Statement of
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
On
Bank of America Acquisition of Merrill Lynch
before the
Committee on Oversight and Government Reform
And the
Subcommittee on Domestic Policy
House of Representatives; Room 2154
Rayburn House Office Building
December 11, 2009
Thank you Chairman Towns, Chairman Kucinich, Ranking Members Issa and Jordan,
and members of the Committee. I appreciate the Committee's interest in the role of the
Federal Deposit Insurance Corporation in the measures being taken to address the
challenges facing the economy and the financial industry.
As you know, just over one year ago, we faced an historic liquidity crisis in global
financial markets that shook the confidence of the financial systems in the United States
and around the globe. Markets were under extraordinary stress and exceptional
measures were taken in an effort to stabilize the economy. Included in those measures
were steps taken to provide capital and liquidity to our nation's financial institutions. I
believe that these measures have largely accomplished their objectives and have
remedied many of the immediate problems associated with the financial crisis.
As requested by the Committee, my testimony today will focus on the FDIC's role in the
decision to provide assistance to Bank of America. Let me note at the outset that Bank
of America is an open institution and the FDIC is very sensitive, as I am sure the
Committee is, about any discussion of the condition of open and operating insured
depository institutions.
Background
The FDIC has the statutory responsibility to oversee the national deposit insurance
system. As part of this responsibility, the FDIC is responsible for resolving all failures of
insured financial institutions. The FDIC also serves as primary federal supervisor for
approximately 5,000 state-chartered banks that are not members of the Federal
Reserve System. Since the creation of the FDIC during the Great Depression, deposit
insurance has played a crucial role in maintaining the stability of the banking system. By
protecting deposits, the FDIC ensures the security of the most important source of
funding available to insured depository institutions -- funds that can be lent to
businesses and consumers to support and promote economic activity.
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation
On
Bank of America Acquisition of Merrill Lynch
before the
Committee on Oversight and Government Reform
And the
Subcommittee on Domestic Policy
House of Representatives; Room 2154
Rayburn House Office Building
December 11, 2009
Thank you Chairman Towns, Chairman Kucinich, Ranking Members Issa and Jordan,
and members of the Committee. I appreciate the Committee's interest in the role of the
Federal Deposit Insurance Corporation in the measures being taken to address the
challenges facing the economy and the financial industry.
As you know, just over one year ago, we faced an historic liquidity crisis in global
financial markets that shook the confidence of the financial systems in the United States
and around the globe. Markets were under extraordinary stress and exceptional
measures were taken in an effort to stabilize the economy. Included in those measures
were steps taken to provide capital and liquidity to our nation's financial institutions. I
believe that these measures have largely accomplished their objectives and have
remedied many of the immediate problems associated with the financial crisis.
As requested by the Committee, my testimony today will focus on the FDIC's role in the
decision to provide assistance to Bank of America. Let me note at the outset that Bank
of America is an open institution and the FDIC is very sensitive, as I am sure the
Committee is, about any discussion of the condition of open and operating insured
depository institutions.
Background
The FDIC has the statutory responsibility to oversee the national deposit insurance
system. As part of this responsibility, the FDIC is responsible for resolving all failures of
insured financial institutions. The FDIC also serves as primary federal supervisor for
approximately 5,000 state-chartered banks that are not members of the Federal
Reserve System. Since the creation of the FDIC during the Great Depression, deposit
insurance has played a crucial role in maintaining the stability of the banking system. By
protecting deposits, the FDIC ensures the security of the most important source of
funding available to insured depository institutions -- funds that can be lent to
businesses and consumers to support and promote economic activity.
In the event of a bank failure, the FDIC must determine which resolution strategy will be
used. The decision for each failed institution must be in keeping with the least-cost
provisions in our operating statute, the Federal Deposit Insurance Act. The Act further
includes provisions to authorize action by the Federal government in circumstances
involving systemic risk. Specifically, it permits the FDIC to take action or provide
assistance as necessary to avoid or mitigate the effects of a perceived systemic risk. In
order for this to occur, the Act requires that there be a finding of systemic risk by the
FDIC's Board of Directors, concurrence of the Board of Governors of the Federal
Reserve System and a subsequent determination of systemic risk by the Secretary of
the Treasury, following consultation with the President.
Bank of America
As deposit insurer for Bank of America NA ("Bank of America") and the other insured
depository institutions owned by Bank of America Corporation ("BOA") and Merrill Lynch
& Co., Inc. ("Merrill Lynch"), the FDIC has a continuing stake in the financial well-being
of those insured depository institutions. The FDIC is not the primary federal regulator for
bank holding companies or for most of the largest banks, including Bank of America.
We rely heavily on the judgment and observations of the primary federal regulator at the
largest financial institutions. However, because of our role as deposit insurer, we
maintain an examiner presence -- albeit limited -- at the largest banks, such as Bank of
America.
In mid-September 2008, in the wake of Lehman's failure, BOA had announced that it
would acquire Merrill Lynch. That acquisition was scheduled to close at the beginning of
2009. BOA's acquisition of Merrill Lynch was approved by the Federal Reserve on
November 26, 2008.1
On or very shortly before December 21, 2008, the FDIC was told by the Federal
Reserve and Treasury that BOA had expressed reservations about completing the
acquisition of Merrill Lynch. The FDIC was told that some form of assistance might be
necessary. Over the next three and a half weeks, examiners from the Federal Reserve,
OCC, and FDIC worked to learn more about the type of assistance that might be
required and the pool of assets that BOA suggested might be included in a transaction
where the FDIC, Treasury and Federal Reserve would share in a guarantee against
certain losses ("ring fence" transaction). Based upon the information that was made
available, the FDIC continued to raise questions about whether any assistance was
necessary. The FDIC made no commitment to provide assistance to BOA at that time.
On January 9, I participated in a conversation with Secretary Paulson, Chairman
Bernanke, and several other regulatory staff in which BOA's financial condition was
discussed. Secretary Paulson indicated that providing assistance to BOA in a form
similar to what had been provided to Citigroup -- capital assistance and asset
guarantees -- had been discussed, and that he hoped the FDIC would participate in
providing such assistance. We continued to gather information about whether any
assistance was necessary. We also asked for additional information about BOA's
used. The decision for each failed institution must be in keeping with the least-cost
provisions in our operating statute, the Federal Deposit Insurance Act. The Act further
includes provisions to authorize action by the Federal government in circumstances
involving systemic risk. Specifically, it permits the FDIC to take action or provide
assistance as necessary to avoid or mitigate the effects of a perceived systemic risk. In
order for this to occur, the Act requires that there be a finding of systemic risk by the
FDIC's Board of Directors, concurrence of the Board of Governors of the Federal
Reserve System and a subsequent determination of systemic risk by the Secretary of
the Treasury, following consultation with the President.
Bank of America
As deposit insurer for Bank of America NA ("Bank of America") and the other insured
depository institutions owned by Bank of America Corporation ("BOA") and Merrill Lynch
& Co., Inc. ("Merrill Lynch"), the FDIC has a continuing stake in the financial well-being
of those insured depository institutions. The FDIC is not the primary federal regulator for
bank holding companies or for most of the largest banks, including Bank of America.
We rely heavily on the judgment and observations of the primary federal regulator at the
largest financial institutions. However, because of our role as deposit insurer, we
maintain an examiner presence -- albeit limited -- at the largest banks, such as Bank of
America.
In mid-September 2008, in the wake of Lehman's failure, BOA had announced that it
would acquire Merrill Lynch. That acquisition was scheduled to close at the beginning of
2009. BOA's acquisition of Merrill Lynch was approved by the Federal Reserve on
November 26, 2008.1
On or very shortly before December 21, 2008, the FDIC was told by the Federal
Reserve and Treasury that BOA had expressed reservations about completing the
acquisition of Merrill Lynch. The FDIC was told that some form of assistance might be
necessary. Over the next three and a half weeks, examiners from the Federal Reserve,
OCC, and FDIC worked to learn more about the type of assistance that might be
required and the pool of assets that BOA suggested might be included in a transaction
where the FDIC, Treasury and Federal Reserve would share in a guarantee against
certain losses ("ring fence" transaction). Based upon the information that was made
available, the FDIC continued to raise questions about whether any assistance was
necessary. The FDIC made no commitment to provide assistance to BOA at that time.
On January 9, I participated in a conversation with Secretary Paulson, Chairman
Bernanke, and several other regulatory staff in which BOA's financial condition was
discussed. Secretary Paulson indicated that providing assistance to BOA in a form
similar to what had been provided to Citigroup -- capital assistance and asset
guarantees -- had been discussed, and that he hoped the FDIC would participate in
providing such assistance. We continued to gather information about whether any
assistance was necessary. We also asked for additional information about BOA's