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 As President Obama presses to grant the Federal Reserve broad new regulatory powers, its past handling of the Bank of America Corp. (NYSE:BAC) and Merrill Lynch & Co. merger is coming back to haunt it. Fed Chairman Ben Bernanke will trek up to Capitol Hill Thursday to testify before the House Oversight and Government Reform Committee about his role in the controversial deal. The hearing promises to be a long one for Bernanke. House Republicans are teeing up to go after him about the extent of government involvement in making sure the acquisition went forward after BofA's CEO Ken Lewis got cold feet when he saw the mounting fourth-quarter losses at Merrill. The congressional sideshow may not worry the Obama administration too much as rumors circulate that it already has selected a replacement in economic adviser Larry Summers. In a statement the committee's top Republican representative, Darrell Issa, told Reuters: "The committee has already learned that Ben Bernanke and the Federal Reserve made inappropriate threats to fire Bank of America management unless they went ahead with the 'shotgun wedding' that was the Merrill Lynch acquisition. The Federal Reserve also engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies." When Lewis testified before the same committee on June 11, he declined to characterize any pressure from Treasury or the Fed as "threats," but the GOP and others have pointed to the BofA-Merrill deal as reason why the Fed shouldn't serve as a sort of "super-regulator." The committee also has a stack of Fed e-mails it had to subpoena because the regulator refused to turn them over. One of the e-mails discussed during the Lewis hearing indicated that Bernanke felt Lewis wanted a letter from the Fed saying that the government forced BofA to close the deal. In the e-mail, Bernanke commented that he thought Lewis wanted the letter to protect himself against shareholder lawsuits and because he was worried about his job. Lewis responded that he did not recall requesting such a letter. While Bernanke is giving his side of the story Thursday, the Fed will be engaging other parts of Congress as it seeks to broaden its regulatory role. To that end the Fed recently hired a lobbyist to help press its case on Capitol Hill. - George White See Reuters story See Dealscape story on Ken Lewis testimony See The Deal magazine story on regulatory reform and Congress See Dealscape story about possible Bernanke replacement
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