Capitol Hill Republicans investigating the fire sale purchase of Merrill Lynch by Bank of America last year are digging for evidence of improper behavior by two Bush appointees - former Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.
Newly uncovered e-mails from inside the Federal Reserve, released by these Republicans, show that Paulson, Bernanke and other government officials used a heavy hand to make sure Bank of America CEO Ken Lewis completed the already-announced acquisition.
At issue is whether or not the government put improper pressure on Lewis to move ahead with the proposed acquisition of Merrill Lynch, even though he had learned that Merrill's losses were far worse than he thought, and he worried that the purchase might imperil his own shareholders.
A Republican briefing document obtained by POLITICO shows that investigators have reached a harsh conclusion about the role played by the two financial officials.
"In December 2008, Paulson and Fed Chairman Ben Bernanke put a gun to the head of Bank of America's CEO and Board of Directors in order to force through a merger with Merrill Lynch, even though Bank of America's CEO felt it was his duty to his shareholders to try his luck in the legal system and back out of the deal," the Republican investigators conclude. "They did so in the name of the financial system as a whole, without any transparency or consultation with the American people or the Congress."
Members will hear about about the transaction from Lewis himself during a Thursday morning hearing before the House Committee on Oversight and Government Reform. But while Lewis may be the marquee attraction, the e-mails will play a central role in the continuing drama over how much pressure the government exerted to make sure both sides completed their deal.
In one e-mail, Bernanke complains that Lewis threatened to back out of the purchase as "a bargaining chip," adding that he doesn't view the move "as a very likely scenario" and that Fed officials can "explain to [Bank of America] with some confidence why we think it would be a foolish move and why regulators will not condone it."
Lewis agreed to buy Merrill Lynch last fall in a hasty deal that was cobbled together with Treasury's assistance as Wall Street teetered on the brink of collapse. In December, after realizing Merrill's losses would be a big drag on his own company's bottomline, Lewis tried to exercise a clause in the contract that would allow him to back out. But officials with Treasury and the Federal Reserve rebuffed the Bank of America CEO, forcing him to complete an acquisition that hurt shareholders and required billions in federal funding.
At one point, an official with the Richmond Federal Reserve suggested, in an e-mail, that the government would remove Lewis and other top company officials if they didn't complete the deal.
Bank of America's board documented the threat in the minutes from a December meeting.
"The Treasury and Fed stated strongly that were the corporation to invoke the material adverse clause in the merger agreement with Merrill Lynch and fail to close the transaction, the Treasury and Fed would remove the board and management of the corporation," acccording to minutes released by the committee Wednesday evening.
The animus between Lewis and the government has become a well-established saga on Wall Street, rivaling the now-famous feud between the Bank of America head and former Merrill Lynch CEO John Thain. But these e-mails document just how far the government went to pressure Lewis to complete the acquisition. In their memo, Republican investigators conclude that "government officials crossed the line by applying inappropriate pressure on a private institution to go through with a business deal."
Californa Rep. Darrell Issa, the ranking Republican on the panel, has asked Oversight Chairman Edolphus Towns (D-N.Y.) to bring both Bernanke and Paulson before the panel, according to a Republican memo released to lawmakers on the eve of the hearing. Towns said further testimony "depends on what we get" on Thursday.
In their own memo, Democrats complain that "Bank of America's acquisition of Merrill Lynch in September 2008 began as a private business deal, then ended with a $20 billion taxpayer bailout."
By mid-January, the government had pledged $45 billion to Bank of America and promised to cover another $7.5 billion in toxic assets, according to the Democrats' report.
Bank of America bought Merrill Lynch for $55 billion in company stock last September, and Lewis claims he first learned that Merrill had lost $12 billion a little more than a week after company shareholders voted to approve the purchase - and long after the government gave Bank of America $20 billion under the Troubled Asset Relief Program.
Issa, an outspoken critic of the Wall Street bailout, has promised to pursue this investigation further beyond Lewis's testimony on Thursday.
"While Ken Lewis certainly had an integral role in the Bank of America-Merrill Lynch drama, his side of the story is not the only one," Republicans conclude in their pre-hearing memo. "In order to perform its duty, the committee will need to go beyond [Thursday's] hearing, which will only explore half of the story, and ask these tough questions of the public officials who form the other side of the equation of taxpayer bailouts."