Page last updated at 20:40 GMT, Thursday, 25 June 2009 21:40 UK

Bernanke defends Fed on bank deal

Ben Bernanke testifies before a House of Representatives committee
Mr Bernanke said the decision remained in Bank of America's hands

The chairman of the Federal Reserve says the US central bank acted with the "highest integrity" in Bank of America's takeover of Merrill Lynch.

Ben Bernanke denied the Fed had put pressure on Bank of America to go through with the deal.

The Fed had been accused of a "cover-up", according to one member of a key House of Representatives committee.

Bank of America bought Merrill last year during the height of the financial crisis and suffered severe losses.

Mr Bernanke rejected claims that he had deliberately kept regulators in the dark about key issues.

"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," he told the House Oversight and Government Reform Committee.

'Significant risks'

During the three-hour hearing, Mr Bernanke repeatedly denied the accusation that he had told Bank of America boss Ken Lewis that he would be fired if he backed out of the Merrill deal.

Nor did he instruct the then-Treasury Secretary Henry Paulson to threaten Mr Lewis, he said.

Congressmen believe Mr Lewis's job had been threatened after he expressed second thoughts about the takeover.

In December 2008, when Bank of America learned of "significant losses" at Merrill Lynch for the fourth quarter, the bank threatened to walk away from the deal, citing a "material adverse" clause or MAC.

Mr Bernanke only said that he "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".

Mr Paulson is due to appear before the committee in July.


Bank of America agreed to buy Merrill for $29bn (£17.5bn) last September, a deal that happened with Fed approval.

[The Fed] engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies
Darrell Issa, House Oversight and Government Reform Committee

In the same weekend, the US central bank declined to bail out Lehman Brothers, which subsequently collapsed.

But Mr Bernanke told the committee that if funds from the Troubled Assets Relief Programme (Tarp), designed to rescue banks reeling from the financial crisis, had been available at the time, the Fed would have "given it a try" to save Lehman.

As the crisis in the financial sector intensified, Bank of America subsequently needed $25bn in capital injections from the Tarp bail-out fund.

The House Oversight and Government Reform Committee is investigating claims that Mr Paulson and Mr Bernanke put pressure on Bank of America to close the deal, despite Merrill's financial difficulties.

In a statement, Darrell Issa, the most senior Republican on the committee, said the Fed "engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies".

'Gun to head'

The US Treasury and Fed have been accused of "putting a gun to the head" of Bank of America to absorb Merrill, one of the largest holders of toxic debt.

At the start of this year, Bank of America required a further $20bn.

"Why did a private business deal, announced in September and approved by shareholders in December, with no mention of government assistance, end up costing the taxpayers $20bn in January?" Democratic committee chairman Edolphus Towns said last week.

The bank was told by the US government after several so-called "stress tests" earlier this month that it needed to raise $33.9bn - more than any other US bank - in order to weather the crisis.

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