Grilling Bernanke

The New York Time takes a lot of heat (quite rightly) for editorializing news stories. However, today they deserve a lot of kudos for for watching the sausage being ground - one of their reporters live blogged the House Oversight and Government Reform Committee testimony of Federal Reserve Chairman Ben Bernanke on the Fed's involvement in Bank Of America's take-over of Merrill Lynch. For those that don't know why this is an issue, the best thing to do is scroll to the bottom and read the preview first...

Mr. Bernanke has come under heavy criticism for his handling of Bank of America’s acquisition of Merrill Lynch. The House committee is investigating how the deal turned into an enormous second bailout of Bank of America and Merrill, and lawmakers are examining how Mr. Bernanke and former Treasury Secretary Henry M. Paulson Jr. pushed the bank to complete the transaction after it discovered billions of dollars in additional losses at the securities firm.

Bank of America’s chief executive, Kenneth D. Lewis, told the committee earlier this month that federal officials had pressured him to go through with the Merrill deal and acknowledged that his job had been at risk if he did not.

Mr. Paulson is expected to give the committee his side of the story next month.

The House investigation is heavily colored by partisanship. President Obama is seeking formidable new powers for the Fed to regulate giant institutions, including Bank of America, that could pose risks to the financial system.

Republicans, along with some Democrats, argue that the Fed already has too much power.

The apparent point of contention (in the hearing) was pressure that BOA CEO Lewis says that the Fed exerted on them when they talked about exercising the merger agreements "material adverse effect" or MAC clause. I'm not going to relay the whole thing - you are going to have to go to the NYTimes website to read it all but I wanted to highlight a couple of specific questions.

10:39 a.m. | More on the MAC: Was the MAC clause in the Merrill deal just a “bargaining chip” that Mr. Lewis used to get federal assistance? That’s what Mr. Issa asks Mr. Bernanke, who replies that, in his view, the MAC could not have been invoked to cancel the deal, and if it were invoked, it would have caused a near-collapse of the financial system.

So in otherwords, yes it probably was. I have no doubt that if the Fed believed that invoking the MAC would cause a "near-collapse" of the economy that they relayed that information to Mr. Lewis.

10:50 a.m. | ‘Was Mr. Paulson Lying?’: There’s a blunt question from Dan Burton of Indiana, who wants to know if Mr. Paulson was lying when he testified that Mr. Bernanke told him to threaten BofA’s board and management if the bank tried to walk away from the Merrill deal. “I didn’t tell him anything like that,” Mr. Bernanke says.

Asked about a conversation with Jeffrey Lacker, another Fed official, Mr. Bernanke says he can’t remember the details. In summarizing the conversation in an e-mail, Mr. Lacker has said Mr. Bernanke was going to make it clear that BofA’s management would be gone if they tried to invoke the MAC.

Ouch - that is going to sting.

Utah's own Jason Chaffetz asked a very interesting question...

11:12 a.m | What Makes a Threat?: As with the previous hearing starring Mr. Lewis, there is plenty of discussion today about whether or not threats were made to keep the Merrill-BofA deal intact. Jason Chaffetz of Utah wants to know how Mr. Bernanke’s questioning of Mr. Lewis’ management and judgment could not be perceived as a threat.

Mr. Bernanke tells him that the Fed did not control Mr. Lewis’ destiny. If he had decided to invoke the MAC “and the company had prospered. we would not have the basis to do anything,” he says.

I would be interested to know how Mr. Bernanke would feel if the shoe were on the other foot. Would he have "assumed" that the Fed's had no "basis" to punish him or not? I would venture to guess the answer is "NOT"....

While there was a couple of dips into the conspiracy theory pool (see Marcy Kaptur's non-question at the 11:28am mark) there were a lot of very indept probing questions including this one by Peter Welch of Vermont...

12:17 p.m. | Too Big to Exist?: Peter Welch of Vermont ask whether institutions that are too big to fail should “be too big to exist.” Mr. Bernanke said that it was legitimate to discuss that possibility, but that big banks had an economic role and businesses around the world.

and this one by Dennis Kucinich of Ohio...

1:02 p.m. | What About Those Losses?: Mr. Kucinich continues to believe that Bank of America knew about the losses in mid-November. He also asks if the Fed knew about the losses before it approved the deal at the end of the November, even though the central bank was getting daily updates of Merrill’s financial condition. Mr. Bernanke replied, “We didn’t know about the $14 billion.”

“It’s difficult to know what these valuations are unless they are done by professional asset managers,” he said.

Overall this exercise (by the NYTimes) was well worth it as they provided the country with an insight into the mechaniations that take place in DC. The more light that is shone on how legislation gets done (in DC or in the state capitals) the better it is for ALL citizens. For the more we know about how political business gets done, the more educated the voters will be when they next go into the voting booth - and that is a very good thing!