Bank of America's
may not have ended ideally, but it was better than the alternative,
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.
"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
, the massive government bailouts of
American International Group
, and the near-collapse of
, which was ultimately acquired by
also failed during the period, with much of its assets eventually taken over by
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."