Bernanke Defends Role in BofA-Merrill Deal

"Personally I think management should be downgraded, no more acquisitions, raise some 'real' capital, frequent meetings with the board, etc.," former director Deborah Bailey said in one email exchange. She added that the company "will definitely [have] a price to pay."

Mac Alfriend, a senior vice president at the Richmond Fed responded with what he characterized as "very preliminary thoughts on getting a pound of flesh out of Lewis."

Still, despite the tawdry correspondence, Bernanke noted that the acquisition was going on at a time of severe market stress, with the collapse of Lehman Brothers, the massive government bailouts of Fannie Mae (FNM), Freddie Mac (FRE) and American International Group (AIG), and the near-collapse of Wachovia, which was ultimately acquired by Wells Fargo (WFC). Washington Mutual also failed during the period, with much of its assets eventually taken over by JPMorgan Chase (JPM).

Nonetheless, said Bernanke, the Fed acted as an interested adviser, and neither he nor his staff gave Lewis a mandate on how to proceed.

"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 they believed was in the best interest of their shareholders and company," he said. "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."

>To order reprints of this article, click here: Reprints