Thursday, June 11, 2009

The Long Knives Are Out for Bernanke

At a House hearing, today, BofA CEO Ken Lewis repeated his charge that Bernanke and Paulson muscled him into making the acquisition of Merrill Lynch. This puts Bernanke in the hot seat, since in previous testimony he has denied doing so.

There is no smoking gun, but Bernanke did tell someone he had a gun and planned to point it. That is, at the time, Richmond Fed president Jeffrey Lacker spoke to Bernanke about the matter and then wrote the following email: “Just had a long talk with Ben . . . says they [The Fed] think the MAC threat [to pull the Merrill bid] is irrelevant because it’s not credible. Also intends to make it even more clear that if they [BofA] play that card and they need assistance, management is gone.”

There are two big questions, of course: How will Bernake deal with questions around this subject, if he is called to testify? Will the Administration support Bernanke, given that Larry Summers would like to replace him?

The deeper questions are: Will this impact the way Bernanke handles the money supply? Is he apt to maintain greater quantitative easing than he otherwise would, just to insure that the economy does not become a further problem, while he deals with the muscling probe?

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