Thursday, 11 June 2009 12:25
June 11 (Bloomberg) -- House Republican staffers preparing lawmakers for a hearing today said Federal Reserve and Treasury officials overstepped their authority and pressured Bank of America Corp. to complete its Merrill Lynch & Co. purchase.
In a memo written for Republicans on the House Oversight Committee and obtained by Bloomberg News, the staffers cite what they identify as excerpts from internal Fed e-mails to support their stance. The committee issued a subpoena to the Fed June 9 for documents related to the transaction.
Bank of America Chief Executive Officer Kenneth Lewis, who is scheduled to testify at the hearing in Washington, told New York state investigators in February that he was pressured in December by Fed Chairman Ben S. Bernanke and former Treasury Secretary Henry Paulson to complete the Merrill acquisition amid mounting losses at the brokerage firm.
The memo said that Richmond Fed President Jeffrey Lacker wrote in a Dec. 20 e-mail that Bernanke intended to “make it even more clear that if they play that card and they need assistance, management is gone,” referring to a threat by Bank of America to break off its deal with Merrill. Bernanke indicated he saw the threat as “not credible,” the memo said.
That was a “gun placed to the head of Bank of America to go through with the merger,” the Republican memo said. “Government officials crossed the line by applying inappropriate pressure on a private institution to go through with a business deal.”
Declined to Comment
Lacker’s district includes Bank of America’s headquarters in Charlotte, North Carolina. Fed Board of Governors spokeswoman Michelle Smith in Washington declined to comment. Richmond Fed spokeswoman Laura Fortunato and New York Fed spokeswoman Deborah Kilroe also declined to comment. Paulson spokeswoman Michele Davis didn’t respond to a telephone message requesting comment.
In an April letter to Representative Dennis Kucinich, chairman of the committee’s domestic policy subcommittee, Bernanke said the Fed “acted with the highest integrity” during its discussions with Bank of America on Merrill Lynch and didn’t seek to withhold any information from the public on Merrill Lynch’s losses. Merrill Lynch reported a $15.8 billion loss during the fourth quarter.
The Fed never threatened to terminate or take supervisory action against anyone at Bank of America if they disclosed any of the company’s or Merrill Lynch’s information on losses or other matters, Bernanke said in the letter.
‘Severely Damaged’
The Republican memo said e-mails indicate Bank of America’s relationship with federal regulators “would be severely damaged if it failed to go through with the merger,” and that Bernanke saw the company’s threat as a “bargaining chip.”
“The Fed and the Treasury, jointly acting as a committee, decided the interests of shareholders were going to be subverted to what they perceived were bigger threats,” said Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. and a former research director at the Atlanta Fed. “In this case, those threats were undefined.”
The Republican staff memo says an e-mail from New York Fed economist Adam Ashcraft noted that investors might view Bank of America’s retreat from the deal as a “smart move” as they walked away from “a black hole.”
Eisenbeis said the Fed and the Treasury should have consulted the Securities and Exchange Commission whose mandate is to protect shareholders. SEC Chairman Mary Schapiro called the agency’s absence in the discussions “troubling” in April.
‘Should Have Known’
“Shareholders should have known” that the government was “trying to purposefully have Bank of America shareholders absorb the losses for the takeover,” said Tim Yeager, an associate professor of finance at the University of Arkansas and a former economist at the St. Louis Fed.
“At some time it becomes so material that shareholders need to know,” Yeager said.
The Republican memo said none of the Fed documents show that government officials “explicitly instructed Bank of America employees” not to disclose the Merrill Lynch losses. At the same time, there was “at least the intent to influence disclosure decisions in order to allow the government to manage the situation in an orderly manner,” the staffers said.
The Fed typically keeps supervisory information about bank mergers confidential. Fed officials compiled about 6,000 pages of documents related to the deal to respond to congressional requests. The Fed made the documents available to congressional staff in a room at the central bank.
Staff Review
Congressional staff reviewed the documents on several occasions, giving them the ability to select several specific pages for a subpoena, according to a person familiar with the situation.
The House committee subpoenaed the Fed for e-mails and documents related to Bank of America’s purchase of Merrill Lynch after the panel was unable to obtain them through a request last week.
Lacker, speaking to reporters after a speech yesterday in Raleigh, North Carolina, said he and his staff have “regular conversations” with directors and managers at Bank of America “as part of the supervisory process.” He declined to comment further.
Criticism of Lewis’s handling of the Merrill Lynch purchase prompted shareholders to vote in April to oust the CEO from his post as chairman. The bank’s chief risk officer has been removed and four directors have resigned since then. Four new board members were named last week, including former Fed Governor Susan Bies and Donald Powell, ex-chairman of the Federal Deposit Insurance Corp.
‘Systemic Havoc’
“The failure of Merrill Lynch, particularly on the heels of Lehman’s failure, could have caused systemic havoc or necessitated an AIG-style government bailout,” Lewis said in his prepared testimony, referring to insurer American International Group Inc.
Bank of America shares have declined 64 percent to $11.98 in New York Stock Exchange composite trading since Sept. 12, 2008, the last trading day before the Merrill purchase was announced. The 24-member KBW Bank Index of large U.S. banks has declined 48 percent during that same period.