Did Feds Strong-Arm BoA-Merrill Deal?

Bank of America Chairman and CEO Ken Lewis listens during a news conference in New York, Monday, Sept. 15, 2008. Bank of America on Monday began adding another slice to its growing financial services empire, buying Merrill Lynch in a $50 billion deal that would create a bank that offers everything from fixed-income trading to credit card lending. (AP Photos/Bebeto Matthews) AP Photo/Bebeto Matthews

New York's attorney general said Thursday government officials pressured Bank of America Corp. CEO Ken Lewis to complete the bank's purchase of Merrill Lynch, threatening his job security.

A letter from New York State Attorney General Andrew Cuomo's office sent to Congressional leaders and federal regulators said Lewis testified in February that former Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke threatened to oust Bank of America's management if the bank tried to back out of buying Merrill Lynch.

New York Attorney General Andrew Cuomo's April 23 letter to Sen. Chris Dodd, Rep. Barney Frank, SEC chairman Mary Schapiro and others describing the pressure that Fed chairman Ben Bernanke and then-Treasury Secretary Henry Paulson put on Bank of America CEO Ken Lewis to go through with the acquisition of Merrill-Lynch.
The government helped orchestrate the acquisition of the investment bank by Bank of America over the same weekend in September that another investment bank, Lehman Brothers, went under, setting off one of the most intense periods of the financial crisis.

Bank of America completed its purchase of New York-based Merrill Lynch on Jan. 1.

The bank has repeatedly defended its acquisition to shareholders and investors amid revelations of huge losses at Merrill Lynch before completion of the deal.

Bank of America today told CBS News correspondent Sharyl Attkisson it "acted legally and appropriately." Paulson's office said Treasury was committed to "preven(ting) systemically important institutions from failing," and that Bank of America would've shown "unthinkable" "lack of judgement" to halt the merger. Both Paulson and the Fed's Bernanke say that what Bank of America told shareholders "was left up to the Bank," Attkisson reports.

According to deposition testimony obtained by CBS News, Bank of America's Lewis said he learned of a "staggering amount of deterioration" in Merrill Lynch's finances where it lost $3 billion in just six days. Lewis informed Treasury Secretary Paulson he wanted to terminate the merger. But according to Lewis, Paulson threatened to fire him and the Bank of America board if they "fail(ed) to close" the deal. Lewis replied: "That makes it simple."

A spokeswoman for Sen. Chris Dodd, D-Conn., chairman of the Banking Committee, said Dodd spoke with Cuomo about what he called "troubling findings," and will "decide on next steps soon."

Lewis' testimony came in response to questioning by the attorney general's office about bonuses paid to Merrill Lynch employees in December, before BofA completed its acquisition of the investment bank. The attorney general's office was trying to determine the timing of the bonuses and whether BofA failed to provide adequate disclosure to shareholders about them.

The investigation's focus has since broadened. The attorney general's office continues to investigate the bonus payments, but is now also investigating potential securities fraud tied to Bank of America's purchase of Merrill Lynch and whether enough transparency was provided on the deal.

Bank of America has received $45 billion from the government's $700 billion Troubled Asset Relief Program (TARP). As part of that money, the bank received $20 billion in January after Lewis requested it to help offset mounting losses at Merrill.

Neil Barofsky, the special government inspector general assigned to oversee the TARP, said Thursday he will be issuing audits of various bailout transactions, including government assistance provided to Charlotte, N.C.-based Bank of America in connection with its acquisition of Merrill Lynch. He said his office is also conducting an investigation involving the bank.

"I would caution anyone from leaping to too many conclusions about what Secretary Paulson or Chairman Bernanke said until we've looked at all the facts and reported on them," Barofsky, who said he witnessed Lewis' testimony, told the economic panel. "The conclusion that one may draw that it's black and white that there was an order from the United States government not to disclose this information, I don't think it's as crystal clear."

Lewis has admitted in recent months that he had trepidation about completing the purchase of Merrill Lynch.

According to the testimony, Lewis had several discussions with government officials over his concerns about the deal, including his desire to scuttle it. Purchase deals typically allow companies to back out if there are significant changes in operations or performance.

But Secretary Paulson advised Lewis in late December that if Bank of America terminated the deal, the company's management and board would be replaced.

Lewis told the attorney general's office during his testimony that Secretary Paulson said to him: "I'm going to be very blunt, we're very supportive on Bank of America and we want to be of help, but ... we would remove the board and management if you called it."

Paulson essentially confirmed Lewis' testimony, according to the letter Cuomo sent to government officials on Thursday. But Bernanke and the Federal Reserve have declined to discuss the conversations with Lewis over the Merrill Lynch purchase. The Fed has invoked its bank examination privilege to avoid divulging what it told Lewis, according to the letter.

A government official, speaking on condition of anonymity because of the sensitive legal issues involved in the investigation, said Bernanke did not advise Lewis or Bank of America on questions of disclosure and their responsibilities in that arena.

Just a few weeks after the deal was completed, Bank of America's fourth-quarter earnings report showed the hit its balance sheet took on the Merrill Lynch transaction, making Lewis the target of much shareholder fury. In January, Bank of America reported a $2.39 billion fourth-quarter loss and Merrill disclosed a more than $15 billion loss.

During Lewis' testimony before the attorney general's office, he said he never considered resigning because Paulson and Bernanke had applied pressure to him to complete the deal. Lewis also admitted the deal was likely to hurt Bank of America shareholders over the next two to three years.

Some investors are pushing shareholders to vote against Lewis and other directors' re-election to the company's board. Bank of America's annual meeting is scheduled for Wednesday in Charlotte.

On Monday, Bank of America warned of worsening loan default problems even as it posted a first-quarter profit of $2.81 billion. The amount of its problem loans more than tripled to $25.7 billion, and Lewis said he couldn't predict when the bank's credit morass would end.
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