Bernanke denies Fed threatened BofA over Merrill deal

By Mark Felsenthal and Kim Dixon
WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke, facing his toughest grilling yet by U.S. lawmakers, said on Thursday he had never threatened to fire Bank of America`s management if they pulled the plug on a planned merger with Merrill Lynch.
During a tense three-hour hearing, lawmakers repeatedly pressed Bernanke on whether he had coerced Bank of America chief Kenneth Lewis in December to go forward with the deal despite Merrill`s quickly deteriorating finances.
Bernanke, holding his ground, told the members of the House of Representatives Oversight and Government Reform Committee the Fed never did anything "beyond the law or unethical."
"I did not tell Bank of America`s management that the Federal Reserve would take action against the board or management," he said.
Bernanke also said neither he nor other Fed officials had "ever directed, instructed, or advised" the bank to withhold information about Merrill`s mounting losses from the public, another charge lawmakers have leveled at the central bank.
The Fed has faced intense scrutiny from both Democrats and Republicans on Capitol Hill for many of the extraordinary actions it has taken since the financial crisis erupted in the summer of 2007.
After Bank of America`s eventual decision to go through with its purchase of Merrill, the bank received a fresh injection of $20 billion in public funds and a government backstop on potential losses on a $118 billion pool of shaky assets.
"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," the committee`s chairman, Representative Edolphus Towns, said.
Representative Darrell Issa, the panel`s top Republican, charged on Wednesday that the Fed had covered up its involvement in the merger and "deliberately hid" important details from other federal regulators.
During the hearing, lawmakers cited an e-mail written by Richmond Federal Reserve Bank President Jeffrey Lacker as possible evidence of undue Fed pressure on Lewis. In the e-mail, Lacker said Bernanke had told him he planned to make it clear that pulling back from the merger could result in managers losing their jobs if Bank of America ended up needing aid.
SYSTEMIC RISK ROLE QUESTIONED
The probe into the merger comes as lawmakers debate an Obama administration plan for a regulatory overhaul that would expand the Fed`s powers over the financial system. Some lawmakers said lingering questions over the Fed`s role raised doubts about whether it should be given more power.
Financial market participants watched the hearing with some anxiety that it signals a search for a scapegoat for the financial crisis and a possible erosion of political support for a Fed chairman who has earned high marks on Wall Street.
"It does have a kind of a Watergate feel to it," said Chris Rupkey of Bank of Tokyo/Mitsubishi UFJ in New York, referring to dramatic congressional hearings in the early 1970s that were precursors to the resignation of President Richard Nixon.
The controversy over the Fed`s role in the Bank of America-Merrill deal could also color President Barack Obama`s looming decision on whether to reappoint Bernanke when his four-year term as chairman expires January 31.  Continued...
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