he sort of was rather happy with the acquisition he made that accounted for 75% of its profits for the bank of america in the last quarter so i would suspect about six months to a year from now, he's going to be telling this tremendous victory of this of acquiring merrill lynch. but all that being said, what we really -- i don't know why we're spending our time to find out what happened between the 15th of september and january 5 first. all we all know is a hell of a lot went over the dam and particularly in that spectacular two-week period after september 15th. i want you, one, before you leave here, to tell this committee and the american people what kind of jeopardy the american system and the world system was in so we reiterate that moment that we weren't all a bunch of relaxed confident people walking around making clear judgments but we were

making emergency judgments, working 20-and 24 hour days and not with the clearest heads in the world. is that correct. >> thank you for that opportunity. september was an incredibly intense period of crisis. many of the largest fishingz in america came under very severe pressure, the failure of lehman brothers and near failure of a.i.g. were important reasons why the world economy went into a nosedive that lasted for the entire second fourth quarter of 2008 and the first quarter of 2009. the treasury, federal reinvestor and other aeingz worked overtime to try to prevent additional failures, additional crises, fortunately the congress provided the t.a.r.p. funding in october october. in mid-october there was an incrip yent global crisis that involved responses by policymakers around the world, u. k australia, japan, germany and elsewhere. united states was able to join in that effort because of the t.a.r.m. money.

we averted at that point a global melt down which in my opinion very likely would have created a depression-like environment in the united states far more severe than the recession we have seen recently. >> thank you very much, mr. chairman, and i gave you your shot and now i'm going to come back at you. okay? >> sure. >> the thing we must decide is what we're going to do in the future and how we will handle it and one of the things in the last several months that i've been involved in investigations of everything from the madoff case to other tran sack shongs in the market. but studying the inside of our r our regulatory authorities i find that out they may have the authority, they may have the money to act, they sometimes don't know how to act or don't act properly and as a result they have all the authority in the world to prevent something that happened but it happens anyway. i want to say that charge would lie against the federal reserve and that is where we are hung up in the course of the di lem machlt the federal reinvestor

had several opportunities to prevent this economic crisis. one is the long-used 14 years of power to lay down the conditions on mortgage obligations in this country that all the way through about 12 of those 14 years the federal reserve failed to take any action until you came on the scene and finally did enact a set of standards across the board. if they had enacted those standards earlier, most of these toxic assets we talk about would not be circulating around the world with the im pri mature they are superiorsed and passed on by the united states government.. two, there are issues with the federal reserve that they are now acquiring additional powers when they have failed to use past powers. address those two issues. >> certainly. i agree with you. >> the gentleman's time has expired but please answer the question. >> congressman, you are right, the federal reserve was late to

invoking those consumer protection powers. we have been very aggressive for the past couple years. it's very important that we strengthen the priority that those have in decision make asking we have strengthed accountability that we report frequently to congress about what we are doing in these areas so that's very important. in terms of additional powers, i think it's worthwhile pointing out if we look, for example, at the treasury proposal to make the fed the consolidated supervisor that it's not a major difference in terms of power from what we currently v. being umbrella supervise of all holding companies, but rather not so much a change in powers but approach whereby we take a systemic, systemwide approach in how we would regulate those firms rather than looking at them bank by bank. it's really a change in their strategy. >> i thank the gentleman for his

response. the chair recognizes mr. turner. >> thank you, mr. chairman. mr. bernanke, thank you for being here today. i know that we have had very difficult times and certainly you and mr. paulson and others, we know, have worked diligently to try to restore the financial security of the country. there are dwer ghent opinions of actions taken and how we should approach them. i have voted against every bailout that has come before this congress. i have done that because i felt that the programs that were put before us were not clearly defined, the scope of the cost or expense was not clearly defined. the ability to hold people accountable was i think we are seeing a lot of uncontinue

tended consequences, things the american people were saying i didn't think that was what was was going to be. i know you are facing a lot of questions concerning bank of america and merrill lynch and they go right to the heart of questions concerning the federal government's proper role in private enterprise. how do we step inappropriately and how do we not step in. frequently this committee has hearings on issues as basic as our contracting with private enterprise. we are not a good customer. many times issues arise where people wonder whether there's been abuse of processes, conflicts of interests, so when you then put another layer of us just not beinging a customer but being an investor, and an individual -- entity that is providing a bailout or even an owner, people have a great deal of concern.

yesterday i introduced house joint resolution 57, the preserving capitalism in mesh amendment, proposed amendment to the united states constitution, it came about as a result of my discussion with people back home because several people said they did not believe enough people were taking a stand to say this is wrong. i don't believe this should have happened in this manner, i know we have difficulty but i don't agree with this structure, i don't agree we should own general motors. the constitutional amendment would limit the ability of the federal government to acquire an ownership interest in a private corporation. it does give the government the ability to issue loans, it also allows us to invest in public authorities, public use corporations and also allows investment tz by government pension funds. the -- turns out as i was discussing this with people in my community that limiting government ownership over private enterprise is not a new idea. we found that at least eight state constitutions have in some form limited the state's ability

to acquire stock or equity in a company apparently as a result of the panic of 1837 which you would know a whole lot more about than i do as a result of your great historical expertise but a number of people have concerns as the obama administration moves forward and the bailouts move forward and our domestic automobile industry becomes publicly-owned, that the constitutional amendment that i drafted yesterday was dropped with 102 original co-sponsors, nearly a quarter of the house stepped forward and said, i want to support a constitutional amendment because we don't think it can be done by statute that could say, we understand that there are times when action needs to be taken, we understand when intervention needs to occur, but we do not believe that ownership is a structure that should be available as an option. we are very concerned about what happens next. for example, we have a huge

ownership interest in general motors, we don't in ford, let's say both of them bid on a government contract. what happens then? can ford be assured they are going to have equal treatment when the government is virtually bidding for its own contract? i'd like your thoughts on the amendment and if it was in place, i would like your thoughts as to how you would have gone about and how t.a.r.p. funds would have been used and other things could have been structured in the way we wouldn't have ended up with ownership but you would have responded to our financial crisis. >> well, excuse me, i agree with you that limited government ownership and limited government intervention is frequently a good policy. in that respect, i think that's a very good approach. i should say, though, that in order to make that a viable policy in our financial sector we need a set of rules and regulations that can allow financial firms to fail and i

believe in failure, failure -- capitalism without failure is like legislation without sin, you need failure but you have to have failure in a way that won't bring down the entire system. few are going to do that, you need to also have rules and regulation that is allow the orderly failure of large financial firms. >> before we conclude, if would you allow me. i don't believe you're saying, are you, that you think that the only way you could have intervened is to result in ownership, that there weren't structures of loans and other assistance that could have been provided that wouldn't have ended up in the federal government having an ownership interest in them and then of course we get this conflict of, well, how is the government going to execute its ownership interest? >> i'd have to think about that but if you look at banging crises in history, frequently you do have a period of capital being injected by the government which essentially is a temporary

ownership, usually those things are only temporary, but again, i'm not sure what the alternative would be. i'd be happy to think about it, but in order to avoid ever having government ownership again, you need to figure out a way to avoid having the crisis in the first place and i think that should be the first priority. >> there is great concern about this and this looks like a line we should not be -- thank you so much. >> thank you very much. yield to the gentleman from massachusetts, mr. lynch. >> thank you, mr. chairman. i just -- as someone who voted against the t.a.r.p., i just want to comment on your kind remarks in saying that it was threw the wisdom of congress we passed the t.a.r.p. bill. number one, as you may remember, t.a.r.p. was presented to us as a way to purchase toxic mortgages, never used for that. so what we voted for was never put into action.

number two, several weeks after we did the t.a.r.p., we also passed a t.a.r.p. corrections bill, a 400-page bill we passed to correct all the mistakes we made in t.a.r.p. so i'm not so sure of the wisdom of congress is necessarily accurately as described in that statement. i do want to say i agree with chairman kanjorsky about the context you took all this action, sky was falling, very difficult time but i do want to say the reason we are going over this chronology is because we have granted the fed enormous independence and there is sometimes a tension between the taxpayer interest and the power of the fed and the independence of the fed. that's why we are going over this. there has been a lot of back-and-forth today but basically what the facts are is that merrill lynch got into trouble very early in '07, it

was a very difficult situation, there was a merger proposal that you supported quite strongly between bank of america and merrill lynch. there was an agreement to enter into that merger and then the sub -- at some subsequent time, there were major losses, there were early losses, 8.4 billion that occurred in '07, looked like an additional 12 billion discovered by mr. lewis ong december 14, 2008, and then he announced his desire or his intention to invoking the m.a.c. then we have a difference of opinion and that is that on the one side some folks are saying that you or mr. paulson threatened mr. lewis, other people say it was simply

iron-physicianed encouragement to have him stay in the deal. in any event he did that, he stayed in the deal. there is an interesting e-mail from you and i'm interested in the taxpayers' position. this is from you, mr. chairman, to scott alvarez. had a good conversation with lewis just now, he confirms his willingness to drop the m.a.c., opposition to the deal going forward. and to work with the government to develop whatever support package might be needed for earnings announcements dates around january 20. we discussed his common equity issue, we agreed that having a significant amount of t.a.r.p. capital in the form of common equity was not an ideal solution given the ownership implications. but we agreed both to think about possible solutions, a government-backed capital raise or government common with limited control rights, now, it sounds to me liken lewis was

concerned about his job and for the american taxpayer to get voting rights in return for their tarp money, mr. lewis would be gone. i believe. is that the concern that you believed mr. lewis expressed regarding the tarp being presented with rights, voting rights, for the american taxpayer in that deal? >> i don't know exactly what his concern was. it may have also been involved in just concern about government intervention in his management and the operations of the company. >> well, there was a discussion, it is what it is, it indicates that mr. lewis was concerned about the taxpayer having some input here, some control. and it sounds like you are -- it says but we agree to think about possible solutions to that, backed up with capital raise or government taxpayer involvement here with limited control

rights. i'm just wondering whether in this deal to provide this support whether the taxpayer is getting the full leverage they should have gotten given the amount of assistance we put into this company, into this deal. >> the company is restricted to the limitations of the tarp and on executive compensation and also subject to as discussed they are subject to the supervisory oversight of the reserve and occ and we have taken actions to ask them to add independent directors ask make other appropriate changes to their company. >> could we have not gotten greater protections for the american taxpayer than what we did in terms of considering that we are safeing this company with the american taxpayers' assistance and we don't gain the control that i think is commensurate with that support?

>> well, the -- not quite sure, i have to go back and look at that e-mail again. at that time, the tarp money was all provided in the form of preferred stock which is on the one hand not voting, but on the other hand is senior to common equity and is safer. >> get paid first, i understand that. but it's the lack of -- seems like mr. lewis was most concerned with lack of input or control on the part of the taxpayer and i think that would have helped us, you know, in this deal if we had had greater control on behalf of the american taxpayer. mr. chairman, my time is expired and again i thank you for appearing and helping us with our work. i yield back. >> thank you very much. now i allow five minutes to the gentleman from massachusetts. >> thank you, mr. chairman. mr. bernanke i want to discuss another way the public moneys seemed to have flowed to some of

these financial institutions. back in march of 2009, a.i.g. disclosed the name of the counter parties, people they had credit swap agreements with, and bank of america was within them. it appears from our records that there were losses in the so-called superior peer senior multisector default swaps, portfolio a.i.g. had, and that it created a liquidity problem. they had obligations if there were problems in that, they had to put more cash in or more security for the obligation. federal reserve board of new york then provided yz 85 billion in a loan to a.i. g testimony here was that then that money was used to buy out the contracts and cancel them. that's how they took care of that obligation. what was of concern to me and others was the counsellor parties appeared to have proceeded 100%, even though testimony from people from a.i.g. said they thought there were a lot of reasons to think

they did not owe 100% if they owed anything at all on those particular obligations that there had been serious negotiations about whether they should pay anything to these counter parties and if they should, how much less than 100% they should pay. when we pressed mr. liddy from a.i.g. for background on those, why it is they paid 100%, his comment was that he was the wrong person to talk to, that in fact the fed had all those documents because they struck the deal. so my question to you is: why was 100% paid on these various obligations, including the ones to bank of america, and what was the rationale there? why weren't the public machine interests protected so there was a better negotiation than just forking over 100%? >> i don't see on what basis the less than 100% could have been fade. they were contractual obligations, failure to pay would have allowed creditors to force bankruptcy which is just what we were trying to avoid.

this is why we need a resolution regime which would allow the resolver to abrogate existing contracts but under current law you can't avoid bankruptcy without paying off the existing contractors. >> the people that were running a.i.g. said they thought that there were certainly issues involved in that, that they didn't owe the money under the contracts, default may not have occurred or if it did it didn't object obligate them to pay the full money. these are people that felt very strongly they had been negotiating for a period of time and apparently thought they could have struck deals that would have not obligated 100%. these are contractual issues. once they turned that over to the fed, the fed just rolled over and gave 100% to bank of america, city bang, other people and it looks to others from the outside we were trying to make those people healthy by taking public money and putting it in their coffers.

my question to you is: will you produce to this committee copies of all copies that a.i.g. had with those third party counterpart tis including details and terms of conditions, all documents and correspondence regarding creation of lane 3, special purpose vehicle that was created to do these transactions, and including negotiations that went on for that and then all documents and correspondence concerning management of maiden lane trust so we can get a look at those documents and make an assessment on that. >> i think we have just released a whole set of documents related to those issues but if you have specific -- we just created a publication with information about the maiden lanes, if you send us a letter with specific requests, we'll see what's available. >> we certainly will. you say what's available, we want everything that's available and the question to you is: when we make that request, will you provide it?

>> if i'm able to do so, i will. >> thank you. i'll yield back. >> thank you very much. now i yield to the gentleman from illinois, mr. davis. >> thank you very much, mr. chairman. i thank you for your long patience and endurance. how involved is the fed in the day-to-day management of bank of america? for example, does the fed have veto power on major decision-making at bank of america and has any consideration been given to replace upper-level management? >> the fed is not involved in day-to-day management. that's the responsibility of the board and the management. we are involved in evaluating the capital, assets, liquidity and management of the corporation.

we have had concerns about aspects of the management and we have asked the board, in particular, to add independent directors which they are in the process of doing and we'll continue to be very careful and monitor the management situation but we do not take daily decisions. that's not our job. >> mr. chairman, let me ask you: when the government invested heavily in a.i. g fanny mack and freddie mac, manage hint was replaced. why was the fate of mr. lewis so different in this instance? >> well, i think in this case, the merger was undertaken in good faith, it was at the time looked like a reasonable combination, a lot of firms suffered severe losses in the fourth quarter, one of the worst quarters in history in terms of financial losses.

our judgment at the time was that he could continue to lead the company and we have not addressed that but we'll continue to make sure that we're comfortable with leadership of bank of america. >> in an e-mail from mr. walsh to yourself on december 30, mr. walsh writes and i quote, "ken lewis is going to call you to reaffirm the understanding you have. ken may also raise his favorite perrenial issue, that is, the richmond supervisory team on same page as the board. richmond staff was on our call today but prior to the call, it sounds like they may have threatened a little more than ideal our need to get rid of dividend and fast. i told price systems will be making joint determinations."

my question is to your knowledge do you think that mr. lewis's interaction with the supervisory team at the richmond fed threatened or coerced in any way mr. louis? >> well, the federal reserve in general throughout last year was concerned about bank of america's capital, particularly its tangible common equity, and the federal reserve bank of richmond, supervisor of bank of america was interested in having bank of america increase their capital, perhaps while reducing dividends through other measures. at various points there was some confusion i think about what the position of the fed was because there were miscommunications between the richmond fed and the board of governors in washington and mr. lewis, far from being

intimidated, was free to call me and ask me for resolution of these issues and we made sure everybody that was on the same page and we got that cleared up. >> so it would be a normal interaction in terms of -- >> yes, normal process. >> i'm having some concerns with richmond and that kind of thing. mr. chairman, you've gone on record as supporting increased transparency in connection with federal reserve board operations, yet the bailout of bank of america was done behind closed doors without investor public knowledge or input. could the american people really understand in any way what happened? i mean, what really happened? was mr. lewis bullied into going

forward with his own bad deal or did mr. lewis recklessly agree to pay too much for merrill lynch so that the federal government felt backed into a corner when faced with the prospect of lewis backing out of the merrill lynch deal and of course we experienced the inevitable bankruptcy of merrill lynch? could you respond to that? >> yes, sir. today i think it's been very productive in terms of transparency and more information about what happened. clearly there was a very difficult period and many complex problems being addressed but as i've indicated, i believe that we solved this problem without in any way taking steps that were either beyond the law or unethical and i believe we did the right thing in order to stabilize both companies and the financial system.

>> thank you very much. thank you, mr. chairman. >> gentleman's time has expired. congresswoman norton. >> we do appreciate the transparency, mr. chairman, you are trying to bring to this transaction. i'm not inclined to second-guess people's judgment when trying to deal with problems that are arising, problem after problem, in the midst of a crisis, an unusual crisis at that. i am interested in bank of america's options under the circumstances, bank of america had shareholders. we did have a series of rather unusual late-developing facts or factors to come to light in the

process of the negotiations for this agreement. i am wondering if it would not be true that -- let me lay the predicate for this by saying you apparently, the legal division apparently had an opinion that no delaware court had been found that i'm quoting now "had found a material adverse effect to have occurred in the context of a merger agreement." one would have to know the fact dollars surrounding those and suppose they could not possibly have been at the same level of intensity because we were in the middle of a nati