that no delaware court had been found a material adverse affect within the agreement. one would have to know the facts around those circumstances. to suppose that they could not possibly have been at the same level of intensity as in the middle of an economic crisis. that aside, i can understand from that one sentence, without knowing what the law was, there was that conclusion. but could not bankameric of amea have negotiated a reduction in price with merrill, had it

invoked the matt clauc clause, n the obligation to the shareholders? case law and i think it was quite applicable. i am not a lawyer with the advice i got was directly on the situation that we were looking at specifically that short-term losses no matter how large are not basis for mac in this case only long-term to significant losses in revenue or revenue production are grounds and of course merrill lynch has proved to be a profitable acquisition for bankamerica. why not negotiate a better price, that wasn't the issue that lewis raised. he was talking about breaking off the merger but i think that the walls of be very dangerous because the markets would have been faced with the uncertainty of whether the deal was going to

go through merrill lynch would probably not be able to survive absent the support of bank of america said there would have been immediate problem with merrill lynch which would have created broad problems in the financial market. >> even if they threatened to do that in the context of negotiating? >> well, you can't negotiate anything unless you are willing to go through with your threat. and so therefore there would have to be a probability in the mind of market participants that in fact bank of america wouldn't go through. >> you think that would be considered a plus? >> it has been stabilizing as well, yes. >> and in consummating though, the merger as it was originally planned, didn't the bank of america shareholders take a good part of the hit of the merrill had losses in? >> not in our view, as i said when i talked to mr. lewis rice

stressed not only was invoking the mac that for the financial system broadly, but i thought our opinion was that it would be bad for bankamerica in itself and if invoking mac had cost bank of america to feel or to become, have to be saved on the emergency basis that clearly wouldn't have been good for the shareholders of bank of america. of course in the end he had to make the judgment what to do but that in my opinion it was not obvious at all invoking the mac was a good thing to do the cutting for bank of america shareholders. >> and you think he made the decision on his own without undue influence from the government in any way? >> i believe he did. >> thank you, mr. chairman. >> thank you. mr. chairman, i know that we have agreement we finish up one. would it be possible for you to say 1:10? will that create a problem? i understand the agreement.

thank you very much. >> let me say to the members but we will do is decide ten minutes on each side and of course why don't we yield five minutes to the chairman, the ranking member on the committee? >> thank you mr. chairman i will be brief. i just want to go through a couple of quick questions. first of all, it appears as though much of the media thinks the end justifies the means, meaning that even if there were threats were if people felt threatened to go through it's okay because it worked out. do you agree with that? >> no sir, we use only legal and ethical means. >> i appreciate that. do you agree at all times the rules law and the expectations written into both the letter and the broad meaning of the law should be the guidance for all transactions done behind closed doors by federal officials?

>> yes, sir. >> as we choose to find ways to resolve the ambiguity between ken lewis, hank paulson, yourself, and of course a number of people whose e-mails have been cited today, are you prepared to answer in writing, not to return here probably, additional questions that may come up that would help us clear that up? >> yes. >> do you at this time believed intentionally ken lewis, hank paulson or any people decided today in e-mails intended to lie in their statements? >> i have no judgment on that. >> but you believe in good faith they think what they are saying is true as far as you know? >> as far as i know. >> do you think the federal regulators should pick winners and losers as they go through trying to figure out in a crisis like this who gets to know who or who gets bailout money and

doesn't? >> i did all these interventions are on fortunate and only made necessary by extreme circumstances. >> earlier one of the people we mentioned was mr. lacquer in light of his e-mail paraphrasing a longer discussion, do you intend to speak to him and try to clarify how the difference in interpretation could have happened? >> i have done so already and he didn't have any further recollection. >> then i would like to yield to mr. burton the balance of his five minutes. >> let me say i don't want to dwell on this but one of the biggest problems i have is the government telling the private sector what to do and how to do it. we had the head of general motors literally fired by the government. there might have been justification for his removal but i didn't think the government ought to be telling somebody who is answerable to the stockholders with they are supposed to do. one of the things that concerns me is on december 5, big

american stockholders approved that sale or purchase and merger when they thought it was a 9 billion-dollar loss and then the 14th the found out it wasn't 9 billion but 12 billion, and then because they decided they didn't want to do that they contacted you and mr. paulson and whether mr. paulson said directly you told him to do it or not to do it with the inference was there that the fed said if they pull out of this deal the board and the ceo is going to be gone. mr. iraqi said on the 20th, two days before they made the decision to go ahead with a, he said just a long talk with them back. says they think that the mac is irrelevant because it is not credible and intends to make it more clear if they play this card and then need assistance the management is gone. so even though they were going to incur $3 billion more in

liabilities because of the pressure put on by you and mr. paulson it went ahead with the deal because they felt they and their management was going to be fired. now that's the problem on have. the government is coming in and saying you're going to do this or else. this is not a socialist society. this is a government of free enterprise of the people and by the people and for the people and what bothers me is they felt they are incurring $9 billion found out it was 12 billion you told them, you and mr. paulson told them your going to do this or else and i think that's wrong. you can make a response if you like. >> my response is i never said that to mr. lewis. >> you never said this to mr. lacker? >> again, those are his words summarizing a longer discussion said a single thing than what you're saying. but he said was that if they took this decision and if they required to be rescued, that if this decision led the markets to

attack and america and create a destabilization of the company and the government had to come in on sunday night to save them we would take into account thinking about management that is a different thing and i did not say that to mr. lewis. >> what about your attorney who said you were going to put pressure? i brought that up in my previous five minute. >> again, i did save three strongly -- but i said to mr. lewis we strongly believe that invoking the mac was bad not only for the financial system but the bank of america but i didn't tie it directly to replacing him or the board. >> i yield five minutes to the gentleman from ohio. mr. kucinich. >> i thank the gentleman. chairman bernanke, your staff believed bank of america knew about milledge's accelerating losses in mid november. for months before coming to you,

and weeks before the shareholders voted to approve the merger. those fourth quarter losses rose over 15 billion out of the pockets of bank of america's shareholders. but i want to ask did the fed know about those accelerating losses before the fed approved the merger at the end of november? >> no, i don't think we did. >> may i introduce into the evidence this e-mail which is from the new york fed to autrey of merrill lynch dated wednesday, september 17. it says hope this gets to you. our management, that is the new york fed, has asked to continue the flash report on a daily basis and i am sure with the sec. so the fed was receiving

detailed information by which they could have concluded that the overwhelming losses at merrill lynch were more than problematic and that the fed could have done something if they chose. now, are you familiar with this e-mail? are you saying that there is no -- >> we are certainly involved in a lightweightn the oversight of those -- of merrill lynch since we began to lend to them but we are not the formal supervisory and information about their losses -- >> but mr. chairman, the fed knew what think america knew. you were saying earlier with respect to bank of america as a matter of fact you put on them the responsibility to notify the sec but yet you knew before the merger was approved.

>> and nov we didn't know about 14 billion, i sure we didn't know that. >> but you knew about merrill lynch's condition before you approved the merger did you not, did you not know about their financial condition failing before you approved the merger if not? if you say no again that flies in the face of this e-mail that came from somebody at the new york fed tracking merrill lynch on a daily basis. >> they are tracking it but it's difficult to know what the evaluations are. they have to be done by professional asset managers. i wasn't aware. all i can say is i wasn't aware and i don't think anyone else was aware of the $14 billion -- >> there's another e-mail that the fed has requested daily p and l profit and loss relative to merrill lynch. now, mr. chairman i'm going to enter that into the record as well. >> without objection.

>> when you permitted the merger of this company to be to fail you knew the company would be a significant player in four of the five critical financial markets namely wholesale payments, foreign exchange, u.s. government agency securities and corporate and municipal securities. isn't it true the combined entity of bank of america and merrill lynch is a significant player in four or five critical financial markets was a key rationalization for the fed to bail out the merger? >> i don't know i would have to get back to you. >> excuse a? >> i don't recall the details. >> well i am going to read a quote from a fed memorandum entitled considerations regarding invoking the systemic risk exception for bankamerica corporation and the quote is an ability of these organizations to fulfil their obligations in these markets in a related system would lead to widespread disruption in payment and settlement systems in the u.s. as well as abroad.

now in our investigation, we have not encountered any evidence that it considered the potential for systemic risk when you approve the merger of bank of america merrill lynch which only weeks later is too big to fail. now, chairman bernanke, did you really believe ken lewis's was a bargaining chip as you stated in an e-mail december 2008? >> i thought initially it might be. >> did his use of a bargaining chip help him obtain a deal he put into received had he asked for assistance from the government? >> as i said in the later e-mail after listening to him and having more discussions i came to the conclusion he was uncertain about what to do. we provided advice which he ultimately took and we took steps to prevent the destabilization of his company in the financial system. >> mr. chairman i ask for one

more minute. >> i yield the chairman one additional minute. >> let me direct your attention to hand written note from your first meeting on december 17, 2008. you reported restated the downside 50 billion doesn't sound big for bank of america. the 50 billion refers to aig merrill assets. the record clearly shows you did believe there would be systemic consequences if bankamerica took steps to back out of its deal with merrill lynch perspective when in court. so did the threat of mac which you believe would have serious consequences influence your willingness to give bankamerica's financial assistance when you didn't believe it needed to have it? >> we demonstrated if we saw a major institution about to fail and risk the stability of the financial system we would try to take steps to stabilize it so we would have done that in any event.

>> i just want to conclude with this point. mr. bernanke has testified he was concerned about systemic collapse. we all understand that. he's concerned about think of america, we understand that and he said bankamerica would hardly be a good thing for investors, that was your testimony but if the fed do merrill lynch was feeling before the shareholders voted, why did you not inform the sec? >> if they knew about it, if you knew about before you approved the merger why did you approve the merger? >> the $14 billion of losses that mr. lewis reported i don't believe, i am sure we didn't know about in november. >> the gentleman's time is expired. and i yield five minutes --

>> thank you mr. chairman. mr. dvorkin is going to be primary closing i just want to wrap up a couple things. as you know kneal cash cory appeared before this committee multiple times and another question in the one thing we found is he didn't know at that time how much he paid for things. he didn't know what they were worth, he didn't know how they valued then but he was going to get back and never did. i understand he's left the government, but with that told me because it occurred in real time, it occurred exactly when these things were going on that on a day-to-day basis you didn't know what assets were worth including these toxic assets. is that roughly correct? >> it's difficult to know what they're worth. >> i appreciate that and your service during the best you could in that situation but one thing my last question is when it came to the mac you said a moment ago it only could be invoked if in fact you had forward-looking lesser revenues that it wasn't material to the balance sheet if i can

paraphrase you but to the income statement. is that what i heard you say? >> that's what i understood the memorandum to say. >> but if that is true isn't it true you have to restate your income prospectively or retrospectively then by definition to go forward as reduced in other words if you never made as much as you felt you made because the assets materially degraded because they were never going to produce what you said in the past that in fact it is a mac event so losses accumulating could well have been a viable reason to predict the enterprise value going forward was less, what he's a doubles correct based on normal accounting? >> i shouldn't trust and securities law. the device of my attorneys was that mac would be unlikely to succeed and it was a sycophant probably it could cause a lot of disruption in the financial markets. >> we appreciate your effort. i'm going to turn the rest of

mr. jordan and thank you for everything you did and tried to do to help the country. >> thank you. >> mr. bernanke, when did you know that he would not be able to go in and by the toxic assets, the mortgage-backed securities? if you to remember back the whole package was sold to the united states congress based on what you told the members of congress, what mr. paulson told and i ask this question, you are a sharp guy in my economics mr. paulson as a smart guy and you convinced that congress could go in and put a value on these assets and clean them off the books and everything would be wonderful and yet ten days after we passed this, i didn't vote but ten days after we passed you bring the nine biggest banks, don't tell them what the meeting is about and use completely changed strategy so when did you know that you would not t.a.r.p. you know before congress voted or after congress voted on it when you would not be able to go in and purchase these securities and do when you told us he were going

to do? >> we knew after. one of the problems was -- >> this was a month-long -- i remember the first conference call we listened and september you had a whole month and get within ten days probably within a few days this strategy -- you have a month leading up to this convincing the congress you could do this and yet within ten days complete change and yet you are bringing nine biggest washington of telling what it's about or tick-tocks spearman, completely changed strategy and you look as we went through some of the things the pattern of some might say deception where the banks come to washington of knowing what the meeting is about. mr. angola does the letter saying we are going to steer merrill lynch and what is going on on this merger and what's happening with merrill lynch i think is a reasonable question to say when did you notice and if you didn't know until after octor 3rd what took so long to figure out? you had a month and two weeks of debate in the congress. they send us home a few days and

we came back and past -- >> i would be happy to answer that question. the drawback of the asset purchase plan as we discovered is that it took some time probably months to put an alteration. we thought that would be possible but unfortunately the banking situation deteriorated quickly and by columbus day we have a global banking crisis and the only way to stop the crisis from spreading and creating a huge problem was to inject capital to have guarantees and take the steps we took so this was the only way to do it as quickly as was needed given the way the situation changed so what changed was the financial situation between october 3rd and october 14th and we had no way to do the other approach because it would take too long. >> i'm going to completely change years. tell me if you can appreciate the money supply. i didn't get a chance to ask questions when you were in front of the budget committee and i

apologize. a lot of sharp people are very nervous about where we are with the amount of money in the system right now. talk to me briefly if you can about your concerns and how we are going to deal with what i think a lot of people believe it's been to be inflationary concerns. >> the money is not in the system in any real way. the money is electronic deposits from banks sitting in the federal reserve accounts of being used or loaned or circulating. the key issue is can we unwind this creation and low interest rates in time to head off inflation when the economy begins to recover? we have the tools we need and we believe we can do that and we will remove the stimulus in time and are committed to price stability and we will make sure that it happens. >> i thank the gentleman. i yield to the gentleman from ohio. >> unanimous consent, i asked to put into the record two sets of documents we received with subpoenas containing the e-mails and excerpts of documents i

referred to today. >> without objection so ordered. >> i yield to the gentleman from ohio, congress, captor. >> i thank the congress and for his endurance. i would like to insert into the record information and background on the relationship between bank of america, merrill lynch and black rock. >> without objection. >> i would like to ask churn and bernanke to submit from the fed how did bank of america and up owning 49% of black rock? in 2004 the fbi warned the public and the administration mortgage fraud was headed toward an epidemic level in our country. the fed did nothing. now the fed under your watch has hired black rock, a firm owned 49% by bank of america headed by a man who invented this up prime instrument when it first in boston and later at black rock who treated billions of dollars

of these securities to freddie mac and fannie mae over the last decade. i quote a sentence and we will place in the record from bloomberg news things when it first boston was largely the result of the creative work with mortgage-backed securities slicing and pulling mortgages and selling them as bonds and he took the concept to freddie mac where he sold the company's board on a billion dollar package. that was just the beginning. german bernanke what material can you provide the committee into the record that will plain how the fed will avoid conflicts of interest in self dealing by that firm and besio in the execution of contracts you have signed with black rock? >> we will provide you with the contracts explaining how it works. >> thank you. some lawyers have said rod or control fraud have characterized the mortgage securitization process. will you permit the fbi access to the mortgage instruments being managed by black rod as

the fed contracts are executed and fulfill? >> if there is a reason for the fbi to investigate and the fbi has a right to investigate we wouldn't stand a way of an appropriate investigation. >> um contracts has the fed assigned to handle freddie mac paper and fannie mae mortgage securities under your purview and how much will black rock be paid for those services? >> we have hired for asset managers to manage the mortgage-backed securities portfolio. black rock is one of them. i don't know how much we are paying them. >> will black rock be handling freddie mac paper? >> they will be managing gse guaranteed papers that would include freddie, fannie and johnny. >> i would urge your staff to go back and look at black rock and operations at first boston before he founded black rock in relation to what they transacted with freddie mac and when they did that.

>> the gentleman's time is expired. >> thank you. that we thank the chairman for his time and at the outset of this hearing, bayh said that it's time to shine some light on the events surrounding bank of america's acquisition of merrill lynch. at this point i would say we have got a peek, not much, but we don't have full sunshine yet. i would make three observations before we close. number one. there are significant inconsistencies between what we have been told today, what we were told to weeks ago by ken lewis, and what the fed's internal e-mails seem to say. it is still unclear whether bankamerica will forced by the federal government to go through with the merrill deal or whether the ken lewis's pool what might have been the greatest shakedown

in a long, long time. as a result of this hearing, we have learned the sec and the fdic played a role in this transaction as well. but as i indicated, we are going wherever the road leads us. so therefore let me say that we are going to talk to the sec and we are going to talk to the fdic. we are going to talk to former treasury, secretary hank paulson. he has agreed to appear before the committee in july and i look forward to that hearing. but we also need to hear from the fdic and sec so that we can better understand what happened during the dark days of last december so we will be hearing from them as well. so mr. chairman let me thank you again for your time and i might have taken two minutes over by

sorry. i apologize. thank you very much. therefore now the committee is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2008] >> a couple of live events. a discussion of a validation of justice department is conducted during the bush administration. speakers include a former alabama governor. a representative john conyers. and the president of the alliance for justice. that is on c-span 3 at 8:00. at 9:00 on c-span 2, a form on

the future of health care posted by the national institutes for health care management foundation. panelists include a former head of the congressional budget office and former head of medicare and medicaid. in a few moments, your calls and today's headlines. then the house is in session at 9:00 eastern to consider a bill on climate change and energy. .