Congressman Patrick McHenry (NC-10) delivered the following opening statement at today’s hearing of the House Committee on Oversight and Government Reform.  The hearing dealt with the acquisition of Merrill Lynch by Charlotte-based Bank of America.

Congressman McHenry has raised concerns about the Treasury Department’s conduct in negotiating the deal.

“Unfortunately, Bank of America’s acquisition of Merrill Lynch, and its controversial receipt of TARP funds from the federal government shortly after, is a saga that has played out largely in the newspapers, rather than under congressional oversight in committee hearings.  It is regrettable that neither former Secretary Paulson, nor Secretary Geithner, nor any representatives from the current Administration agreed to testify alongside Mr. Lewis today.  We have materials from the Fed, but no one to speak to them.  This is preposterous.  We are left with only one side of the story to hear, and no context in which to place it.  I hope that we will be able to bring the other parties to this deal in before the Committee at a future date and put the rest of the pieces together in this puzzle,” stated Congressman McHenry.

Statement of Congressman Patrick McHenry
Committee on Oversight & Government Reform
“Bank of America and Merrill Lynch: How did a Private Deal Turn Into a Federal Bailout”
June 11, 2009

In September of 2008, Bank of America Corporation announced it would acquire the struggling brokerage giant, Merrill Lynch, in a $50 billion all-stock transaction.  By adding Merrill Lynch’s more than 16,000 financial advisers to its team, Bank of America now has the largest retail brokerage in the world with more than 20,000 advisers and $2.5 trillion in client assets. The acquisition has propelled Bank of America to the top of the list as the leading underwriter of global high yield debt and the third largest underwriter of global equity.
 
Shortly after closing the deal on Merrill on January 1st, Bank of America was on the receiving end of a $20 billion injection from the federal government for “troubled” financial companies – a shock to shareholders and pension holders – as a result of an inherited $15 billion net loss incurred by Merrill in the last months of 2008.  Since then, the company and Mr. Lewis have been vilified by the public and the press for not disclosing losses at Merrill before the merger was finalized.
 
However, details have emerged over the last three months about the role of the Treasury and the Federal Reserve in the plan for a healthy company to buy another that was considered a systemic risk by the government.  The more we learn about the government’s conduct, the more troubling the story becomes. 
 
When he appeared before NY Attorney General Cuomo, Mr. Lewis stated that Bank of America faced intense pressure to buy Merrill in order to absorb their financial woes and keep them from spreading across the industry, and that he was instructed to remain silent while the two sides negotiated government funding to do so.
 
I can appreciate that the Treasury Department felt that this transaction was important because of the perceived risk Merrill’s collapse would pose to the entire financial system.  However, that does not justify the tactics that were employed.  As a result, shareholders were kept in the dark about the losses Bank of America was taking ownership of.   A high-ranking government official threatening the employment of bank officials is not an appropriate means to closing a deal of such magnitude.
 
Unfortunately, Bank of America’s acquisition of Merrill Lynch, and its controversial receipt of TARP funds from the federal government shortly after, is a saga that has played out largely in the newspapers rather than under congressional oversight in committee hearings. 

It is regrettable that neither former Secretary Paulson, nor Secretary Geithner, nor any representatives from the current Administration agreed to testify alongside Mr. Lewis today.  We have materials from the Fed – but no one to speak to them.  This is preposterous. 

We are left with only one side of the story to hear, and no context in which to place it.  I hope that we will be able to bring the other parties to this deal in before the Committee at a future date and put the rest of the pieces together in this puzzle.
 
The testimony we will hear today from Mr. Lewis begs the question – How do we regulate systemic risk into the future? – a question that’s being discussed right now in the Financial Services Committee, on which I also serve.  
 
As Congress begins to dissect the events of the past several months, I hope we, along with the American public, are able to get a much better understanding of what has transpired behind the scenes. 
 

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