Republicans to Paint Bernanke as Ally of Big Government

Edmund L. Andrews and Louise Story, The New York Times

In a peculiar role reversal, Republican lawmakers are mounting a ferocious attack on the Republican chairman of the Federal Reserve, while Democrats are coming to his defense.

Ben S. Bernanke, the Fed chairman, will be grilled on Thursday by the House Oversight and Government Reform Committee about his role in orchestrating Bank of America’s controversial

Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 14, 2007, before the Senate Banking Committee hearing on monetary policy. (AP Photo/Dennis Cook)
Dennis Cook

takeover of Merrill Lynch late last year.

The House investigation is heavily colored by partisanship. President Obama is proposing to give the Federal Reserve formidable new powers 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.

Unhappy about the huge bank bailouts that the Fed arranged with the Treasury Department during the Bush administration, many Republicans are even more displeased that Mr. Bernanke is now working hand-in-glove with the Obama administration.

The result is a set of dueling narratives and agendas, all of which will be on full display when Mr. Bernanke testifies on Thursday. Henry M. Paulson Jr., the former Treasury secretary, is expected to testify next month.

A memo written by Republicans, citing e-mail and internal Fed documents that were subpoenaed from the central bank, is building a case that Mr. Bernanke was a Machiavellian autocrat who forced Bank of America to go through with a disastrous merger that it no longer wanted to complete.

But the committee’s Democratic chairman, Representative Edolphus Towns of New York, is investigating whether Bank of America executives were engaged in an elaborate shakedown, demanding that the Fed and the Treasury provide more than $100 billion in fresh capital and guarantees against the losses that were building up at Merrill Lynch .

Republicans are circulating newly unearthed e-mail that suggests Fed officials kept the Securities and Exchange Commission and the Office of the Comptroller of the Currency in the dark about its efforts to keep the merger alive by informally reassuring Kenneth D. Lewis, the chief executive of Bank of America, that the government would provide the bank with extra help if it was needed.

By that point, however, the S.E.C. had abdicated to the Fed its authority over investment banks like Merrill Lynch. And the comptroller’s office was responsible for overseeing commercial banks, but not the umbrella holding company.

The new e-mail message reinforces the impression that Fed officials badly wanted Bank of America to complete the Merrill takeover, despite Merrill’s spiraling losses.

But other e-mail between Fed officials shows that Bank of America executives were pressuring the Fed and the Treasury up to the last minute on Dec. 30, when the deal was scheduled to close, to provide written promises that the government would provide billions in new capital and other protection.

The documents show that Fed officials refused to provide any specific commitments, though a top official did assure the bank’s chief financial officer, Joe L. Price, that the government would provide help, if needed.

“I told Joe that we were not yet in a position to proffer a package, but we were working toward something that works for them and for us,” wrote Kevin M. Warsh, a Fed governor, in an e-mail message to a senior Treasury official on Dec. 30.

A little more than two weeks later, the Fed and the Treasury indeed provided huge assistance — $20 billion in new capital and guarantees against losses for $118 billion in Merrill Lynch assets — over the protests of Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, whose agency would be the guarantor.

Mr. Lewis told the oversight committee on June 11 that Fed and Treasury officials pressured him to keep the deal alive, even threatening his job and those of his board members. Mr. Lewis testified early this year to the New York attorney general that Fed and Treasury officials urged Bank of America not to disclose Merrill’s losses, but he retreated from that assertion at the June 11 hearing.

Fed officials have acknowledged that they warned Mr. Lewis that he would be on shaky legal ground if he tried to back out of the deal by invoking a “material adverse change” clause.

But Fed officials insist they never threatened to oust the bank’s executives if they scuttled the deal. In e-mail disclosed before the last hearing, Mr. Bernanke referred to Mr. Lewis’s qualms about the merger as a “bargaining chip” to get more help from the government.

Despite Mr. Bernanke’s Republican roots, and the fact that President Bush nominated him to be Fed chairman, the Republican memo prepared for the hearing on Thursday describes Mr. Bernanke as a champion of government intrusion and an ally of President Obama.

“Given the Obama administration’s proposal to vastly expand the Federal Reserve’s financial regulatory power over virtually any economic actor,” it warned, “the Fed’s willingness to keep key regulatory partners such as the S.E.C. and O.C.C. in the dark raises important questions.”

But Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency, said on Wednesday that Fed officials had in fact kept the agency informed about Bank of America’s situation.

“We were kept apprised,” Mr. Mukri said.