The Financial Times reports that the House Oversight committee wants to have a little chat with the Fed over the widespread reports that it muscled BofA more than a tad to complete its acquisition of Merrill after the Charlotte bank learned that the securities firm had posted large losses in December and tried to exit the deal.
What is noteworthy about this move is that this is apparently the first time in 20 years that Congress has subpoenaed the Fed. Some will lament the supposed loss of Fed independence, but Willem Buiter has already tagged the Fed as the second least independent major central bank, surpassed only by the Bank of Japan.
As we noted in an earlier post, the Fed began selling out its vaunted independence in the Greenspan era, when the Maestro made nice to the Clinton administration for an unidentified quid pro quo. presumably reappointment as Fed chairman. And Bernanke hasn’t simply been coordinating policy with the Treasury, but has instead acted as an off balance sheet vehicle for the Treasury, enabling it to circumvent budgetary constraints and evade the need for Congressional approval (and oversight too).
So while it is a positive step to see this shot across the Fed’s bow, Congress peculiarly is not going after the elephant in the room, namely the Fed’s increasing role, as Buiter put it, as quasi-fiscal agent of the Treasury.
From the Financial Times:
The Federal Reserve was served with a subpoena from a Congressional committee on Tuesday,…
The committee said it would “have a subpoena served on the Federal Reserve” as it tries to discover whether undue pressure was placed on Ken Lewis, chief executive of Bank of America, to complete an agreed deal to buy Merrill Lynch last year….
One person familiar with the Fed’s history could remember only one previous occasion in the past 20 years when it had been served with a subpoena.
As the Fed adopts non-conventional tactics such as buying bonds to restore liquidity to the economy, parts of Congress are trying to subject the institution to new oversight.
The House committee is holding a hearing on Thursday where Mr Lewis will be questioned. In his prepared testimony, seen by the Financial Times, Mr Lewis says that the Treasury and Fed “expressed significant concerns about the systemic consequences and risk to Bank of America” of declaring a “material adverse change” – a step that would precede cancelling the transaction….
The House oversight committee last month asked for e-mails and documents related to the deal. In response, Mr Bernanke said he had offered “full access to all papers, documents, notes related to those meetings and to the Bank of America-Merrill Lynch transaction”. However, the House oversight committee, chaired by Democrat Edolphus Towns, said the opportunity to review documents at the Fed’s office was insufficient and he wanted copies to pursue an investigation.
The Fed had resisted providing the documents because they contain confidential supervisory information.
In a Congressional hearing last month, Mr Bernanke denied acting inappropriately in urging BofA to complete the Merrill deal. He said the presence of legal staff, including the Fed’s general counsel, at a meeting with Mr Lewis ensured that “everything… met all the necessary legal requirements”.