Bernanke Defends Role in BofA-Merrill Deal

Bank of America's (BAC Quote) acquisition of Merrill Lynch may not have ended ideally, but it was better than the alternative, Federal Reserve Chairman Ben Bernanke said Thursday.

Bernanke has faced harsh questioning and criticism for the Fed's role in pressuring BofA to go forth with the merger, despite CEO Ken Lewis' second thoughts. But in testimony before the House Committee on Oversight and Government Reform, which is investigating the deal, Bernanke downplayed regulators' influence.

He characterized the Fed as an adviser, rather than a puppet master, and one that had a vested interest in whether or not the Merrill deal was consummated. Bernanke said he believed that if BofA walked away, the Fed would be required to take further action to stabilize the financial system, possibly putting more taxpayer dollars on the line to prevent the collapse of both firms and others.

Furthermore, he said, there was no guarantee that Lewis' invocation of a material adverse change, or MAC, clause would be successful. Instead, Bernanke predicted expensive litigation that would result in either BofA paying "substantial damages" or acquiring a firm whose value would have been "greatly reduced or destroyed."

"For these reasons, I believed that, rather than invoking the MAC, Bank of America's best option, and the best option for the system, was to work with the Federal Reserve and the Treasury to develop a contingency plan," Bernanke said.

As staid as his testimony was, Bernanke's appearance before the committee comes with the release of less graceful correspondence among Fed staffers and other regulators concerning the Merrill deal. Several expressed concerns about the appearance of the government stepping in to provide sweeteners.