Bernanke defends Fed's role in Merrill deal

The U.S. Federal Reserve did not push Bank of America into buying Merrill Lynch last year as the financial system struggled with a crisis, Fed chair Ben Bernanke testified Thursday.

"I did not tell Bank of America's management that the Federal Reserve would take action against the board or management" if they tried to stop the deal, he told a congressional committee.

Bernanke's testimony differs from that given by Bank of America CEO Kenneth Lewis earlier in June. Lewis said that, between the announcement in September and the closing early this year, he was told that he and the bank's directors would be fired if the bank walked away from the Merrill purchase.

"I did not" instruct anyone to tell the bank officials they would be fired, Bernanke said.

The Fed actions were done with the "highest integrity," he said.

At the end of a three-hour hearing before the House Oversight and Government Reform Committee, chairman Edolphus Towns said there were "significant inconsistencies" between the testimonies by Bernanke and Lewis.

"It is still unclear whether Bank of America was forced to go through with the Merrill Lynch deal," he said.

The Fed was not involved in setting up the deal, which was made public on Sept. 15. But between that date and the closing in January, the Fed did review and approve it, he said.

During that period, Bank of America doubted whether it should close the deal, given the losses in Merrill. 

Bernanke said he did tell the bank's officials that buying Merrill was the best option for the bank and the financial system.

When Lewis raised the possibility of using the "material adverse event" clause, which would have allowed the bank to walk away, Bernanke said that could destabilize the system.

Using the clause "might have triggered a broader systemic crisis that could well have destabilized Bank of America as well as Merrill Lynch," Bernanke said.

It would also raise doubts about the bank's management, given that they had been doing due diligence for three months.

And there were legal issues, Bernanke said, which would have led to long litigation that the bank would lose.

Bank of America would have been forced "either to pay substantial damages or to acquire a firm whose value would have been greatly reduced or destroyed by a strong negative market reaction," he said.

Instead, Bernanke advocated developing a contingency plan that would allow the bank to buy Merrill.

The bank received $45 billion US in backing from the government, including an additional $20 billion from the Troubled Asset Relief Program in January as part of the contingency plan, Bernanke said.