, 
``knows something is up.''
    The Wall Street Journal reported that you and Mr. Paulson 
attended two weekly meetings of the Financial Stability 
Oversight Board and refused or declined to disclose the 
seriousness of the problems that were being faced by the Bank 
of America and Merrill Lynch at that time.
    What would you say to the majority of this Congress who has 
now co-sponored--who have now co-sponsored the bill to require 
audits of the Federal Reserve? Do you feel that the Federal 
Reserve is operating with too much secrecy and too much refusal 
to disclose information that you have to other Federal banking 
regulators?
    Mr. Bernanke. The Federal Reserve has made enormous strides 
in the last year under my chairmanship to expand the 
information that we release. We release monthly information on 
all the various programs that we have. We've developed a Web 
site and a monthly report that involves all kinds of 
information. We think we are quite transparent.
    We are happy to work with Congress if they have further 
concerns about any of our programs. We are more than happy to 
work with you to make sure that you are comfortable that they 
are well managed and are serving a public purpose.
    Mr. Duncan. Do you think it would cause problems for the 
Fed or for the economy if that legislation was to pass?
    Mr. Bernanke. My concern about the legislation is that if 
the GAO is auditing not only the operational aspects of our 
programs and the details of the programs, but is making 
judgments about our policy decisions, that would effectively be 
a takeover of monetary policy by the Congress, a repudiation of 
the independence of the Federal Reserve, which would be highly 
destructive to the stability of the financial system, the 
dollar, and our national economic situation.
    Mr. Duncan. Thank you.
    Chairman Towns. Thank you, the gentleman from Tennessee. 
Thank you very much.
    I now yield 5 minutes to the gentlewoman from Ohio, Marcy 
Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman, very much.
    And, Chairman Bernanke, welcome to this committee. I am 
very concerned about those who create money in our society and 
how we hold them accountable. For those who counterfeit, if we 
can find them, most often they go to jail for a long time. But 
to those who create money in sophisticated ways through our 
financial system and then do great damage, sometimes they are 
more difficult to apprehend and prosecute.
    Today I would like to explore the relationship between the 
Bank of America, Merrill Lynch and a firm called BlackRock that 
went public in 1999, after its founding about a decade earlier.
    Let me say I'm also concerned that there may be some clever 
foxes in the henhouse over there at the Fed as our Nation 
proceeds to dig out of this housing collapse, which still 
continues in regions like my own, and hold those truly 
responsible accountable.
    Now, as I understand it, the Bank of America acquired 
Merrill Lynch last September, but at the time of that 
acquisition, because of several relationships, Bank of America 
actually also bought BlackRock which now owns a near majority 
share of Bank of America. Recently--that had to do with the 
interrelationship between BlackRock and Merrill Lynch, as you 
know.
    Recently the Fed has just hired BlackRock to execute at 
least four contracts, and maybe five, to analyze and handle the 
troubled assets of Freddie Mac and Fannie Mae, making BlackRock 
the dominant player in pricing these distressed assets. I am 
concerned that BlackRock and its chief executive officer Mr. 
Fink may not be fair and impartial in conducting these 
responsibilities because they in fact have been heavily 
involved in inventing, creating and trafficking in those 
instruments for most of the last two decades, indeed doing the 
risk analysis associated with them and selling billions of them 
to the Government of the United States.
    So one of my questions Mr. Bernanke, is do you know in what 
year Mr. Fink sold his first tranche of mortgage-backed 
securities to Freddie Mac? The first tranche was $1 billion. Do 
you know what year that occurred in?
    Mr. Bernanke. I do not.
    Ms. Kaptur. Do you think that's important for you to know?
    Mr. Bernanke. No, I don't, because the arrangements we have 
with BlackRock and with other asset management companies are 
carefully set up to prevent conflicts of interest, to set up 
firewalls between the portion of the company that's working for 
us and the portion of the company that's engaging in other 
market activities.
    Ms. Kaptur. Do you know what other instruments BlackRock 
and its subsidies sold to the Federal Government over the last 
10 years?
    Mr. Bernanke. No, I don't.
    Ms. Kaptur. You do not. Well, I would say that I think it's 
pretty important for you to know some of that. Because one of 
the difficulties with these securities is you can't unwind 
them. You cut them up in pieces, you sell them off. And given 
what we know about these pools of toxic assets, I have to say 
that I ask whether the Fed could actually be in collusion with 
Mr. Fink in covering up his own potential fraud by giving him 
the opportunity to shift the portfolios and have access to 
information that no one on this committee has access to, in 
ways favorable to those clients he served and in ways favorable 
to that company today.
    How can we assure ourselves that is not happening.
    Mr. Bernanke. We can provide you with the contracts we have 
with BlackRock. And they involve very careful controls to make 
sure there's a separation between the parts of the company that 
are working managing the assets of the Fed according to our 
instructions, and the other parts of the company that are 
involved in a variety of asset management activities.
    Ms. Kaptur. Well, you know, Mr. Chairman, when you appeared 
before the Budget Committee, I asked you for those contracts. 
And I want to thank you because they were finally placed on the 
Web site of the Fed. However, the contracts that were placed 
there have multiple exhibits missing.
    For example, the investment guidelines are absent, except 
for one single statement of policy objective. The fee schedules 
and the payments are omitted, along with the designated 
representatives of the Federal Reserve Bank of New York, as 
well as key personnel.
    Given that you are using taxpayer dollars to pay these 
contracts, why omit the fee schedule and payment procedures?
    Mr. Bernanke. We have a committee that works through all of 
these different types of information, some of which is 
confidential or proprietary, and releases all that it believes 
is appropriate. But I will go back and talk to them and make 
sure they are looking at all those issues.
    Ms. Kaptur. Well, I will tell you, the housing crisis is at 
the heart of this economic crisis. And if we are going to fix 
what's gone wrong in this society, it seems to me that those 
who hold extraordinary power to create money--and certainly the 
New York Federal Reserve has more power in that than any 
regional reserve bank does, or people who live on the street 
that I live on where homes are being foreclosed as we sit here. 
Something went seriously wrong.
    And I hear what you said this morning, but I am deeply 
concerned that the Fed itself is involved in the manipulation 
of the markets, of the mortgage markets, particularly the toxic 
assets that the public of the United States now owns. And I am 
not convinced what you've said to me about the contracts that 
the Fed has signed with BlackRock will be properly administered 
in a way that will be fair and impartial to all holders. And I 
hope that you can provide information to the record to convince 
me that my suspicions are unwarranted.
    Chairman Towns. The gentlewoman's time is expired. 
Congressman Souder from Indiana.
    Mr. Souder. Thank you. I think that there was some 
prediction as you went into office that it was going to be a 
relatively activist Fed, and I think that you certainly have 
been an activist Fed.
    Do you see in the descriptions as we look at these e-
mails--and I think cases can be made that there was a certain 
feeling of intimidation at Bank of America at the same time 
that Bank of America probably used the situation to try to 
leverage their best gain--do you see how you got involved here 
as something extraordinary in the sense of you felt the system 
was collapsing, or is this going to be a repetitive pattern of 
the Fed? Obviously we----
    Chairman Towns. Could the gentleman talk directly into the 
mic? We are having difficulty hearing you.
    Mr. Souder. That several other times in--whether it be the 
Asian flu or various mini-crises, had you been Fed chairman 
taken this aggressive a role?
    Mr. Bernanke. The past 2 years have been the worst 
financial crisis since the 1930's. It has threatened disability 
of the global financial system and the global economy. 
Extraordinary actions had to be taken. We've learned a great 
deal from them. And as I said in my testimony, I hope that 
Congress will take actions to ensure that the system will 
remain stable and that no such actions will be needed in the 
future.
    I very very much regret being involved in them, but I saw 
no alternative at the time.
    Mr. Souder. And how do you see yourself extricating at this 
point--given the fact that you've been fairly politicalized, 
your Treasury is directly political, you have quasi-political 
entities that you are working with now indirectly in TARP and 
TARF and all the different programs, we have equity stake in 
companies--how do you get yourself untwined from this so you 
are not totally politicalized?
    Mr. Bernanke. Well, we work closely with the Treasury to 
deal with the crisis. As the crisis ends, we will withdraw all 
of our nonstandard programs. We saw just a couple of weeks ago 
that 10 banks repaid their TARP money, and, as we go forward, 
will expect to see more withdrawal of programs and support as 
the economy normalizes and the financial system normalizes.
    Mr. Souder. Do you see yourself--because in this particular 
case, part of the problem was that Bank of America moved into 
the nonbank sector with Merrill Lynch, and that about 40 
percent of our lending--and, as you know, one of my challenges 
has been recreational vehicles and autos and how we get money 
into floor plans and how to do that type of thing, most of that 
was the nonbank sector--how do you see the Fed in the future 
dealing with this nonbank sector which isn't normally where you 
would be?
    Mr. Bernanke. Well, there are a number of suggestions in 
the administration's reform plan and other reform plans for 
dealing with that. Certainly the extraordinary steps we've 
taken, for example, to revitalize the asset-backed securities 
market--we're seeing a lot of progress there, by the way, as 
that market revitalizes and financial systems normalize. We 
will certainly withdraw and not be involved in that any 
further.
    Mr. Souder. And do you see yourself or see the Fed in the 
future being--I mean, we've gone back and forth here. Sometimes 
we want an independent Fed, sometimes we say, well, ``you are 
all the government, you ought to be sitting down at one table 
and working out this strategy.'' Where do you see the Fed going 
based on this experience and getting increasing--I mean, I 
don't see in the short term you are getting less politicalized, 
because you are in the middle of everything now and everybody 
is asking you to do this, do that.
    Mr. Bernanke. In a financial crisis I think the American 
people expect their government to work collectively and 
cooperatively to try to solve the problem. We've worked closely 
with both the former Treasury and the current Treasury as well 
with other agencies, and that's relevant to the crisis. We have 
maintained very strong independence on monetary policy. That's 
critical going forward. And we expect, of course, as the 
financial crisis eases, to stand down on the financial crisis-
related policies.
    Mr. Souder. And agreeing that we were in deep trouble last 
fall, how would you--because one of your expertise is 
deflation, and sometimes when it's your expertise you have a 
tendency to anticipate--in this case I think we've proven we 
have had deflation--but you in your career projected it was 
going to happen before, and it didn't.
    How would you have a guideline that says, ``oh, we're going 
to have these extraordinary interventions?'' How did you 
determine that this was the greatest thing and the greatest 
crisis since the Great Depression when it wasn't there yet?
    Mr. Bernanke. Well, it was my judgment based on history, 
lots of research, and reading and thinking and experience, that 
the collapse of major financial firms can be very detrimental 
to the economy. And if there was any doubt about that, the 
failure of Lehman Brothers and the near failure of AIG should 
put that to rest.
    I think it's critically important as we go forward that we 
find measures to avoid such a situation in the future, and I 
very much would like, again, not to be involved in such 
activities.
    Mr. Souder. And you've outlined the challenge, because some 
feel that some failures would have cleansed the system, some 
believe that they would have brought down the whole thing. And, 
in fact, this debate has occurred probably at least five times 
in the last 15 years as to we were at the praecipe.
    And the question is, is that if it's going to lead to this 
much intervention every time there's extraordinary discretion 
in a few individuals to say--I mean, I'm not disagreeing on 
this one; I voted every single time, with great political 
duress, for each of the financial interventions. But the 
process here concerns me, and the more data we get the more it 
concerns me.
    Mr. Bernanke. Again, if we have a resolution regime that 
will be more appropriate for resolving these firms in a crisis, 
we can avoid this problem in the future.
    Chairman Towns. The gentleman's time is expired. I now 
yield 5 minutes to the gentlewoman from California, 
Congresswoman Watson.
    Ms. Watson. Thank you, Mr. Chairman. And thank you, Mr. 
Bernanke, for coming here.
    I'm going to give you a series of events, and I will give 
you a list of questions. You can answer them all together.
    First, despite the fact that the plan for a merger was 
announced on September 15, 2008, there was no mention of the 
$20 billion capital injection from the government until January 
16th. At that point during the negotiations between Bank of 
America, Merrill Lynch and the Federal Government, was it 
determined that this money would be necessary for the merger to 
be finalized? And then, given that as of January 16th, Merrill 
Lynch's projected losses for the fourth quarter were 
approximately $15.3 billion, how was the sum of the $20 billion 
agreed upon?
    And finally in this set of questions, to date how much of 
this money has been drawn down and how has it been used?
    Mr. Bernanke. Well, at the time that Merrill Lynch and Bank 
of America initially announced their merger agreement in the 
middle of September--this was before the Congress had passed 
the TARP law, and so there had been no--at that time, no 
capital injection and no expectation of capital injection. Both 
Merrill Lynch and Bank of America receives capital in the 
middle of October during the intense phase of the banking 
crisis. An additional $20 billion was injected, as you say, on 
January 16th. That was based on a review of what the 
supervisors and the other experts of the Federal Reserve 
believed would be sufficient to reassure the market that Bank 
of America would be stable going forward.
    They have used that capital to support their activities, 
including lending, and they of course are repaying the 
government dividends. They hope to repay at least part of the 
TARP in the future.
    Ms. Watson. I'm sure this might be the experience in other 
Members' offices. I represent a district out in Los Angeles and 
we get calls every day, up to 10 and 30 calls, of people who 
have gone to the bank and they're not having their loans 
restructured. And I'm very curious about where that money went 
when it went into the system. It's like trying to unscramble 
eggs. But I know the consumers and the owners of property are 
not being assisted with refinancing their loans.
    Let me go on. In testimony before the committee on June 
11th, Bank of America's CEO Ken Lewis claimed that the 
revelation of a $12 billion loss at Merrill Lynch on December 
14, 2008 caused him to consider invoking the Material Adverse 
Effect clause, referred to as MAC, to back out of the deal 9 
days after shareholders had voted to approve the acquisition. 
However in an e-mail on December 19th, the bank's supervision 
officer of the New York Fed, Tim Clark, stated that Lewis' 
claim that they were surprised by the rapid growth of the 
losses seems somewhat suspect.
    Chairman Bernanke, given that shortly after the deal was 
announced in September, Bank of America has installed 200 
people at Merrill Lynch to thoroughly review their books, do 
you believe Mr. Lewis was honestly surprised by the 
acceleration of losses?
    Mr. Bernanke. I have no way of knowing. We did have 
concerns about the quality of the due diligence, but I have no 
direct evidence that he was in fact informed about the losses.
    Ms. Watson. Well, 200 people were installed at Merrill 
Lynch, so that seems like they were going to dig very deeply. 
You know, somewhere the due diligence kind of fizzled out. And 
I just think that Bank of America's due diligence was not as 
thorough as it should be.
    Do you believe that there were insights into Merrill 
Lynch's books that the government had that Bank of America did 
not?
    Mr. Bernanke. I can't answer that with certainty. We would 
have had some information about Merrill Lynch because we were 
working with the SEC to supervise it after we began lending to 
investment banks. But I don't think that we had knowledge of 
the size of losses either. I'm quite sure we did not.
    Ms. Watson. All right. Mr. Chairman, I'm going to try to 
make another statement and questions, and if the time runs out, 
I would ask Mr. Bernanke to give me his answers in writing.
    In an e-mail on December 20th, the president of the Federal 
Reserve Bank of Richmond, Jeffrey Lacker, described a telephone 
conversation with you where you expressed the belief that the 
MAC threat is irrelevant because it's not credible, and that 
you plan to make it even more clear that if they play that card 
and then need assistance, management is gone.
    So do you remember the phone call with Mr. Lacker that the 
e-mail was referring to, and do you believe that Mr. Lewis' 
claim that he would invoke the MAC and back out of the deal 
where credible? And had the Bank of America decided not to 
complete the merger, would the Fed have pursued the removal of 
their management and board? And had the Fed ever taken action 
to remove the management of a private entity before? Do your 
best.
    Mr. Bernanke. I was concerned initially about whether this 
was a serious proposal to invoke the MAC, because I did believe 
that it would be very detrimental to the Bank of America as 
well as to the financial system. I never made any threat to Mr. 
Lewis regarding removing the board and the management.
    One example of where the Federal Reserve removed management 
was in the case of AIG, where there was an agreement that the 
CEO would be replaced upon the acquisition--upon the 
consummation of the loan we made to stabilize that company.
    Chairman Towns. The gentlewoman's time is expired.
    Ms. Watson. Thank you, Mr. Chairman. Thank you Mr. 
Bernanke.
    Chairman Towns. Congressman McHenry from North Carolina.
    Mr. McHenry. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for your testimony. I know 
this is certainly not easy to recall what happened in those 
very, very busy days in the fall, and you've certainly had a 
very challenging tenure with the Federal Reserve. You didn't 
come in at easy times. So thank you for your service to your 
country.
    And during your testimony in front of Financial Services, 
which I'm on, in your numerous comments you worked very closely 
in the fall with the former Secretary of the Treasury, Mr. 
Paulson, is that correct?
    Mr. Bernanke. That's correct.
    Mr. McHenry. And in some testimony, some comments, it was 
almost daily or hour-by-hour conversations throughout the fall 
with your counterpart there.
    Mr. Bernanke. Daily certainly.
    Mr. McHenry. Certainly. And with then-New York Fed head Tim 
Geithner you also had significant involvement with him on a 
very regular basis; is that true?
    Mr. Bernanke. That's correct.
    Mr. McHenry. So the combination of the two, in the context 
of this event, this controversy that we're analyzing today, did 
you have conversations with those two about Bank of America?
    Mr. Bernanke. I had conversations with Secretary Paulson 
who, of course, was the Treasury Secretary at that time. And we 
talked about, for example, plans for how we might structure a 
package to help Bank of America avoid being destabilized.
    At that point, at that time, President Geithner had already 
been designated as the Treasury Secretary nominee, and 
therefore he recused himself from detailed intervention or 
involvement in such transactions. We did give him basic 
information so that he would be informed, but he was not 
involved in the details of the package that was put together 
for Bank of America.
    Mr. McHenry. So he was not directly involved and recused 
himself because of the confirmation hearings and the potential 
of going from the Fed to the Treasury and the conflicts that 
would pose.
    Did you have conversations with Mr. Geithner to keep him 
informed of what was going on?
    Mr. Bernanke. I did.
    Mr. McHenry. There was an e-mail from Tim Geithner on 
December 20th at 8:02 a.m.: ``Are you all over BofA slash ML, 
and are you getting what you need from the troops?'' And this 
was to Kevin Warsh.
    Now, this e-mail sort of raises to me that while Mr. 
Geithner was concerned--and we have another chain here that 
says that he has basically washed his hands in concern for a 
potentially tough confirmation hearing. That makes sense. But 
it seems to me that he was all over this. Is that your 
impression?
    Mr. Bernanke. No. My impression is that he was informed 
about the general situation. I would assume that when he meant 
the ``troops,'' he was referring to the staff at the New York 
Fed, where he was still the president. But I should say, to the 
best of my knowledge, he was not involved in the detailed 
negotiations that developed the package for Bank of America.
    Mr. McHenry. In an e-mail--we know from a subpoenaed e-mail 
from the Fed that Mr. Geithner was, like you said, aware, and 
was at least aware of an ultimatum to Ken Lewis as well.
    And he says: ``Can't MAC have to close.''
    There's also notes from Bank of America with the CFO, Mr. 
Price, who said: ``Fire BOD. If you do it''--meaning the MAC--
``Tim G agrees.''
    So it seems that he was very involved, Tim Geithner was 
very involved step by step in this process, if not working 
through third parties.
    Mr. Bernanke. My only association with Mr. Geithner during 
this period was occasional phone calls to update him on the 
general developments. I'm not aware of any other involvement.
    Mr. McHenry. Two additional things just to wrap up. Did you 
have conversations about Paulson's conversation with--did you 
have a conversation with Mr. Paulson about his discussions with 
Ken Lewis? Because there's been testimony, and we've heard, 
that Paulson said very clearly that he would fire Ken Lewis and 
the board. And it seems to me in the reading of all this stuff, 
is that the government became one. And so perhaps what Mr. 
Paulson said was thought of as coming from you. And there could 
be some of this, you know, coming about. So--confusion coming 
about after the fact.
    Mr. Kucinich [presiding]. The gentleman's time is expired, 
but the witness can answer your question, of course.
    Mr. McHenry. Could you describe the conversation you had 
with Mr. Paulson about his conversation with Mr. Lewis?
    Mr. Bernanke. He reported back to me that Mr. Lewis, as I 
recall, had decided not to invoke the MAC. And that laid open 
the basis for developing the transaction. But, again, I never 
told anyone to threaten Mr. Lewis.
    Mr. McHenry. Thank you.
    Mr. Kucinich. I thank the gentleman. The Chair recognizes 
Mr. Cummings of Maryland. You may proceed.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Mr. Bernanke, as I've listened to you very carefully, I 
think I get it. You were so intertwined in this thing, and, 
following up on one of Mr. McHenry's questions, that it's hard 
to see where your participation ended and where Paulson's 
began.
    And I just take it to your own statement. One of the first 
things you say in your background is: ``On September 15th, Bank 
of America announced an agreement to acquire Merrill Lynch. I 
did not play a role in arranging this transaction and no 
Federal Reserve assistance was promised or provided in 
connection with that agreement.''
    Is that accurate? Yes or no.
    Mr. Bernanke. Yes.
    Mr. Cummings. All right. Well, then you go on to talk about 
all the things you did to--I'm confused. Let's talk about this 
whole situation with one of the things you did.
    This is your statement. It says: ``In responding to the 
Bank of America and these discussions I''--talking about 
yourself--``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 are right on this.'' But basically, it sounds like you 
did not believe in the competence of Mr. Lewis. I'm just 
finding this out today?
    Is that right, did you think he was competent? Yes or no.
    Mr. Bernanke. That's not a yes or no question. I think on 
this particular issue, I think that invoking the MAC would have 
been a mistake. And I would like to mention, sir, that the 
first reference was to the original September deal in which I 
was not involved in any way.
    Mr. Cummings. Yeah, but you're all wound up in the rest of 
it, all the way down to the end, based on your testimony.
    Mr. Bernanke. Certainly, I was.
    Mr. Cummings. So you felt that he was competent--
incompetent with regard to this issue, the MAC, although he was 
an experienced banker, although he had a fiduciary duty to his 
shareholders, to his board--and I know that you are always very 
concerned about disclosure, right? That's a major, is it not?
    Mr. Bernanke. Certainly.
    Mr. Cummings. Certainly. And so--but the man who would be 
held responsible if his bank went down, you say to him when he 
says--when you pull up this material, this MAC, and says, ``do 
you know what, I don't do this, but I'm taking this very 
seriously, and I think I better declare a MAC here.''
    So when he declares it, after all his experiences and what 
have you, then you come along and say, ``although it's your 
duty to disclose certain things, although it's your duty and 
you are going to be the one who's going to get hit if this 
thing falls down, I'm going to put my judgment above your 
judgment;'' is that basically right?
    Mr. Bernanke. No, that's not right. I offered my views 
based on my experience as a Federal Reserve chairman and based 
on the advice I got from staff at the Federal Reserve that 
invoking the MAC would not be a good idea for the Bank of 
America. He himself was uncertain about what to do. But at all 
times it was his decision to make, and he understood that, I 
believe.
    Mr. Cummings. Well, I don't know whether you saw his 
testimony, but the man did everything he could not to--we got 
him to a point where he basically said he felt threatened, but 
he tried to say that he wasn't threatened. There was not a 
person in this room who did not understand that he was 
threatened. You even used the word several times in this 
hearing. You used it, I didn't, you did.
    Mr. Bernanke. To say that I did not threaten anyone.
    Mr. Cummings. No, no, no, no, no. I said that you used the 
word that he was ``threatened.'' I think you may have been 
referring to Paulson. And so all I'm saying to you is that I 
can see how we got to where we've gotten to, where it appears 
as if we've got Paulson saying--I mean we've got Lewis saying 
that you may have been behind the scenes doing some things. 
We've got you saying that you were behind the scenes doing some 
things. But at the same time, you come back and say, ``well, 
you know, I just gave my opinion, you know, it's not--it was up 
to him.''
    I do not think--and I'm asking you, do you think it was up 
to him when Paulson comes to him and says, ``I'm going to fire 
you and I'm going to release your board?'' Is that the way you 
would want things to happen in this regard?
    Mr. Bernanke. I don't know what Paulson said to him.
    Mr. Kucinich. The gentleman's time is expired.
    Mr. Bernanke. But it was his decision.
    Mr. Kucinich. Excuse me. The gentleman's time is expired, 
but the witness should answer the gentleman's question.
    Mr. Bernanke. As I said, I don't know what Mr. Paulson said 
to him, but it was always his decision, and I did not threaten 
him.
    Mr. Cummings. Thank you.
    Mr. Kucinich. The Chair recognizes Mr. Bilbray.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Chairman, I know this whole process looks like an 
inquisition. We're not here to indict, just to question and to 
find out--try to work out the reality here. I think it's a 
little more confrontational than it should be traditionally. 
Let's just remember you are placed in that position of being 
under oath, and I'm hearing testimony going back and forth, so 
I'm trying to find out how two people may perceive something 
differently, how words may be changed back and forth.
    So let me just ask you, at that time or at this time, did 
you believe that Merrill Lynch was too big to fail?
    Mr. Bernanke. I thought very likely that if Merrill Lynch 
failed, it was after all bigger than Lehman Brothers, that it 
would create a very serious problem in the financial markets. I 
did.
    Mr. Bilbray. So as a manager you pretty well felt Merrill 
Lynch needed to be addressed one way or the other to keep it 
from going under.
    Mr. Bernanke. I thought letting it fail would pose a 
serious risk, although it's not clear that we could have 
prevented it from failing.
    Mr. Bilbray. OK. Now, I saw you made a statement here, and 
it's in the record, that when someone said, did you invoke a 
threat or something else, that if they invoked the MAC there 
would be repercussions to management.
    And we can pull up the record. I'm almost sure you said, 
``no, I didn't say it that way, but I did indicate that if they 
invoked the MAC, and there was--what was it--they needed 
assistance afterwards, that if there was--this created a 
situation where they needed assistance, then there would be a 
problem. And that the clarification there was that it wasn't 
just the MAC, but if they did the MAC and then needed to come 
to us for assistance because of that arrangement, then there 
would be hell to be paid.'' That was the inference of your 
statement at that time.
    Mr. Bernanke. That was what was in Mr. Lacker's e-mail 
about a conversation between us, but I did not make that 
statement to Mr. Lewis. Although I don't think it's 
unreasonable if someone makes a decision that endangers his 
company, that he would be accountable for that.
    Mr. Bilbray. OK. That's why I want to clarify, Mr. 
Chairman, because today you did make the comment that you felt 
that way and you felt comfortable with that. You indicated, I 
thought you indicated, that you communicated that at that time 
that--not just that if they invoked a MAC, but if there was 
assistance needed later, after they invoked a MAC, then there 
would be repercussions.
    Mr. Bernanke. I don't believe I said that.
    Mr. Bilbray. Mr. Chairman, I would ask that testimony--
because we need to clarify that, because I heard something from 
you today that sounds very familiar. And that's why I went back 
to that statement about, it wasn't just about the MAC. It was 
the MAC; then if they needed assistance, then that management 
should be held responsible.
    And I just thought that your statements today kind of 
reflected the statement of the 12-20-08 statement. So we can go 
back into the record and see that. I'm just trying to help you 
clarify what you said today.
    Mr. Kucinich. Is the gentleman submitting something into 
the record?
    Mr. Bilbray. Yes, please.
    Mr. Kucinich. Without objection.
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    Mr. Bilbray. Now, when you get into this, you said ``we did 
not guarantee BofA anything,'' and you said, ``there was no 
dollar amount referenced.'' But could you in this conversation, 
instead of saying ``we will pay this much out'' or ``we'll get 
out of it,'' could there have been any other discussion? 
Statements like: Look, if there's a concern, if there's a 
problem here, we'll take care of it or we'll make you whole, 
you won't--this deal will not impact you in the long run, that 
we'll cover the difference.
    Mr. Bernanke. We committed to work with them to make sure 
they would be a stable company and that they would not collapse 
because of this issue.
    Mr. Bilbray. OK. I'm trying to clarify here because we're 
going with testimony. So in other words, you are in a situation 
where you've got to handle this Merrill Lynch problem anyway. 
You have what looks like a merger forming, all at once the BOA 
starting to get cold feet, may pull it apart. They're seeing it 
from the BOA, I mean Bank of America, taking on this burden. 
You see, you are going to have a burden one way or the other.
    Is it safe to say that from a management point of view, it 
looks simpler to get them to take this on so you can manage it 
as a single piece, rather than going back and forth?
    Mr. Kucinich. The gentleman's time has expired. Do you want 
to put that in a question and then Mr. Bernanke can answer?
    Mr. Bilbray. Let me finish with this. You stated today that 
if you had it to do all over again, you believe today that you 
would do it exactly the same? Later in your testimony----
    Mr. Kucinich. I am going to take it as a question.
    Mr. Bilbray. I will take the question. How do you explain 
the fact that today you did add a conditioning clause that you 
did exactly what you needed to do for what you knew at that 
time? Does that leave you a question? With that statement that 
you made today, does that leave in the back of your mind that 
maybe there are things you know today that you would have done 
differently?
    Mr. Kucinich. The witness may answer the question.
    Mr. Bernanke. I don't know of anything material that would 
have affected that, given the powers we had and the situation 
at the time.
    Mr. Kucinich. I thank the gentleman. The Chair recognizes 
Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman. Thank you, Chairman 
Bernanke, for coming today.
    You have stated that the Fed acted appropriately regarding 
issues of public disclosure. You have further stated that 
neither you nor any member of the Federal Reserve ever 
directed, instructed, or advised Bank of America to withhold 
from public disclosure any information relating to Merrill 
Lynch, including the losses, the compensation packages, or 
bonuses. And I can believe that, and I have found you to be a 
person of integrity of the highest degree.
    Retrospectively, looking at the developments that occurred 
with the whole saga of Bank of America-Merrill Lynch, and the 
Department of Treasury, and looking at the losses investors, 
both institutional and individuals, absorbed, do you feel that 
you had some 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.
    Mr. Clay. At what point does the welfare of the investor 
become as important as the institution invested in?
    Mr. Bernanke. The welfare of the investor is very 
important. And my concern was that the system would collapse, 
that Bank of America would collapse, which would hardly be a 
good thing for the investors.
    Mr. Clay. And that was your responsibility then.
    Mr. Bernanke. My responsibility is to protect the overall 
financial system. But I have to do that within the boundaries 
of supervisory practice and law.
    Mr. Clay. And at what point should you disclose information 
to the public?
    Mr. Bernanke. With respect to this particular issue, the 
law is clear that any action regarding TARP needs to be 
disclosed within a week, and we did that.
    Mr. Clay. Do you believe that the people were better served 
by being uninformed in making their investment decisions, 
especially when official America knew there were 
misrepresentations in the financial status of BofA?
    Mr. Bernanke. Well, again, those judgments were up to Bank 
of America. Our job was to try and make sure that the system 
was stabilized, and that was our primary focus.
    Mr. Clay. Mr. Chairman, why did you think it was necessary 
for BofA to acquire Merrill Lynch when Lehman had been allowed 
to fail? What was the thinking of saving AIG, Merrill, and 
Citigroup when these companies failed to adequately perform and 
uphold their fiduciary responsibilities to its stockholders? 
What made these three different from Lehman?
    Mr. Bernanke. We made extraordinary efforts to prevent 
Lehman from failing. We were unsuccessful partly because we 
couldn't find a merger partner. Bank of America was a potential 
merger partner. They decided against it, and we didn't try to 
coerce them to do it. We didn't have the powers to save Lehman, 
and that's why they failed, very much--we were very concerned 
about it, and our concerns proved to be justified.
    With respect to the other cases, we did everything we could 
to avoid a systemic failure because of the risk of the 
financial system. AIG, as I mentioned earlier, was possible to 
address because the large insurance company provided collateral 
for a loan that would allow us to provide liquidity to the 
Financial Products Division, which was the source of the 
problem.
    After the Congress passed the TARP legislation, it was then 
much more direct and easy to address these problems. If we'd 
have had the TARP money in September, we might have been able 
to address the Lehman problem.
    Mr. Clay. Was it really necessary to salvage AIG? I heard 
your explanation, but----
    Mr. Bernanke. I do believe so.
    Mr. Clay [continuing]. They failed. They failed their own 
investment. They failed themselves.
    Mr. Bernanke. I had no sympathy for AIG, and particularly 
for the Financial Products Division. But my concern was that if 
it failed that the consequences would have been a worldwide 
banking run, a severe financial meltdown, and very unknown but 
difficult consequences for the global economy, and I didn't 
feel that I could take that chance.
    Mr. Clay. And I guess we thought the same about American 
automakers a few months ago; that they just couldn't fail, 
either, they couldn't go into bankruptcy. But we know a 
different story now.
    Thank you, Mr. Chairman, for your responses.
    Mr. Chairman, I yield back.
    Mr. Kucinich. I thank the gentleman.
    The Chair recognizes Mr. Fortenberry. You may proceed, sir.
    Mr. Fortenberry. Thank you, Mr. Chairman, and thank you, 
Chairman Bernanke, for your appearance here today.
    I read your testimony, and it appears to me to be a 
reasonable explanation of your role in the Bank of America-
Merrill Lynch merger and the advocacy of certain additional 
bailout funds. However, while that is the narrow purpose of 
this hearing, to unpack whether or not there were any conflicts 
there, and certainly you can understand the cynicism in that we 
have conflicting impressions from you and Mr. Lewis about the 
nature of this deal, I think fundamentally what is at issue 
here, what is the heart of the matter, is the Fed's future role 
as a systemic regulator. In that regard, let me go back to a 
couple of points that were just touched on.
    Do you believe it was in the best interest of this country 
for Merrill Lynch and Bank of America to be merged and to 
receive the bailout funds that they received, first the $25 
billion between the two companies and then later the $20 
billion, as Bank of America expressed concern, or let's put it 
another way, waffling about the potential deal?
    Mr. Bernanke. I think it was critical that we avoided the 
failure of those firms and the implications that would have had 
for our financial system. We did so in a way that protected the 
taxpayer, and again I think we did the right thing.
    Mr. Fortenberry. One thing that concerns me about this, 
though, is information that we have from the FDIC Chairman 
Sheila Bair, who wrote to you prior to the final bailout moneys 
being received by Bank of America. She said there had been 
``strong discomfort with this deal at the FDIC for all of the 
reasons you and I have discussed.''
    What did you discuss?
    Mr. Bernanke. My recollection was that her concern was not 
about taking action to stabilize Bank of America. Her concern 
was that the FDIC would have financial exposure as part of the 
transaction, and she was concerned in particular because the 
transaction involved not only a bank but also an investment 
bank, which was not in her sphere of responsibility. So it was 
the details of the transaction, I understand it, that was her 
concern, not the basic idea of taking steps to stabilize the 
company.
    Mr. Fortenberry. Currently we have a situation, it is my 
understanding, where 10 major banks control about 50 percent of 
deposited assets in this country, Bank of America being the 
largest. Is this a systemic risk?
    Mr. Bernanke. We have a lot of large banks, and under our 
current system and particularly in the current circumstances 
with financial conditions the way they are, the failure of one 
of those firms would be very dangerous for the American 
economy, and that is why I believe that the centerpiece of 
financial regulatory reforms should be steps to get rid of too-
big-to-fail, to find measures that allow a large firm to fail 
when it is appropriate, but to do so in a way that doesn't 
bring everything else down with it.
    Mr. Fortenberry. Well, I agree with that assessment, but I 
think it is pointing to the need to, in whatever future 
regulatory framework that we have, to consider the fact that we 
have 10 banks controlling a majority of assets in this country, 
and that systemic risk is very real. Do you agree with that?
    Mr. Bernanke. It's certainly real now. But I think there 
are steps that could reduce the risk associated with those 
things.
    Mr. Fortenberry. What could be those steps potentially?
    Mr. Bernanke. Well, for example, greater oversight, 
capital, and supervision of those companies. A resolution 
regime that would----
    Mr. Fortenberry. That assumes failure.
    Mr. Bernanke. In the case of failure, that is correct. But 
that would create more market discipline because lenders to 
those banks would know that they wouldn't necessarily be made 
whole in the case of a failure and they would therefore exert 
more discipline on those companies.
    Mr. Fortenberry. The point I am driving at, are these too 
big? Are these banks too big?
    Mr. Bernanke. I think it is important that banks have no 
incentive to grow just to become too big to fail. But large 
banks probably have some other economic purposes, including 
global transactions, networks, and the like. I doubt we can go 
back to the world with only very small banks.
    Mr. Fortenberry. But we are concerned that this level of 
concentration in the hands of too few is a potential systemic 
problem.
    Mr. Bernanke. It is a legitimate concern, Congressman, 
absolutely.
    Mr. Fortenberry. Mr. Chairman, I would like to yield the 
remainder of my time to Mr. Burton.
    Mr. Kucinich. The gentleman has the remainder of the time, 
about a minute.
    Mr. Burton. Thank you very much.
    You indicated that Secretary Paulson's comment that he made 
that threat at the request of Chairman Bernanke was changed 
later on by Mr. Paulson. But what he said was, and I think this 
ought to be in the record, his prediction of what could 
happen--talking about you--his prediction of what could happen 
to Lewis and the board was his language--was Paulson's 
language, but based on what he knew to be the Fed's strong 
opposition to Bank of America attempting to renounce the deal.
    You were the Fed. And he said it was based upon the 
knowledge that the Fed's strong opposition to Bank of America 
attempting to renounce the deal was something that he knew to 
be the case, and that he was in effect speaking on behalf of 
what you had said to him.
    Mr. Kucinich. The gentleman's time has expired. Chairman 
Bernanke, you are directed to answer his question though.
    Mr. Bernanke. We were strongly opposed to that action for 
the reasons I have described.
    Mr. Kucinich. Is that your answer?
    Mr. Bernanke. Yes.
    Mr. Kucinich. I thank the gentleman.
    The Chair now recognizes Mr. Welch. Thank you.
    Mr. Welch. Thank you, Mr. Chairman.
    Mr. Bernanke, I have one comment and two questions. My 
comment is thank you for your incredible service in very 
turbulent times. You have been very sturdy, and I think all of 
us really appreciate that.
    Two questions, one about Mr. Lewis and Bank of America, and 
then following up on what Mr. Fortenberry was asking about.
    Mr. Lewis was here, and he had a number of different 
stories on a single transaction. He told the shareholders that 
this Merrill deal was a great deal for them, and persisted in 
that story even in December after he found out about a $9 
billion additional deterioration. And to, frankly, my amazement 
and shock, he never bothered to tell the shareholders the news 
that led him to the next assertion he made, that was so dire 
that he might invoke the nuclear option of the MAC clause. And 
then he told us basically that--using his words--he didn't use 
the word ``threat,'' but he said there was ``heavy pressure'' 
from the Fed and Treasury to go through with this deal, with 
the assurance that the American taxpayer through the Fed and 
the Treasury would back up any of the toxic assets from 
Merrill. And I'll just ask one specific question about that.
    One of his assertions to the board was that the Treasury 
and Fed have confirmed they will provide assistance to the 
corporation to restore capital and protect the corporation 
against the adverse impact of the Merrill Lynch assets. And he 
went on to say: ``The corporation can rely on the Fed and 
Treasury to complete and deliver the promised support by 
January 20, the date scheduled for the release of earnings by 
the corporation.''
    In your recollection, is that an accurate statement by Mr. 
Lewis?
    Mr. Bernanke. We did indicate that we would work with him 
in good faith to develop a transaction, develop a package that 
would preserve the stability of this company, and we proposed 
to do that by January 20th. That is correct.
    Mr. Welch. And that included backing up the toxic assets on 
Merrill's balance sheet?
    Mr. Bernanke. There were no specifics about how we were 
going to do it. There were different possible approaches, in 
the event that RingFence is apparently not even going to be 
consummated.
    Mr. Welch. What he was specifically referring to was the 
news that they were aware of, that Merrill had far more toxic 
assets than had been disclosed to shareholders when they 
approved the deal in the early part of December. So is it your 
recollection that the assurance he gave his board that the Fed 
and Treasury would back up the toxic assets on Merrill was 
accurate?
    Mr. Bernanke. Well, he knew that in the case of Citi, for 
example, that we had used both capital and a RingFence. So, 
clearly, that was one of the options that we were discussing as 
part of the transaction.
    Mr. Welch. Why don't I get to this question that was 
started by Mr. Fortenberry. You have wisely stated, in my view, 
that we need a new regulatory regime to protect the economy 
from systemic risk. And there's really two approaches that can 
be taken, and the Congress has to make a judgment which is the 
better one to go. One is a super sized regulator or some entity 
that has the capacity to monitor the risk of these huge 
financial conglomerates that when they go down bring us all 
with them. That is one approach.
    The other approach is to take the view that if an 
institution is too big to fail, it is too big to exist. And the 
virtue of that, frankly, is that it brings them down to a size 
where we don't have to depend on the vigilance of regulators 
being overcome by the influence of the financial industry.
    So my question to you is, does it make sense for Congress 
to pursue a policy that says if an institution is too big to 
fail without threat to the economy, it is in fact too big to 
exist and, instead of regulating it, we should break it up?
    Mr. Bernanke. Well, there are two options. One is to allow 
large banks to take steps to protect the economy if in fact one 
comes to the brink of failure, which is what Treasury's 
proposal, for example, includes. The other possibility is to 
restrict the size of the banks.
    I think it is legitimate to discuss both options. I would 
just point out that very large banks do have an economic 
function, a global reach, diversity of activities. But Congress 
may wish to look at different options. I don't want to prejudge 
what you will be deliberating.
    Mr. Welch. Thank you. I yield back.
    Mr. Kucinich. The gentleman yields back. When our 
colleagues on the Republican side have others show up, they 
will be recognized. In return, we recognize Mr. Kanjorski.
    Mr. Kanjorski. Mr. Chairman, thank you for your testimony. 
And I have listened to a lot of my colleagues today use words 
like ``threats,'' even ``lies,'' ``lying.'' The reality is if a 
judge cautions an attorney that certain conduct would 
constitute contempt, it is not a threat. Is it? That is telling 
him the power of the court. It is laying out what the rules 
are. I can't see how people are jumping to the conclusion that 
by either yourself or the Secretary of Treasury informing a 
bank officer or a board that there were powers of the 
government to take action in a certain way which could 
constitute removal of the CEO or the board, that doesn't 
constitute a threat. That is informing them of what the powers 
are. Isn't it?
    Mr. Bernanke. As long as the reason for exerting that power 
is legitimate; i.e., that the manager took actions that 
prejudiced his own company.
    Mr. Kanjorski. And then that would be an issue that later 
on could be determined. But, nevertheless, it is not a threat. 
It is telling the truth.
    Mr. Bernanke. Yes, sir.
    Mr. Kanjorski. These are the confines of the power we have, 
and we're willing to use it. And I am glad somebody told them 
that, if they did. I don't know if they did, because--I doubt 
whether they seriously did. I listened to Mr. Lewis both here 
and as a witness, and I interviewed him individually. And he's 
sort of rather happy with the acquisition that he made and it 
accounted for 75 percent of its profits of the Bank of America 
in the last quarter. So I would suspect that about 6 months to 
a year from now he is going to be telling this tremendous 
victory of his of acquiring Merrill Lynch.
    But all that being said, I don't know why we are spending 
our time to find out what happened between September 15th and 
January 1st. All we all know is a hell of a lot went over the 
dam, and particularly in that spectacular 2-week period after 
September 15th.
    I want you, one, before you leave here to tell this 
committee and the American people what kind of jeopardy the 
American system and the world system was in so we reiterate 
that moment, that we weren't all a bunch of relaxed confident 
people walking around making clear judgments, but we were 
working--making emergency judgments, working 20 and 24 hours a 
day, and not with the clearest heads in the world. Is that 
correct?
    Mr. Bernanke. Thank you, sir, for that opportunity. 
September was an incredibly intense period of financial crisis. 
Many of the largest firms in America came under very severe 
pressure.
    The failure of Lehman Brothers and near failure of AIG were 
important reasons why the world economy went into a nosedive 
that lasted for the entire second half or second--fourth 
quarter of 2008 and the first quarter of 2009.
    The Treasury, the Federal Reserve, and other agencies 
worked overtime to try to prevent additional failures and 
additional crises. Fortunately, the Congress provided the TARP 
funding in early October. In mid-October, there was an 
incipient global banking crisis that involved responses by 
policymakers around the world, the U.K., Australia, Japan, 
Germany, and elsewhere. The United States was able to join in 
that effort because of the TARP money. We averted at that time 
a global financial meltdown which, in my opinion, very likely 
would have created a depression-like environment in the United 
States far more severe than the recession we have seen 
recently.
    Mr. Kanjorski. Thank you very much, Mr. Chairman. And I 
gave you your shot; now I am going to come back at you.
    Mr. Bernanke. Sure.
    Mr. Kanjorski. The thing we have to decide is what we are 
going to do in the future and how we are going to handle it. 
And one of the things in the last several months--and I have 
been involved in investigations of everything from the Madoff 
case to other transactions in the market. But what--studying 
the inside of our regulatory authorities, I find that, although 
they may have the authority, they may have the money to act, 
they sometimes don't know how to act or don't act properly. 
And, as a result, they have all the authority in the world to 
prevent something from happening, but it happens anyway. And I 
want to say that charge would lie against the Federal Reserve, 
and that is where we are hung up in the course of a dilemma.
    The Federal Reserve, as I can see it, had several 
opportunities to prevent this economic crisis. One is the long 
used 14 years of power to lay down the conditions on mortgage 
obligations in this country, that all the way through, about 12 
of those 14 years the Federal Reserve failed to take any action 
until you came on the scene and finally did enact a set of 
standards across the board. If they had enacted earlier those 
standards, most of these toxic assets we talk about wouldn't be 
circulating around the world with the imprimatur that they're 
supported and passed on by the U.S. Government.
    Two, there are issues with the Federal Reserve that they 
are now acquiring additional powers when they failed to use 
their past powers.
    Could you address those two issues.
    Mr. Bernanke. Certainly. And I agree with you----
    Mr. Kucinich. The gentleman's time has expired, but please 
answer the question.
    Mr. Bernanke. Congressman Kanjorski, you are right that the 
Federal Reserve was late to invoke those consumer protection 
powers. We have been very aggressive, as you know, for the past 
couple of years. I think it is very important if the Fed 
retains those powers that we strengthen the priority that those 
have in our decisionmaking and that we strengthened 
accountability that we report frequently to Congress about what 
we are doing in these areas. So that is very important.
    In terms of additional powers, I think it is worthwhile 
pointing out that if we look, for example, at the Treasury's 
proposal to make the Fed the consolidated supervisor of 
systemically critical firms, that it's not major difference in 
terms of powers from what we currently have, which is being an 
umbrella supervisor of all the financial holding companies. 
Rather, it would be not so much a change in powers but a change 
in approach whereby we would take a systemic systemwide 
approach in how we would regulate those firms rather than 
looking at them bank by bank or firm by firm.
    So it is not a massive increase in powers. It is really a 
change in their strategy.
    Mr. Kucinich. I thank the gentleman for his response. The 
Chair recognizes Mr. Turner.
    Mr. Turner. Thank you, Mr. Chairman.
    Mr. Bernanke, I want to thank you for being here today. I 
know that we have had very difficult times, and certainly you 
and Mr. Paulson and others we know have worked diligently to 
try to restore the financial security of the country.
    There are divergent opinions, though, of the actions that 
are taken and to how we should approach them. I have voted 
against every bailout that has come before this Congress, and I 
have done that because I felt that the programs that were put 
before us were not clearly defined; the scope of the costs or 
expense was not clearly defined; the ability to hold people 
accountable was difficult to ascertain in programs that were 
undefined. And I think that we are seeing now, as the American 
public looks at this, there's a lot of unintended consequences. 
There are things that are happening that the American people 
are saying, ``well, I didn't quite think that's what it's going 
to be.''
    I know you are facing a lot of questions today concerning 
Bank of America and Merrill Lynch, and they go right to the 
heart, I think, of questions concerning the Federal 
Government's proper role in private enterprise. How do we step 
in appropriately? How do we not step in?
    You know, the Federal Government has very mixed performance 
when it comes to the issues of interfering or intervention in 
private enterprise. Frequently, this committee has hearings on 
issues as basic as our contracting processes with private 
enterprise. We are not a very good customer. Many times issues 
arise where people wonder whether there's been abuse of 
processes, conflicts of interest. So when you then put another 
layer of us just not being a customer but us being an investor, 
an entity that is providing a bailout, or even an owner, people 
have a great deal of concern.
    Yesterday, I introduced House Joint Resolution 57, the 
Preserving Capitalism in America Amendment. It is a proposed 
amendment to the U.S. Constitution. It came about as a result 
of my discussion with people back home because several people 
that I spoke to said that they did not believe that enough 
people were taking a stand to say this is wrong, I don't 
believe that this should have happened in this manner. I know 
we have difficulty, but I don't agree with this structure. I 
don't agree that we should own General Motors.
    The Constitutional amendment would limit the ability of the 
Federal Government to acquire an ownership interest in a 
private corporation. It does give the government the ability to 
issue loans. It also allows us to invest in public authorities, 
public use corporations, and also allows investments by 
government pension funds.
    It turns out that, as I was discussing this with people in 
my community, that limiting government ownership over private 
enterprise is not a new idea. We found that at least eight 
State Constitutions have in some form limited the State's 
ability to acquire stock or equity in a company apparently as a 
result of the panic of 1837, which you would know a whole lot 
more about than I do as a result of your great historical 
expertise.
    But a number of people have concerns as the Obama 
administration moves forward, as the bailouts in the financial 
sector move forward, as our domestic automobile industry 
becomes publicly owned.
    The Constitutional amendment that I dropped yesterday was 
dropped with 102 original cosponsors. Nearly a quarter of the 
House stepped forward and said, I want to support a 
Constitutional amendment because we don't think it can be done 
by statute, that could say: We understand that there are times 
when action needs to be taken. We understand when intervention 
needs to occur. But we do not believe that ownership is a 
structure that should be an available option. We are very 
concerned about what happens next.
    For example, we have a huge ownership interest in General 
Motors. We don't in Ford. Let's say both of them bid on a 
government contract. What happens then? Can Ford be assured 
that they are going to have the equal treatment when the 
government's virtually bidding for its own contract?
    I would like your thoughts on the amendment. And if that 
amendment was in place, I would like your thoughts as to how 
you would have gone about--and how TARP funds would have been 
used and some of these other things could have been structured 
in a way where we wouldn't have ended up with ownership but you 
would have responded to our financial crisis.
    Mr. Bernanke. Well, I agree with you that limited 
government ownership, limited government intervention in the 
private sector is frequently a good policy. And in that 
respect, I think that is a very good approach.
    I should say, though, that in order to make that a viable 
policy in our financial sector we need to have a set of rules 
and regulations that can allow financial firms to fail. And I 
believe in failure. You know, failure--capitalism without 
failure is like religion without sin, somebody said. You need 
to have failure. But you have to have failure in a way that is 
not going to bring down the entire system. So if you are going 
to do that, you need to also have rules and regulations that 
allow the orderly wind-down, the orderly failure of large 
financial firms.
    Mr. Turner. Before we conclude, Mr. Chairman, if you'd 
allow me. So I don't believe you are saying, are you, that you 
think that the only way you could have intervened is to result 
in ownership; that there weren't structures of loans and other 
assistance that could have been provided that wouldn't have 
ended up in the Federal Government having an ownership 
interest? And then of course, therefore, where we get this 
conflict of, well, how is the government going to execute its 
government interest?
    Mr. Bernanke. I have to think about that. But if you look 
at banking crises in history, in Japan and Sweden, in the 
United States in the 1930's, and so on, frequently you do have 
a period of capital being injected by the government, which 
essentially is a temporary ownership. Usually those things are 
temporary.
    But, again, I am not sure what the alternative would be. I 
would be happy to think about it. But in order to avoid ever 
having government ownership again, you need to figure out a way 
to avoid having the crisis in the first place, And I think that 
should be the first priority.
    Mr. Turner. I appreciate the thoughts, because people are 
obviously very concerned about this. And this looks like a line 
that perhaps we should not take.
    Thank you so much.
    Chairman Towns [presiding]. Thank you so much. Yield to the 
gentleman from Massachusetts, Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman. As someone who voted against the TARP, I just want to 
comment on your kind remarks in saying that through the wisdom 
of Congress we passed the TARP bill. No. 1, as you may 
remember, TARP was presented to us as a way to purchase toxic 
mortgages. It was never used for that. So what we voted for was 
never put into action.
    No. 2, several weeks after we did the TARP bill, we also 
passed a TARP corrections bill. It was a 400-page bill that we 
passed to correct all the mistakes that we made in TARP. So I 
am not so sure that the wisdom of Congress is necessarily 
accurately ascribed in that statement.
    I do want to say I agree with Chairman Kanjorski about the 
context in which you took all this action. The sky was falling, 
it was a very difficult time. But I do want to say the reason 
we are going over this chronology is because we have granted 
the Fed enormous independence, and there is sometimes a tension 
between the premise of the taxpayers' interest and the power of 
the Fed and the independence of the Fed, and that is why we are 
going over this.
    There has been a lot of back and forth today. But, 
basically, what the facts are is that Merrill got into trouble 
very early in 2007 when E. Stanley O'Neal was there. It was a 
very difficult situation. There was a merger proposal that you 
supported quite strongly between Bank of America and Merrill 
Lynch. There was an agreement to enter into that merger. And 
then at some subsequent time there were major losses. There 
were early losses, $8.4 billion that occurred in 2007. It 
looked like an additional $12 billion that was discovered by 
Mr. Lewis on December 14, 2008. And then he announced his 
desire or his intention to invoke the MAC. And then we have a 
difference of opinion, and that is on one side some folks are 
saying that you or Mr. Paulson threatened Mr. Lewis. Other 
people say it was simply iron-fisted encouragement to have him 
stay in the deal. In any event, he did that. He stayed in the 
deal. And there is an interesting e-mail from you, and I just 
want to go over this because I am interested in the taxpayers' 
position.
    It says here--this is from you, Mr. Chairman, to Scott 
Alvarez. And it says: ``I had a good conversation with Lewis 
just now. He confirms his willingness to drop the MAC--the 
opposition to the deal going forward--and to work with the 
government to develop whatever support package might be needed 
for earnings announcement dates around January 20th. We 
discussed his common equity issue. We agreed that having a 
significant amount of TARP capital in the form of common''--
common equity--``was not an ideal solution given the ownership 
implications. But we agreed both to think about possible 
solutions,'' parenthesis, ``a government backstop of a capital 
raise or a government common with limited control rights.''
    Now, it sounds to me like Ken Lewis is concerned about his 
job. And for the American taxpayer to get voting rights in 
return for their TARP money, Mr. Lewis would be gone, I 
believe. Is that the concern that you believe Mr. Lewis 
expressed regarding the TARP being presented with rights, 
voting rights for the American taxpayer in that deal?
    Mr. Bernanke. I don't know exactly what his concern was. It 
may have also been involved in just concern about government 
intervention in his management and in the operations of the 
company.
    Mr. Lynch. Well, there was a--this discussion, it is what 
it is. It indicates that Mr. Lewis is concerned about the 
taxpayer having some input here, some control. And it sounds 
like your--it says: But we agreed to think about possible 
solutions to that, a backstop of capital raise or government 
taxpayer involvement here with limited control rights. And I am 
just wondering whether--in this deal to provide this support, 
whether the taxpayers are getting the full leverage that they 
should have gotten given the amount of assistance we put into 
this company, into this deal.
    Mr. Bernanke. Well, the company is subject both to the 
restrictions of the TARP and the Treasury's provisions on 
executive compensation and the like, and they are also subject 
to--as has been discussed, they are subject to the supervisory 
oversight of the Federal Reserve and the OCC. And we have taken 
actions, for example, to ask them to add independent directors 
to their board and make other appropriate changes to their 
company.
    Mr. Lynch. Could we have not gotten greater protections for 
the American taxpayer in this deal than what we did in terms 
of--considering that we are saving this company with the 
American taxpayers' assistance and we don't gain the control 
that I think is commensurate with that support?
    Mr. Bernanke. Well, the--I am not quite sure. I would have 
to go back and look at that e-mail again. At that time the TARP 
money was all provided in the form of preferred stock, which 
is--on the one hand is not voting but on the other hand is 
senior to common equity and, therefore, is safer.
    Mr. Lynch. They get paid first. I understand that. But it 
is the lack of--it seems like Mr. Lewis was most concerned with 
lack of input or lack of control on the part of the taxpayer. 
And I think that would have helped us, you know, in this deal 
if we had had greater control on behalf of the American 
taxpayer.
    Mr. Chairman, my time has expired. Again, Mr. Chairman, I 
thank you for appearing and helping us with our work. I yield 
back.
    Chairman Towns. Thank you very much. I now yield 5 minutes 
to the gentleman from Massachusetts, Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman.
    Mr. Bernanke, I want to discuss, if I can, for a second, is 
this another way that public money seemed to have flowed to 
some of these financial institutions? Back in March 2009, AIG 
disclosed the name of certain of the counterparties, people 
that they had credit default swaps agreements with, and Bank of 
America was among them as well as others. It appears from our 
records here that there were losses in the so-called super 
senior multi-sector credit default swaps, the portfolio that 
AIG had, and that it created a liquidity problem. They had 
obligations, that if there were problems in that portfolio they 
had to put more cash in or more collateral security for their 
obligation.
    The Federal Reserve Board of New York then provided $85 
billion in a loan to AIG. The testimony here was that then that 
money was used to buy out the contracts and cancel them. That 
is how they took care of that obligation. What was of concern 
to me and some others was that the counterparties appeared to 
have received 100 percent, even though testimony from people at 
AIG before this committee said that they thought that there 
were a lot of contentious reasons to think they did not owe 100 
percent, if they owed anything at all, on those particular 
obligations, that there had been serious negotiations about 
whether they should pay anything to these counterparties and, 
that if they should pay something, how much less than 100 
percent they should pay.
    When we pressed Mr. Liddy, AIG, for background on that for 
just how the negotiations went, why it is they paid 100 
percent, his comment was that he was the wrong person to talk 
to; that in fact the Fed had all of those documents and 
paperwork because they in fact struck the deal.
    So my question to you is, why was 100 percent paid on these 
various obligations, including the one to Bank of America? And 
what was the rationale there? Why weren't the interests of 
the--the public money interests protected so that there was a 
better negotiation than just forking over 100 percent?
    Mr. Bernanke. Sir, I don't see on what basis that less than 
100 percent could have been paid. They were contractual 
obligations. Failure to pay them would have allowed the 
creditors to force bankruptcy, which was exactly what we were 
trying to avoid. This is precisely why we need a resolution 
regime which would allow the resolver to haircut creditors and 
to abrogate existing contracts. But under current law you can't 
avoid bankruptcy without paying off the existing contracts.
    Mr. Tierney. Well, except that the people that were running 
AIG said that they thought that there were certainly issues 
involved in that they didn't owe money; that the default may 
not have occurred, or if it occurred, it didn't obligate them 
to pay a full amount. These people that were running the 
company, that had made the contracts, that felt very strongly 
they had been negotiating on these for a period of time and 
apparently thought that they could have struck deals that would 
have not obligated 100 percent. These are contractual issues. 
So it could have been done. And yet, once they turned that 
matter over to the Fed, the Fed and their inferences was, just 
rolled over and gave 100 percent to Bank of America, Citibank, 
other people. And it looks to others from the outside that we 
were trying to make those people healthy, unquestionably, by 
taking public money and putting it in their coffers by folding 
on that deal.
    So my question to you is, will you produce to this 
committee copies of all the credit derivative contracts that 
AIG Financial Products Corp. had with those third-party 
counterparties, including all the details of the terms and 
conditions of the contracts? All documents and correspondence 
regarding the creation of Maiden Lane 3, the special purpose 
vehicle that was created by the Fed to do these transactions, 
and including the negotiations that went on for that? And then, 
all documents and correspondence concerning the management and 
overside of Maiden Lane Trust so that we can get a look at 
those documents and make an assessment on that?
    Mr. Bernanke. I think we just--in our recent release, I 
think we just released a whole set of documents related to 
those issues. But if you have specific--we just created a 
monthly publication that provides a lot of information about 
the Maiden Lanes, for example. If you would send us a letter 
with a specific request, we will see what is available.
    Mr. Tierney. We certainly will. When you say you will see 
what is available, I mean, we want everything that is 
available. And the question to you is, when we make that 
request, will you provide it?
    Mr. Bernanke. If I am able to do so, I will.
    Mr. Tierney. Thank you. I yield back.
    Chairman Towns. Thank you very much. I now yield to the 
gentleman from Illinois, Mr. Davis.
    Mr. Davis. Thank you very much, Mr. Chairman. And, Chairman 
Bernanke, thank you for being here and for your long patience 
and endurance.
    Let me just ask you, how involved is the Fed in the day-to-
day management of Bank of America? For example, does the Fed 
have veto power on major decisionmaking at Bank of America? 
And, has any consideration been given to replacing upper-level 
management?
    Mr. Bernanke. The Fed is not involved in day-to-day 
management. That is the responsibility of the board and the 
management. We are involved in evaluating the capital, the 
assets, liquidity, and the management of the corporation. We 
have had concerns about aspects of the management, and we have 
asked the board in particular to add independent directors, 
which they are in the process of doing, and we will continue to 
be very careful and monitor the management situation. But we do 
not take daily decisions. That is not our job.
    Mr. Davis. Mr. Chairman, let me ask you, when the 
government invested heavily in AIG, Fannie Mae, and Freddie 
Mac, the management was actually replaced. Why was the fate of 
Mr. Lewis so different in this instance?
    Mr. Bernanke. Well, I think in this case that the merger 
was undertaken in good faith. It was--at the time looked like a 
reasonable combination. A lot of firms suffered severe losses 
in the fourth quarter. It was one of the worst quarters I think 
in history in terms of financial losses.
    Our judgment at the time was that he could continue to lead 
the company, and we have not addressed that, but obviously we 
will continue to evaluate management and the board as we go 
forward and make sure that we are comfortable with the 
leadership of Bank of America.
    Mr. Davis. In an e-mail from Mr. Warsh to yourself on 
December 30th, Mr. Warsh writes, ``Ken Lewis is going to call 
you to reaffirm the understanding you have. Ken may also raise 
his favorite perennial issue; that is, the Richmond supervisory 
team on the same page as the board. Richmond staff was on our 
call today, but prior to the call it sounds like they may have 
threatened a little more than ideal. Need to get rid of 
dividend and fast. I told price system will be making joint 
determinations.''
    My question is, to your knowledge, do you think that Mr. 
Lewis' interaction with the supervisory team at the Richmond 
Fed threatened, coerced in any way Mr. Lewis?
    Mr. Bernanke. Well, the Federal Reserve in general 
throughout last year was concerned about Bank of America's 
capital and particularly its tangible common equity. And the 
Federal Reserve Bank of Richmond, which was the supervisor of 
Bank of America, was interested in having Bank of America 
increase their capital perhaps by reducing their dividend or 
through other measures.
    At the various points there were some confusions, I think, 
about what the position of the Fed was because there were 
miscommunications between the Richmond Fed and the Board of 
Governors in Washington. And Mr. Lewis, far from being 
intimidated, was free to call me and ask me for resolution of 
these issues, and we made sure that everybody was on the same 
page and got that cleared up.
    Mr. Davis. So it would be a normal interaction in terms 
of----
    Mr. Bernanke. Yes. A normal process.
    Mr. Davis [continuing]. Than, look, I am having some 
concerns with Richmond, and that kind of thing?
    Mr. Bernanke. Yes.
    Mr. Davis. Mr. Chairman, let me ask you. You have gone on 
record as supporting increased transparency in connection with 
the Federal Reserve operation. Yet the bailout of Bank of 
America was done behind closed doors without investor public 
knowledge or input. Could the American people really understand 
in any way what happened? I mean, what really happened? Was Mr. 
Lewis bullied into going forward with his own bad deal? Or, did 
Mr. Lewis recklessly agree to pay too much for Merrill Lynch so 
that the Federal Government felt backed into a corner when 
faced with the prospect of Lewis backing out of the Merrill 
deal? And of course we experience the inevitable bankruptcy of 
Merrill Lynch.
    Could you respond to those?
    Mr. Bernanke. Yes, sir. Today I think has been very 
productive in terms of transparency and more information about 
what happened. Clearly, it was a very difficult period and many 
complex problems that were being addressed. But, as I have 
indicated, I believe that we solved this problem without in any 
way taking steps that were either beyond the law or unethical. 
And I believe we did the right thing in order to stabilize both 
companies and the financial system.
    Mr. Davis. Thank you very much. And thank you, Mr. 
Chairman.
    Chairman Towns. The gentleman's time has expired. 
Congresswoman Norton for 5 minutes.
    Ms. Norton. Thank you, Mr. Chairman. And we do appreciate 
the transparency you are trying to bring to this transaction. I 
am not inclined to second-guess the judgment of people in the 
midst of trying to deal with a problem arising, problem after 
problem, in the midst of a crisis, an unusual crisis at that. I 
am interested in Bank of America's options under the 
circumstances. Bank of America had shareholders. We did have a 
series of rather unusual late-developing facts or factors to 
come to light in the process of the negotiations for this 
agreement.
    I am wondering if it would not be true that--let me lay the 
predicate for this by saying you apparently--the Legal Division 
apparently had an opinion that no Delaware court had been found 
that ``that have found a MAC or material adverse effect to have 
occurred in the context of a merger agreement.'' Well, one 
would have to know the facts surrounding those circumstances. 
And to suppose that they could not possibly have been at the 
same level of intensity as these, because we were in the middle 
of a national economic crisis. That aside, I can understand 
from that one sentence that, without knowing what the case law 
was, that there was that conclusion.
    But could not Bank of America have negotiated a reduction 
in price with Merrill had it invoked the MAC clause? Wouldn't 
you think that would be the logical thing to try to do, given 
the obligation to the shareholders?
    Mr. Bernanke. First, we did review the case law, and I 
think it was quite applicable. I am not a lawyer, but the 
advice I got was that it bore very directly on the situation 
that we were looking at, specifically, that short-term losses, 
no matter how large, are not basis for a MAC in this particular 
case. Only long-term durationally significant losses in revenue 
or revenue production are grounds. And, of course, Merrill 
Lynch has proved to be a profitable acquisition for Bank of 
America.
    Ms. Norton. Then why not negotiate a better price? That 
wasn't the issue that Lewis originally raised. He was talking 
about just breaking off the merger. But I think that would have 
also been very dangerous, because the markets would have been 
faced with the uncertainty of whether or not the deal was going 
to go through. Merrill Lynch would probably not be able to 
survive absent the support of Bank of America, and so there 
would have been an immediate problem with Merrill Lynch which 
would have created broader problems in the financial markets.
    Mr. Bernanke. I don't think----
    Ms. Norton. Even if they threatened to do that in the 
context of negotiating?
    Mr. Bernanke. Well, you can't negotiate anything unless you 
are willing to go through with your threat, as you know.
    Ms. Norton. It happens every day.
    Mr. Bernanke. And so, therefore, there would have to be a 
probability in the minds of market participants that in fact 
Bank of America would not go through with the merger.
    Ms. Norton. So you think that would have been considered a 
bluff?
    Mr. Bernanke. I think that would have been destabilizing as 
well. Yes.
    Ms. Norton. And in consummating, though, the merger as it 
was originally planned, in effect didn't the Bank of America 
shareholders take a good part of the hit of the Merrill losses?
    Mr. Bernanke. Not in our view. As I said, when I talked to 
Mr. Lewis about this, I stressed that not only was invoking the 
MAC bad for the financial system broadly, but I thought--our 
opinion was that it would be bad for Bank of America itself. 
And, in particular, if invoking the MAC had caused Bank of 
America either to fail or to become--have to be saved on some 
emergency basis by the government, that clearly would not have 
been good for the shareholders of Bank of America. Now of 
course, in the end he had to make the judgment of what to do. 
But that, in my opinion, it was not obvious at all that 
invoking the MAC was a good thing for the Bank of America 
shareholders.
    Ms. Norton. And you think he made that decision on his own 
without undue influence from the government in any way?
    Mr. Bernanke. I believe he did.
    Ms. Norton. Thank you, Mr. Chairman.
    Chairman Towns. Thank you very much. Mr. Chairman, I know 
we have an agreement that we would finish at 1. Would it be 
possible for you to stay until 1:10? Would that create a 
problem for you? And I understand agreement. OK.
    Mr. Bernanke. Yes.
    Chairman Towns. Thank you very much. Let me say to the 
Members, what we will do is divide 10 minutes on each side. And 
of course--so why don't we yield 5 minutes to the ranking 
member on the committee.
    Mr. Issa. Thank you, Mr. Chairman. I will be brief. I just 
want to go through a couple of quick questions.
    First of all, it appears as though much of the media thinks 
the end justifies the means, meaning that even if there were 
threats or if people felt threatened to go through with deals, 
it is OK because it worked out. Do you agree with that?
    Mr. Bernanke. No, sir. We used only legal and ethical 
means.
    Mr. Issa. I appreciate that. Do you also agree that at all 
times the rule of law and the expectations that are written in 
both the letter and the broader meaning of the law should be 
the guidance for all transactions done behind closed doors by 
Federal officials?
    Mr. Bernanke. Yes, sir.
    Mr. Issa. As we choose to find ways to resolve the 
ambiguity between Ken Lewis, Hank Paulson, yourself, and of 
course a number of people whose e-mails have been cited today, 
are you prepared to answer in writing--not return here 
probably--additional questions that may come up that would help 
us clear that up?
    Mr. Bernanke. Yes.
    Mr. Issa. Do you at this time believe that, intentionally, 
Ken Lewis, Hank Paulson, or any of the people we have cited 
today in e-mails intended to lie in their statements?
    Mr. Bernanke. I have no judgment on that.
    Mr. Issa. But you believe in good faith that they think 
what they are saying is true, at least as far as you know?
    Mr. Bernanke. As far as I know.
    Mr. Issa. Do you think that Federal regulators should pick 
winners and losers as they go through trying to figure out in a 
crisis like this who gets to own who or who gets bailout money 
and who doesn't?
    Mr. Bernanke. I think all these interventions are very 
unfortunate, and they are only made necessary by the extreme 
circumstances.
    Mr. Issa. Earlier, one of the people we mentioned was Mr. 
Lacker. In light of his e-mail paraphrasing a longer 
discussion, do you intend to speak to him and try to clarify 
how the difference in interpretation could have happened?
    Mr. Bernanke. I have done so already, and he didn't have 
any further recollection.
    Mr. Issa. OK. And then I would like to yield to Mr. Burton 
the balance of this 5 minutes.
    Mr. Burton. Let me just say that I don't want to dwell on 
this, but one of the biggest problems I have is the government 
telling the private sector what to do and how to do it. We had 
the head of General Motors literally fired by the government. 
Now, there might have been justification for his removal, but I 
didn't think the government ought to be telling somebody who is 
answerable to the stockholders what they are supposed to do.
    One of the things that concerns me is on December 5th, Bank 
of America's stockholders approved that sale or that purchase 
and that merger when they thought it was a $9 billion loss. And 
then the 14th, they found out it wasn't $9 billion but $12 
billion. And then, because they decided that they didn't want 
to do that, they contacted you and Mr. Paulson. And whether Mr. 
Paulson said directly you told him to do it or not to do it, 
but the inference was there, that the Fed said if they pull out 
of this deal, their board and the CEO is going to be gone.
    Mr. Lacker said on the 20th, 2 days before they made the 
decision to go ahead with it, he said: ``Just had a long talk 
with Ben. Says they think that the MAC threat is irrelevant 
because it is not credible. Also intends to make it even more 
clear that if they play this card and then need assistance, the 
management is gone.''
    So even though they were going to incur $3 billion more in 
liabilities, because of the pressure put on by you and Mr. 
Paulson they went ahead with that deal because they thought 
they and their management was going to be fired.
    Now, that is the problem I have. The government is coming 
in and saying you are going to do this or else. This is not a 
socialistic society. This is a government of free enterprise 
and of the people and by the people and for the people. And 
what bothers me is they thought they were incurring $9 billion; 
they found out it was $12 billion. And you told them--you and 
Mr. Paulson told them: You are going to do this or else. And I 
just think this is wrong.
    You can make a response, if you'd like.
    Mr. Bernanke. My response, sir, is I never said that to Mr. 
Lewis.
    Mr. Burton. You never said this to--Mr. Lacker is wrong?
    Mr. Bernanke. Mr. Lacker, who is an internal person at the 
Fed--and, again, those are his words summarizing a much longer 
discussion--said a more subtle thing than what you are saying. 
What he said was that if they took this decision and if they 
were required to be rescued, that if this decision led the 
markets to attack Bank of America and create a destabilization 
of the company and the government had to come in on Sunday 
night and save them, that we would take that into account in 
thinking about management. That is a very different thing. And, 
also, I did not say that to Mr. Lewis.
    Mr. Burton. What about your attorney who said that you were 
going to put pressure on them? I brought that up in my previous 
5 minutes.
    Mr. Bernanke. Well, again, I did say very strongly----
    Mr. Burton. He works for you.
    Mr. Bernanke. I said to Mr. Lewis that we strongly believed 
that invoking the MAC was bad not only for the financial system 
but for Bank of America. But I didn't tie it directly to 
replacing him or the board.
    Chairman Towns. I yield 5 minutes to the gentleman from 
Ohio, Mr. Kucinich.
    Mr. Kucinich. I thank the gentleman.
    Chairman Bernanke, your staff believed that Bank of America 
knew about Merrill Lynch's accelerating losses in mid-November, 
a full month before coming to you and weeks before its 
shareholders voted to approve the merger. Those fourth quarter 
losses rose to over $15 billion out of the pockets of Bank of 
America's shareholders. But I want to ask you, did the Fed know 
about those accelerating losses before the Fed approved the 
merger at the end of November?
    Mr. Bernanke. No, I don't think we did.
    Mr. Kucinich. Well, may I introduce into evidence this e-
mail, which is from Dennis Herbst of the New York Fed to Audrey 
Overby of Merrill Lynch. And it is dated Wednesday, September 
17th. It says: ``Hope this gets to you, Audrey. Our 
management''--that is the New York Fed--``has asked to continue 
the flash report on a daily basis, and I am sure you will share 
it with the SEC.''
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] 55102.045
    
    Mr. Kucinich. So the Fed was receiving detailed information 
by which they could have concluded that the overwhelming losses 
at Merrill Lynch were more than problematic and that the Fed 
could have done something if they chose to.
    Now, are you familiar with this e-mail, or are you saying 
that there is no----
    Mr. Bernanke. We are certainly involved in a light way in 
the oversight of those--of Merrill Lynch since we began to lend 
to them. But we are not their formal supervisor, and our 
information about their losses would certainly not be----
    Mr. Kucinich. But, Mr. Chairman, the Fed knew what Bank of 
America knew. You were saying earlier with respect to Bank of 
America, as a matter of fact you were--you really put on them 
the responsibility to notify the SEC. But yet you knew--you 
knew before the merger was approved.
    Mr. Bernanke. In November? We didn't know about the $14 
billion. I am sure we didn't know that.
    Mr. Kucinich. But you knew about Merrill Lynch's condition 
before you approved the merger. Now, you--did you not? Did you 
not know about their financial condition was failing before you 
approved the merger? If not--if you say no again, that flies in 
the face of this e-mail that came from somebody at the New York 
Fed who is tracking Merrill Lynch on a daily basis.
    Mr. Bernanke. Well, they are tracking it. But it is 
difficult to know what these valuations are. They have to be 
done by professional asset managers. I was not aware. All I can 
say is I was not aware and I don't think anyone at the Fed was 
aware of the $14 billion in losses.
    Mr. Kucinich. But there's an e-mail here saying that the 
Fed is following up with the request for daily P&L, profit and 
loss, relative to Merrill Lynch. Now if--and, Mr. Chairman, I 
am going to enter that into the record as well.
    Chairman Towns. Without objection.
    Mr. Kucinich. When you permitted the merger of this company 
that was too big to fail, you knew the company would be a 
significant player in four of the five critical financial 
markets; namely, wholesale payments, foreign exchange, U.S. 
Government and agency securities, and corporate and municipal 
securities.
    Isn't it true that the combined entity of Bank of America 
and Merrill as a significant player in four or five critical 
financial markets was a key rationalization for Fed action to 
bail out the merger?
    Mr. Bernanke. I don't know. I would have to get back to you 
on that.
    Mr. Kucinich. Excuse me?
    Mr. Bernanke. I would have to get back to you on that. I 
don't recall the details.
    Mr. Kucinich. Well, I am going to read a quote from a Fed 
memorandum entitled Considerations Regarding Invoking the 
Systemic Risk Exception for Bank of America Corp. ``An 
inability of these organizations to fulfill their obligations 
in these markets and the related systems would lead to 
widespread disruptions in payment and settlement systems in the 
United States as well as abroad.''
    Now, in our investigation we have not encountered any 
evidence that the Fed considered the potential for systemic 
risk when you approved the merger of Bank of America and 
Merrill Lynch, which only weeks later was too big to fail.
    Now, Chairman Bernanke, did you really believe that Ken 
Lewis' threat to invoke a MAC was a bargaining chip, as you 
stated in an e-mail dated December 21, 2008?
    Mr. Bernanke. I thought initially that it might be. Yes.
    Mr. Kucinich. Did his use of a bargaining chip help him 
obtain a deal he would not have otherwise received had he 
merely asked for increased assistance from the government?
    Mr. Bernanke. As I also said I think in a later e-mail, 
after listening to him and having more discussions, I came to 
the conclusion that he was really uncertain about what to do. 
We provided advice, which he ultimately took, and we took steps 
to prevent the destabilization of his company and the financial 
system.
    Mr. Kucinich. Mr. Chairman, I ask you for 1 more minute.
    Chairman Towns. Yield the gentleman an additional minute.
    Mr. Kucinich. Isn't it true that you did not believe the 
Merrill losses merited special attention from the government?
    Let me direct your attention to handwritten notes from your 
first meeting with Ken Lewis on December 17, 2008. You 
reportedly stated the downside of $50 billion doesn't sound big 
for Bank of America. The $50 billion refers to Merrill assets 
that Lewis had wanted protection for from the government. The 
record clearly shows you did believe that there would be 
systemic consequences if Bank of America took steps to back out 
of its deal with Merrill Lynch irrespective of whether it would 
win in court.
    So, did the threat of a MAC, which you believe would have 
serious consequences, influence your willingness to give Bank 
of America financial assistance when you didn't believe it 
needed to have it?
    Mr. Bernanke. We had demonstrated with Citigroup, for 
example, that if we saw a major financial institution about to 
fail and to risk the stability of the financial system, we 
would try to take steps to stabilize it. So I think we would 
have done that in any event.
    Mr. Kucinich. Mr. Chairman, I just want to conclude with 
this point. Mr. Bernanke has testified that he was concerned 
about systemic collapse. We all understand that. He was 
concerned about Bank of America's collapse. We understand that. 
And he said that the Bank of America collapse would hardly be a 
good thing for investors. That was your testimony.
    But if the Fed knew that Merrill Lynch was failing before 
the shareholders voted, why did you not inform the SEC about 
this? If they knew about it, if you knew about it before you 
approved the merger, why did you approve the merger?
    Mr. Bernanke. The $14 billion of losses that Mr. Lewis 
reported to us, I don't believe that we--I am sure we didn't 
know about that in November.
    Chairman Towns. The gentleman's time has expired. I now 
yield 5 minutes to Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman. Mr. Jordan is going to 
be primary closing. I just want to wrap up a couple things I 
heard.
    As you probably know, Neel Kashkari has appeared before 
this committee multiple times. And in our questioning of him, 
the one thing we found is he didn't know at that time how much 
he had paid for things, he didn't know what they were worth, he 
didn't know how they valued them, but he was going to get back 
to us and never did. I understand he has left the government.
    But what that has told me, because it occurred in real 
time, it occurred exactly when these things were going on, that 
on a 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 what they're 
worth.
    Mr. Issa. I appreciate that, and I appreciate your service 
in trying to do the best you could in this tough situation. But 
one thing, and my last question is, when it came to the MAC. 
You had said just a moment ago that it only could be invoked 
if, in fact, you had forward-looking lesser revenues, that it 
was not material to the balance sheet--if I can paraphrase 
you--but to the income statement. That's what I heard you say.
    Mr. Bernanke. That's what I understood the memorandum to 
say.
    Mr. Issa. And I appreciate that. But if that's true, then 
isn't it true that if you have to restate your income 
prospectively or retrospectively, then by definition the go 
forward is reduced? In other words, if you never made as much 
as you thought you made because the assets materially degraded 
because they were never going produce what you had said in the 
past, then in fact it is a MAC event. So losses accumulating 
could well have been a viable reason to predict that the 
enterprise value going forward was less? Wouldn't you say that 
was correct based on normal accounting?
    Mr. Bernanke. I shouldn't drift into securities law which 
I'm not an expert. The advice of my attorneys was that the MAC 
would be unlikely to succeed. And even if there was a 
significant probability of not succeeding, it could have caused 
a lot of disruption in the financial markets.
    Mr. Issa. We appreciate your effort here. I am going to 
turn the rest over to Mr. Jordan. And thank you for everything 
you did and everything you tried to do to help our country.
    Mr. Jordan. Mr. Bernanke, when did you know that you would 
not be able to go in and buy the toxic assets, the mortgage-
backed securities? Because if you remember back, I mean the 
whole package was sold to the U.S. Congress based on what you 
told Members of Congress, what Mr. Paulson told Members of 
Congress.
    And I think I asked this question. You're a sharp guy, MIT 
graduate, Ph.D. in economics, Mr. Paulson is a smart guy, Mr. 
Geithner is a smart guy, you convinced the Congress you could 
go in, you could put some value on these assets, you could 
clean them off the books, everything would be wonderful after 
that point.
    And yet 10 days after we passed this--and I didn't vote for 
it--but 10 days after you passed it, you bring the nine biggest 
banks to Washington, don't tell them what the meeting is about, 
and you completely change strategy.
    So when did you know you would not be--did you know before 
Congress voted on it, or did you know after Congress voted on 
it, when you would not be able to go in and purchase these 
securities and do what you told us you were going to do?
    Mr. Bernanke. Well, we knew after. One of the reasons, one 
of the problems was----
    Mr. Jordan. Here's what I don't understand. This was a 
month long--I remember the first conference call we listened 
into as Members of Congress was in September. You had a whole 
month, and yet within 10 days the strategy--probably within a 
few days the strategy.
    So you had a whole month leading up to this convincing the 
Congress you could do this, and yet within 10 days a complete 
change; and yet you're bringing nine banks to Washington, not 
telling them what it's about, not telling them you're going to 
force them to sign a form, take taxpayer money and completely 
change strategy.
    And you look at, as we went through some of the things 
here, the pattern of some might say deception, where the banks 
come to Washington not knowing what the meeting is about. Mr. 
Angulo does the letter saying we're going steer Merrill Lynch 
on how to disclose to the public what is going on on this 
merger, what is happening with Merrill Lynch.
    I think it's a reasonable question to say when did you know 
this, and if you didn't know until after October 3rd, what took 
you so long to figure it out? You had a month as we were going 
through this whole thing, and, frankly, 2 weeks of debate in 
this Congress. You remember they sent us home for a few days, 
come back, and we passed this after a second vote.
    Mr. Bernanke. I would be happy to answer that question. The 
drawback of the asset purchase plan, as we discovered, was that 
it took some time, probably some months, to put it into 
operation. We thought perhaps that would be possible. But, 
unfortunately, the banking situation deteriorated very quickly, 
and by Columbus Day we had a global banking crisis. And the 
only way to stop the crisis from spreading and creating a huge 
problem was to inject capital, to have guarantees and to take 
the various steps we took.
    So this was the only way to do it as quickly as was needed, 
given the way the situation changed. So what changed was the 
financial situation between October 3rd and October 14th. And 
we had no way to do the other approach because it would just 
take too long.
    Mr. Jordan. Mr. Chairman, I've got a few seconds. I'm going 
to completely change gears here. Tell me--and if you can go 
after this, I appreciate it--the money supply. I mean, I didn't 
get a chance to ask you questions when you were in front of the 
Budget Committee, and I apologize. A lot of people, a lot of 
sharp people, are very nervous about where we are with the 
amount of money out there in the system right now.
    Talk to me briefly, if you can, about your concerns there 
and how we're going to deal with what I think a lot of people 
believe is going to be real inflationary concerns in the not-
too-distant future.
    Mr. Bernanke. The money is not in the system in any real 
way. The money is electronic deposits from banks sitting in the 
Federal Reserve accounts. They're not being used, not being 
loaned, they're not circulating. The key issue here is can we 
unwind this money creation and low interest rates in time to 
head off inflation when the economy begins to recover? We have 
all the tools we need to do that, we believe we can do that. We 
will certainly remove that stimulus in time. And we are 
committed to price stability, and we will make sure that it 
happens.
    Chairman Towns [presiding]. I thank the gentleman. I yield 
to the gentleman from Ohio.
    Mr. Kucinich. For unanimous consent, I ask unanimous 
consent to put into the record two sets of documents we 
received with subpoenas containing the e-mails and excerpts of 
documents I referred to today.
    Chairman Towns. Without objection, so ordered.
    [The information referred to follows:]
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    Mr. Kucinich. Thank you.
    Chairman Towns. I yield 2 minutes to the gentlewoman from 
Ohio, Congresswoman Kaptur.
    Ms. Kaptur. I thank the chairman and I thank Chairman 
Bernanke for his endurance. We all have to do our jobs. I would 
like to insert into the record the information and background 
on the relationship between Bank of America, Merrill Lynch and 
BlackRock.
    Chairman Towns. Without objection, so ordered.
    Ms. Kaptur. I thank the chairman. I would like to ask 
Chairman Bernanke to submit for the record from the Fed how did 
Bank of America end up owning 49 percent of BlackRock?
    In 2004 the FBI warned the public and the administration 
mortgage fraud was headed toward an epidemic level in our 
country. The Fed did nothing.
    Now, the Fed under your watch, has hired BlackRock, a firm 
owned 49 percent by Bank of America, headed by a man who 
invented the subprime instrument when at First Boston and then 
later at BlackRock, who traded billions of dollars of these 
securities to Freddie Mac and Fannie Mae over the last decade.
    I quote a sentence and will place in the record from 
Bloomberg News: Fink's rocket-like rise when at First Boston 
was largely a result of his creative work with mortgage-backed 
securities, slicing and pooling mortgages and selling them as 
bonds. And he took his concept to Freddie Mac where he sold the 
company's board on a billion package.
    That was just the beginning of it. Chairman Bernanke, what 
material can you provide this committee and to the record that 
will explain how the Fed will avoid conflicts of interest in 
self-dealing by that firm and its CEO in the execution of 
contracts you have signed with BlackRock?
    Mr. Bernanke. We'll provide you with the contracts and with 
a letter explaining how it works.
    Ms. Kaptur. I thank you.
    Some lawyers have said systemic fraud or controlled fraud 
have characterized the mortgage securitization process. Will 
you permit the FBI access to the mortgage instruments being 
managed by BlackRock as the Fed contracts are executed and 
fulfilled?
    Mr. Bernanke. If there's a reason for the FBI to 
investigate and the FBI has a right to investigate, we would 
not stand in the way of an appropriate investigation.
    Ms. Kaptur. Thank you.
    How many contracts has the Fed signed with BlackRock to 
handle Freddie Mac paper and Fannie Mae mortgage securities 
under your purview, and how much will BlackRock be paid for 
those services?
    Mr. Bernanke. We've hired four asset managers to manage our 
mortgage-backed securities portfolio. BlackRock is one of them. 
I don't know how much we're paying them.
    Ms. Kaptur. Will BlackRock be handling Freddie Mac paper?
    Mr. Bernanke. They'll be managing GSE guaranteed paper, so 
that would include Freddie, Fannie and Ginnie.
    Ms. Kaptur. I would seriously urge your staff to go back 
and look at the operations of BlackRock and Mr. Fink's 
operations at First Boston before he founded BlackRock in 
relation to what they transacted with Freddie Mac and when they 
did that.
    Chairman Towns. The gentlewoman's time has expired.
    Ms. Kaptur. Thank you very much, Mr. Chairman and Mr. 
Bernanke.
    Chairman Towns. Thank you. Thank you very much.
    Let me thank the chairman for his time, of course, today. 
At the outset of this hearing I said that it's time to shine 
some light on the events surrounding Bank of America's 
acquisition of Merrill Lynch. At this point I would say we got 
a peek, not much, but we don't have full sunshine yet.
    I would make three observations before we close:
    No. 1, there are significant inconsistencies between what 
we have been told today, what we were told 2 weeks ago by Ken 
Lewis, and what the Fed's internal e-mails seem to say. It is 
still unclear whether Bank of America was forced by the Federal 
Government to go through with the Merrill deal, or whether Ken 
Lewis pulled off what may have been the greatest financial 
shakedown in a long, long time.
    As a result of this hearing we have learned that the SEC 
and the FDIC played a role in this transaction as well. But as 
I indicated, we're going wherever the road leads us. So 
therefore let me say that we're going to talk to the SEC and 
we're going to talk to the FDIC. We're going to talk to former 
Treasury Secretary Hank Paulson. He has agreed to appear before 
the committee in July, and I look forward to that hearing.
    But we also need to hear from the FDIC and the SEC so that 
we can better understand what happened during the dark days of 
last December. So we will be hearing from them as well.
    So, Mr. Chairman, let me thank you again for your time. And 
I might have taken you 2 minutes over, but I'm sorry about 
that, I apologize. Thank you very much. Therefore now the 
committee is adjourned.
    [Whereupon, at 1:18 p.m., the subcommittees were 
adjourned.]
    [Additional information submitted for the hearing record 
follows:]
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