Bernanke says Fed acted with 'highest integrity' on Merrill deal

Federal Reserve Chairman Ben Bernanke took his turn today before a Congressional committee investigating last year's acquisition of Merill Lynch by Bank of America (BAC). He told lawmakers the central bank acted with "the highest integrity" in discussions about the deal.

"I did not play a role in arranging this transaction and no Federal Reserve assistance was promised or provided" to give either company an incentive to go through with it, he said.

Bernanke's testimony comes two weeks after Bank of America CEO Ken Lewis told the panel that regulators threatened him with removal if he tried to reverse course and back away from taking over Merrill. "I never said that I would replace the board and management" if they attempted to pull out, Bernanke testified.

At issue is the interplay between Bernanke and Lewis late last year, after Bank of America determined that losses at Merrill Lynch were mounting faster than previously thought. Those losses led Lewis to contemplate exercising a clause in the merger agreement between the companies that would have allowed Bank of America to back away in the event of a "material adverse change" in Merrill's financial condition.

E-mails discovered during lawmakers' investigation revealed that Bernanke and other Fed officials thought Lewis was threatening to invoke the clause as a "bargaining chip" and saw the move as "not credible." Meanwhile, Lewis testified that Bernanke threatened to replace him if he sought to exit the deal.

Bernanke rebutted that claim, saying that he would only have considered taking that step if a decision to scuttle the transaction weakened Bank of America so much that it needed further government assistance.

The testimony could foreshadow some of the questions Bernanke, whose term as Fed chairman ends early next year, will face if President Barack Obama decides to reappoint him.

It seems unlikely Bernanke will back down from his defense of the Fed's actions. "I have nothing that I regret about the whole transaction," he said.

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