Fed Shielded Facts Of Merrill Sale, Republicans Say
Thursday, June 25, 2009
The Federal Reserve tried to keep other federal regulators out of the loop while pushing Bank of America to follow through on its deal to buy the crippled investment bank Merrill Lynch late last fall, according to Republicans on the House Oversight and Government Reform Committee.
The Republicans say documents obtained by the committee show that the Fed sought to limit the information given to the Securities and Exchange Commission, which was responsible for overseeing financial disclosures from the two companies, and the Office of the Comptroller of the Currency, one of Bank of America's regulators. In a memo circulated yesterday, the Republicans also say the Fed tried to avoid the public disclosure of accelerating losses at Merrill Lynch.
The allegations are new fodder for a Washington controversy rooted in the government's dramatic actions to stabilize the financial markets in the fall and winter.
Bank of America initially agreed to buy ailing Merrill Lynch in September, then considered reneging on the deal after discovering the size of losses at the investment bank. Bank of America chief executive Kenneth D. Lewis has testified that Fed Chairman Ben S. Bernanke and then-Treasury Secretary Henry M. Paulson Jr. pressured him to close the deal. The government was forced to provide more aid.
Bernanke is scheduled today to testify about the events before the oversight committee. The Fed would not comment yesterday.
Citing internal Fed e-mails, the Republicans allege that the SEC and OCC were not kept abreast of the negotiations in December among the Fed, Bank of America and Merrill Lynch.
On Jan. 11, a top banking supervisor at the Federal Reserve Bank of New York, Arthur Angulo, wrote to the Fed's general counsel, Scott Alvarez: "Have we conveyed anything to the SEC" about the deal? Angulo said he received an e-mail from an SEC official. "He knows something is up . . . I intend to give him the broad outlines, but before doing so I wanted to check to [see] how much (if anything) has been shared with the SEC."
Alvarez responded that he had not talked to the SEC about the deal. He said Bank of America had complained "that someone did talk to the SEC, with the result that the SEC called late last week to say they heard [Bank of America] was negotiation [sic] a Citi type deal with the [U.S. Government] and to ask [Bank of America] to explain the unexpectedly high losses at [Merrill Lynch]."
A few weeks earlier, amid discussions with Bank of America over whether it might pull out of the deal, Fed staff sought to withhold information about negotiations from OCC staff during a telephone call, the Republican memo asserts.
Brian Peters, a banking supervision official, wrote in Dec. 19 e-mail: "Given the presence of the OCC on the call, I think we should not discuss or reference the call with Ken Lewis and Paulson." Jennifer Burns, an official at the Federal Reserve Bank of Richmond, agreed with Peters in an e-mail the same day.
Rep. Darrell Issa (Calif.), the ranking Republican on the oversight committee, said yesterday that the Fed "engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other Federal Regulatory agencies."
In response to questions about the deal, Bernanke will tell lawmakers today that the Fed has a strong relationship with other regulators and that there was no effort to withhold information from other agencies, according to sources familiar with his testimony.
Oversight committee chairman Edolphus Towns (D-N.Y.) said yesterday he was "not going to prejudge these issues."
As Bank of America executives grew more alarmed about red ink at Merrill Lynch, they did not alert investors to concerns about the deal. The Republican memo cites evidence that the Fed tried to discourage early disclosure.
In a Dec. 22 e-mail to the New York Fed's general counsel, Angulo says he will call Merrill Lynch's chief financial officer to discuss whether the company is planning an early disclosure to investors about the mounting losses. "If I get the sense that [Merrill Lynch] is leaning toward an early January filing, I'll try to steer him toward a later filing. If I get a sense that [Merrill Lynch] is committed to an early January filing, I'll ask for a follow-up discussion with appropriate securities counsel at [Merrill Lynch] to get a better sense as to the amount of flexibility [Merrill Lynch] has in this regard," Angulo wrote.
The Bank of America-Merrill Lynch deal ultimately closed after Bank of America secured $20 billion in federal aid and a government guarantee, split between the Fed, Treasury and Federal Deposit Insurance Corp., to limit losses on $118 billion in toxic assets.
The documents reveal opposition from the FDIC to the arrangement. FDIC Chairman Sheila C. Bair wrote in a Jan. 14 e-mail to Bernanke: "Dear Ben, Strong discomfort with this deal at the FDIC, for all of the reasons you and I have discussed. . . . My board does not want to do this."