Why Congress Is Asking Bernanke Bogus Questions

Our esteemed Congress seems determined to make rapacious bankers look good.

The latest spectacle involves Federal Reserve chairman Ben Bernanke explaining how he reacted when he learned last December that Bank of America (BAC) might back out of its deal to buy Merrill Lynch, which would have unraveled some of the bailing wire holding the financial system together. We still don’t have a good, factual account of what exactly happened, but it appears that Merrill’s losses turned out to be a lot bigger than BofA realized when it agreed to buy the investment bank last September.

As the extent of losses became clear, it dawned on BofA boss Ken Lewis that Merrill could sink his company if the deal went through. He considered backing out. There were tense talks with the Federal Reserve, which desperately wanted to see the deal go through. It finally did. As a little incentive, the government invested an extra $20 billion in BofA, on top of $25 billion in TARP funds the bank got in October.

Ken Lewis is perhaps the most endangered CEO in America, with shareholders steamed over vainglorious management, a depressed stock price and a Merrill deal that stinks with or without the $20 billion spiff. Bank of America is effectively a ward of the state, with more federal funding than any firm except AIG and General Motors (GMGMQ.PK). And the men who led those two firms to the government feed bin are long gone.

Last December, when the Merrill deal was about to be consummated, Fed officials circulated an email quoting Bernanke saying that “management is gone” if BofA backed out of the deal. Bernanke may have meant that the Fed would use its powers as BofA’s chief regulator and out-bailer to get Lewis fired if he reneged and left Merrill on the verge of collapse. Or, he may have been suggesting that BofA’s board would dump Lewis if he bungled the Merrill deal.

The House Committee on Oversight and Government Reform is appalled. Republican Rep. Jason Chaffetz of Utah criticized Bernanke for threatening Lewis’s job. Rep. Dan Burton of Indiana, also a Republican, suggested Bernanke might be guilty of perjury for saying he can’t remember all the details of his negotiations with Lewis. Rep. Darrel Issa of California, a third Republican, accused Bernanke of making a power grab. He’s also accused the Fed of a coverup with regard to the entire BofA bailout.

So just to clarify the storyline: Ken Lewis, benevolent banker, is a hapless victim of federal Gestapo tactics meant to enrich the taxpayers at the expense of innocent financial titans like Bank of America. Bernanke, meanwhile, was getting all hysterical about saving the economy when he should have just let the CEOs handle it. Maybe Congress will pass a law ordering Bernanke to call Lewis up and apologize for ever questioning his management, which has been stellar except for a few horrible acquisitions that nearly made his bank insolvent. Bernanke could throw in a government gift card good for another $5 billion or so.

It goes without saying that these hearings aren’t really about Ken Lewis, the new poster child for abused CEOs everywhere. The Bernanke critics are staking out turf for the coming battle over proposed new rules that would give the Fed “superregulator” powers allowing it to rein in the nation’s biggest financial firms if the Fed felt they were taking too much risk. Endowing the Fed with such powers is genuinely controversial, since the Fed chairman in theory is answerable to nobody, and not subject to Congressional oversight the way other agencies are.

But if the Congressional critics really cared about the financial crisis and the best reforms, they wouldn’t need Ken Lewis as a stalking horse. There are plenty of more important questions that still haven’t been answered by Bernanke or anybody else in the executive branch. At the top of my list:

How much of the government’s $180 billion or so in aid to AIG has actually ended up at profitable trading partners like Goldman Sachs (GS)? How much has gone to foreign firms like Deutsche Bank (DB) and Barclays (BCS)? Did the government know this was going to happen, or did the money just slip away?

What are the prospects for AIG, anyway? Is there any chance the U.S. government will get any of its money back, or will this end up as the biggest giveaway in American history? The AIG bailout was the Fed’s baby back in September. So if Bernanke’s going to stay up late preparing testimony, it should be on how the government is ever going to extract itself from this colossal pileup.

And if we must talk about Bank of America, it would be nice to know when the government will stop insuring more than $100 billion worth of toxic assets the bank holds, and when the taxpayers will get their $45 billion back. Maybe those feisty Congressional inquisitors will invite their pal Ken Lewis to have a friendly chat and explain.

Disclosure: no positions

Comments

[Clive Corcoran:]

The questions you pose are very good ones - but the answers would be way too long and difficult for sound bites.

Jun 26 09:18 AM

[GregT:]

Your commentary shows a very poor understanding of the events that have taken place over the last 9 months. It sounds more like political rambling than an intelligent analysis of the matters. And I will add that my criticism of your commentary is not because I disagree with everything you've said. It is because of the very poor logic and observation you apply to the facts. Quite honestly, someone with your level of critical thinking should not be writing articles for Seeking Alpha.

Jun 26 09:52 AM

[Dave Wrixon:]

Obvious, they don't want to hear the answer to those that everyone else wants to ask!

Jun 26 10:12 AM

[Duude:]

Weighing all that was said it appears very likely that Congressman Issa's accusation is right on the mark. Whether Bernanke personally threatened Lewis with financial support or his job is not as clear. Other Fed officials could have passed the message in a host of ways without Bernanke speaking the words himself. Some feel that the seriousness of the situation warranted pulling out all the stops. I feel there is a real problem with government strong-arming business leaders to do what's not in the best interest of their own shareholders. But it seems also likely that Lewis did his part to see the deal done by purposely failing to disclose to shareholders what he knew before the Merrill vote. Lewis was in a catch-22. If he disclosed all, shareholders clearly would have voted it down. That could have meant his job was at risk if and when the company sought government support.

Jun 26 10:17 AM

[Jeff Nielson:]

While I consider Ken Lewis to be even MORE of a bumbling fool than most, he still has a ways to go to equal Bernanke - as either a fool or a liar.

In a few weeks time, Bernanke's FIFTH prediction of a "U.S. economic recovery" will be seen to be just as baseless as his first FOUR predictions. A few weeks after that, he will make his SIXTH prediction for an economic recovery (this time to start at the beginning of 2010).

Personally, I think all these predicted "recoveries" by Bernanke were intentional lies - and he knew all along there was no possibility of a recovery.

However, I would also be open to suggestions that Bernanke is so terminally stupid that he was actually sincere in all these totally ridiculous predictions.

Jun 26 10:18 AM

[jratl:]

"Our esteemed Congress seems determined to make rapacious bankers look good."
I didn't realize that questioning the ethics of a fed official was equivalent to making rapacious bankers look good. Making government officials accountable for their actions does not preclude accountability in the corporate world.

Jun 26 11:07 AM

[huangjin:]

Few people think Ken Lewis is the good guy. This is all relative. The fact that the Fed is now viewed less favorably than Ken Lewis should make you happy, as some Congressman may decide to ask those questions.

Politicians are cowards and will not act unless they are assured of success. The Bernanke pinata took enough whacks to embolden one or two, I believe.

Jun 26 11:16 AM

[thiazole:]

In my opinion, politicians want as many scape goats to wag their fingers at as they can find so that they can avoid the spotlight on themselves. If they can just keep us angry at everyone but them, we might forget that it was their policies that ultimately got us into this mess in the first place.

Jun 26 11:43 AM

[DLB40:]

Please consider that our Congress is made up of people who's "only" job is to get re-elected. They know nothing and care nothing about banking and only know and care about lobbyists and rich contributors who will fill their coffers every election cycle with tons of cash.

Jun 26 12:08 PM

[dw57:]

i think you forgot Citi. its has the most government support (with an exception of maybe AIG).

but i am not sure that leaving the rescue of the economy to the CEOs is like leaving the foxs in charge of the hen house after they raided it killing all but a few chickens. they created the debacle to begin with, and putting them in charge of fixing it, leaves the hen house empty. we have seen how well they perform. and its not pretty at all.

Jun 26 12:28 PM

[Gerry Sullivan:]

Bernanke repeatedly states that BAC would not have
been successful invoking the "material adverse change" (MAC) clause. That opinion is a convenient explanation for why the Fed jawboned BAC to keep the deal together.

In my opinion it seems that BAC might well have prevailed in court if they used MAC.

Several times the Fed Chairman stated that he is not an attorney, but in the case of BAC invoking MAC he gives a legal opinion anyway.

Jun 26 12:38 PM

[van Schayk:]

Instead of grilling the Fed on its catastrophe avoidance maneuvers, the Congress should ask itself how its oversight failures got us into that predicament in the first place.

Jun 26 12:55 PM

[Mr. Ed, Jr.:]

Bernanke's term is up in January. So far, his treatment by the media has been pretty favorable, overall. Maybe a little too favorable for the White House, which seems to want to put Summers in that job, making it a very political position.

So, the White House leaks the BAC-MER memos and the Democrats call for the hearings, knowing the Republicans will go after Bernanke and the Fed, which Obama wants to give even more power (For their guy, Summers ?). The Democrats, for the most part, get to put up a mild defense of Bernanke.

This is just politics, getting Bernanke "roughed up" a bit makes it easier to replace him, if that is what Obama decides to do. Even if the decision has not yet been made, it is good to get the "roughing up" started well ahead of time.

This is just the warmup, though. The road ahead will be even bumpier for Bernanke.

Jun 26 01:11 PM

[Al-USA:]

GregT wrote:
"
Quite honestly, someone with your level of critical thinking should not be writing articles for Seeking Alpha.
"

What's up with this character, GregT? He takes the time to write a whole paragraph, basically his thesis, and then stops. Nothing else follows to support his idea. GregT, "man", stop wasting virtual paper.

Jun 26 01:17 PM

[JL11:]

Rick, we get it, you don't like Republicans. Can you please provide a post that isn't ideological for once? This is not U.S. News and World Report.

Jun 26 03:20 PM

[Frugal Joe:]

Good article.....thanks.

Glad to see an honest detailed account of the mess we are in.

Jun 26 03:42 PM

[jaydawg:]

It is this type of sainthood placed on Bernake by market economists, CNBC, and Cramer that make it dangerous for anyone investing in this stock market. I for one will take a complete collapse of market over the government now being defending for strong arming those who stand in their way!

Jun 26 04:51 PM

[Robespierre:]

Well don;t really know if his questions or logical thinking is on the spot. I do know, however, that in a financial debacle like the one we are going through an honest government will at least would have investigated the main beneficiaries of the collapse. Alas, none of them are being investigated by this or the previous administration.


On Jun 26 09:52 AM GregT wrote:

> Your commentary shows a very poor understanding of the events that
> have taken place over the last 9 months. It sounds more like political
> rambling than an intelligent analysis of the matters. And I will
> add that my criticism of your commentary is not because I disagree
> with everything you've said. It is because of the very poor logic
> and observation you apply to the facts. Quite honestly, someone
> with your level of critical thinking should not be writing articles
> for Seeking Alpha.

Jun 26 09:42 PM

[johngonole:]

Somehow the banks win eitherway. The bankers still have their jobs even though they took the whole financial system to the brink of collaspe. They got to keep all those bonuses. It is perhaps the most crooked industry of all. When they no longer discount risk and are bailed out for it with tax payer money why should they care. Write as many loans as possible. Banks produce nothing. Their only job is to loan out other peoples monies using leverage on top of that (fractional reserve banking). When they stop caring about being good stewarts of the basis of their whole business why do we need them. I'm sure the public can loan out money to their in laws, the neighbor down the street, or the guy that promises to pay you right back though you hardly know him and has alcohol on his breath. I mean really the general public would have lost far less of their own money making loans with no contract at all. The bailouts I hear are costing each individual tax payer like $40-50,000 a piece. So I collect a few hundred dollars and interest by depositing my money at the bank and they in debt me $50,000. Heaven forbid your married. Now your family is in the hole for $100,000. I realize that not all of the stimulus, tarp, and other govt spending was to bail out the banks. But is a very real way the poor financial status and economic status is a direct result of the banks making very very poor decisions while at the same time leveraging our money.

Why aren't the architects of this disaster hanging from the gallows. Give me a show trial for cryin out loud. I want to see someone in jail other than just Bernie. If this is how things are going to be run (lets not forget the savings and loan crisis, and all the other every tenth year disaster) why do we need them at all. Honestly if they are going to loan our money out to people who are never going to pay them back then why do we need a banking system.

Don't give me that liquidity speach. Far too many of those who need to roll over the loans they have never intend on paying the banks back. Its always been for the Trumps of this world a game of how long can they rollover the debt into ever higher loans and then just declare chapter 7 later on after skimming from the large pot for cash along the way. Our society is decaying in every aspect and nobody cares. We should be seeing riots in the streets if this were a sane society. Or is it that everyone is playing this game of musical chairs. Can't afford to stop the game anymore.

As a society were have enslaved ourselves to debt.........I mean the bankers. Wake up America its time to fire your banker. They serve no purpose at all. The only companies that pay back their debt are the ones that didn't need it in the first place.

Pay as you go my friends. Businesses too.... I'd say pull all your money out of the bank to punish them but if we all did that at the same time.......well the money really isn't there at all is it.

My advice is just don't save money anymore. Spend it or lose it I say. Let the bankers steal someone elses money. When the government finally goes broke you can just leave the country. OR if the govt prints their way out of indebtness then you'll be glad you never saved in dollars.

Jun 27 02:56 AM

[thannagan:]

The only thing keeping BAC and their poor shareholders afloat was the government funding and guarantees. Otherwise they were gone, with or without Merrill. Lewis had slready broken BAC and given up his soul to the government. The government herded Merrill into a safe harbor, housing it in their ward, BAC. Lewis had nothing to say and no leg to stand on in the situation, which he created for himself by his prior decisions and governance.

Of course, Congress and White House are always, and only and all, about politics. It was pretty clear in Bernake's expressions what he would have liked to have responded to the idiots questioning him.

Jun 27 09:26 AM

[PMZ:]

The problem is that Congress sees Bald Bearded Ben as a person abusing his power when the true problem is any one person having that power in the first place. In the end, it is all the fault of Congress who keep outsourcing their responsibility to unelected officials, such as the FED chair and Treasury Sec, instead of having the balls to make some politically dangerous decisions.

Jun 27 09:53 AM

[dcb:]

--- On Sat, 6/27/09, davidcdavid64........ <davidcdavid64@yaho... wrote:

> From: davidcdavid64........ <davidcdavid64@yaho...
> Subject: How fading political will..... (forward to Mr. Plender)
> To: [e-mail]
> Cc: [e-mail]
> Date: Saturday, June 27, 2009, 10:06 AM
>
> Please forward to Mr. Plender
>
> Dear Mr. Plender,
> It is with great dismay that each and every day I read in
> multiple sources about how the efforts of reform of the
> financial system are getting bogged down because of a lack
> of political will in the United States. Perhaps it is time
> that columnists around the world start to look beyond the
> traditional excuses for "the lack of will". If one ignores
> the rhetoric with which Mr. Obama used to get elected, but
> instead looked only at his appointments, his policy choices,
> and his support for change (in summary a real black box
> analysis of the reform effort) one would conclude that in
> fact no real reform was intended from the start.
>
> President Obama's appointment of Mr. Geitner, Summers, and
> multiple other insiders suggests that change was not high on
> the agenda to begin with. The decision to hand to congress
> the details of policies allows for greater influence by
> special interests groups. By beginning the debate with very
> mild reform efforts Mr. Obama ensured the final reforms,
> after compromise, would be even further diluted.
>
> At a certain point the evidence pointing towards one
> direction becomes overwhelming. At what point does
> politeness get put aside and the clear and obvious
> conclusion get mentioned in the press. From the start Mr.
> Obama never intended for any significant financial reform to
> occur.
>
> Sincerely,
>
>
>
>
>

Jun 27 10:13 AM

[Sovestor:]

Congress had better spend more time to identify more frauds in the financial sector rather than interviewing Bernanke. There is much bigger problem outthere. Frauds by crooks managing other people's money are increasing. Government needs to increase oversight and regulations (to some extend, not excessively) to identify and catch these fraudulent investment managers. Read this: www.sovestor.com/conte...

Jun 27 10:29 AM

[kgeechee:]

Ken Lewis is portrayed as 'leader of abused CEO's'. I doubt it. Perhaps he could have be seen as a valued member of the 'Bonnie and Clyde' gang, but he refuses to drive a Ford!

Jun 27 11:18 AM

[Pelide:]

Quote
"the Fed chairman in theory is answerable to nobody, and not subject to Congressional oversight the way other agencies are."
Unquote

Quote
The Federal Reserve System is a contradiction in terms, for it isn’t federal, has no reserves, nor is a system. It is a central bank not a federal agency, that is a privately owned for profit corporation. Most banks don’t own stock in the Fed, however JP/Morgan does as a shareholder in the global banking system. Therefore, they basically bailed themselves out in this instance. Frankly, the Fed is not authorized by the constitution and is consequently illegal and corrupt.
Unquote

If it is indeed so, why no one seem to care ?

Jun 27 01:00 PM

[H. T. Love:]

On Jun 26 12:38 PM Gerry Sullivan wrote:

><snip>

> In my opinion it seems that BAC might well have prevailed in court
> if they used MAC.

Like GM/Chyrsler bond holders got good support over lower-tier capital in (bankruptcy) court?

>
> Several times the Fed Chairman stated that he is not an attorney,
> but in the case of BAC invoking MAC he gives a legal opinion anyway.

I recall that he spoke to Fed lawyers and was informed that MAC applies to long-term consequences, not near-term.

True? I don't know. But I'm unwilling to judge any of this on incomplete information, political posturing, conflicting statements from two with vested interests in the outcome, selected e-mails (possibly selected to support a particular bias), etc.
>

Clowns are clowns even if the paint, costume and noses look different.

HardToLove

Jun 27 03:47 PM

[H. T. Love:]

On Jun 27 01:00 PM Pelide wrote:

> Quote
> "the Fed chairman in theory is answerable to nobody, and not subject
> to Congressional oversight the way other agencies are."
> Unquote
>
> Quote
> The Federal Reserve System is a contradiction in terms, for it isn’t
> federal, has no reserves, nor is a system. It is a central bank not
> a federal agency, that is a privately owned for profit corporation.
> Most banks don’t own stock in the Fed, however JP/Morgan does as
> a shareholder in the global banking system. Therefore, they basically
> bailed themselves out in this instance. Frankly, the Fed is not authorized
> by the constitution and is consequently illegal and corrupt.
> Unquote

Since congress authorized it, it is legal. Its purpose is *not* permitted in the constitution, so it is unconstitutional. Moreover, one of its primary functions is *supposed* to be done by treasury (and has been in the past).

>
> If it is indeed so, why no one seem to care ?

Ignorance caused by many things, deception being one.

publiccentralbank.com/ has some links near the end to good videos.

A series of 10 minute or so videos start here www.youtube.com/watch?...

Gets really good about part 14 and around part 21(?) we see todays situation perfectly predicted.

If you know folks who would benefit from these links, please pass them on.

HR 1207, sponsored by Ron Paul, to audit the Federal Reserve has a lot of support (240 or so co-sponsors) and seems to be gaining support in the senate too.

A first step, hopefully not the last.

Youtube has some Ron Paul stuff and other things of interest to some folks.

HardToLove

Jun 27 04:01 PM

[Sovestor:]

Bernanke is not that bogus vs. Greenspan.

Jun 27 08:25 PM

[nova:]

GregT wrote:
"Quite honestly, someone with your level of critical thinking should not be writing articles for Seeking Alpha"

This is a typical example of today "politically correct" thinking. If someone does not kiss ass of the government, the one must be an enemy.

It appears that America has crossed a point of no return when Democracy and the Constitution are not valued. For the last 200 years, these were the most important building blocks of American power and prosperity but not anymore.

Presently demagogues, thieves, and gangsters are running America with the rest foolishly believing in propaganda miracles of going back to "the old good welfare prosperity". WOW!

Jun 27 10:08 PM

[Supersuperman:]

In contracts to Bernanke, Warran Buffett thinks that we have not seen any green shoot on turning the economy around yet; this is just a heavily funded recession:

www.wealthalchemist.co.../

Recovery is coming Very slow, based on new home sales figures, fundamentals, and job loss rate.

Jun 27 11:46 PM

[optionsgirl:]

Great observation, Thiazole. Sounds like something from a George Orwell novel, doesn't it?


On Jun 26 11:43 AM thiazole wrote:

> In my opinion, politicians want as many scape goats to wag their
> fingers at as they can find so that they can avoid the spotlight
> on themselves. If they can just keep us angry at everyone but them,
> we might forget that it was their policies that ultimately got us
> into this mess in the first place.

Jun 28 08:20 AM

[optionsgirl:]

That's like a debate on Hitler v Stalin-who was the most evil?
Both Greenspan and Bernanke stink!


On Jun 27 08:25 PM Sovestor wrote:

> Bernanke is not that bogus vs. Greenspan.

Jun 28 08:22 AM

[i'mwithher:]

Here is the "real" story per Andrew Cuomo's investigation and letter to congress and to the director of the Tarp program. Lewis was pressured, because Paulson and Bernanke didn't want to disclose the systemic risk to the entire financial system. This is a long letter, but everyone should read it. Here is the link:
www.marketwatch.com/st...


On Jun 26 12:38 PM Gerry Sullivan wrote:

> Bernanke repeatedly states that BAC would not have
> been successful invoking the "material adverse change" (seekingalpha.com/symbo...)
> clause. That opinion is a convenient explanation for why the Fed
> jawboned BAC to keep the deal together.
>
> In my opinion it seems that BAC might well have prevailed in court
> if they used MAC.
>
> Several times the Fed Chairman stated that he is not an attorney,
> but in the case of BAC invoking MAC he gives a legal opinion anyway.
>

Jun 28 08:44 AM

[Marli:]

"if it is indeed so, why does no-one seem to care?"

Because the average American hasn't the foggiest notion of how the banking system works, and people who rail against the fed tend to be sidelined by mainstream media.


On Jun 27 01:00 PM Pelide wrote:

> Quote
> "the Fed chairman in theory is answerable to nobody, and not subject
> to Congressional oversight the way other agencies are."
> Unquote
>
> Quote
> The Federal Reserve System is a contradiction in terms, for it isn’t
> federal, has no reserves, nor is a system. It is a central bank not
> a federal agency, that is a privately owned for profit corporation.
> Most banks don’t own stock in the Fed, however JP/Morgan does as
> a shareholder in the global banking system. Therefore, they basically
> bailed themselves out in this instance. Frankly, the Fed is not authorized
> by the constitution and is consequently illegal and corrupt.
> Unquote
>
> If it is indeed so, why no one seem to care ?

Jun 28 10:23 AM