- The Washington Times - Tuesday, October 20, 2009

Government regulators threatened to remove top Bank of America executives in December if they didn’t acquire Merrill Lynch, but also agreed to provide taxpayer funds to compensate for Merrill’s poor performance, according to company records obtained by The Washington Times.

The documents — e-mails between bank executives and their outside lawyers as well as board-meeting talking points prepared for then-Chief Executive Ken Lewis — indicate that former Treasury Secretary Henry Mr. Paulson Jr. and Federal Reserve Board Chairman Ben S. Bernanke promised to give the bank taxpayer bailout funds to compensate them for Merrill’s poor performance.

Summaries written by the executives of their conversations with Mr. Bernanke and Mr. Paulson also appear to show that Treasury Secretary Timothy F. Geithner vowed to honor the deal once he took office, contrary to congressional testimony given by Mr. Bernanke this summer in which he said Mr. Geithner was not involved in the discussions.

Bank of America’s acquisition of Merrill Lynch — and the government’s role in the deal — is the subject of a hearing Thursday before the House Committee on Oversight and Government Reform. Last week, the company decided to waive its attorney-client privilege and turned over some 1,000 documents to committee investigators ahead of the hearing.

In the documents, Bank of America executives repeatedly referenced threats from regulators that their top brass would be on the chopping block if they attempted to renegotiate their bid for Merrill by declaring what’s known as a material adverse change (MAC), a clause in their acquisition agreement that would allow them to renegotiate the price of the transaction in light of Merrill’s mounting losses.

“The Treasury and the Fed strongly stated that if we were to invoke the MAC clause and fail to close this transaction, they would remove the board and management due to the risk we would create in the system,” according to draft talking points prepared by company lawyers for Mr. Lewis ahead of a Dec. 22, 2008, board meeting.

Bank executives say financial regulators assured them that taxpayer money from the $700 billion Troubled Asset Relief Program (TARP) was available to compensate them for Merrill’s disappointing fourth-quarter financial results if they followed through on the acquisition.

In an e-mail to Kevin Warsh, a member of the Federal Reserve Board of Governors, Bank of America Chief Financial Officer Joe Price wrote: “I think Ken [Lewis] mentioned to me that there was some 45 bn still out there, clearly enough to replenish the capital loss at Merrill. FYI - Treasury (HP) had a higher number but nevertheless, enough to deal with this issue.”

According to the notes of a board member, Mr. Lewis likewise said at a board meeting the same day that Mr. Bernanke told him $45 billion in TARP funds were “available if necessary.”

Elsewhere in the records, handwritten notes by a bank official during a Jan. 9, 2009, meeting indicate that the Fed was willing to provide even more taxpayer assistance: “400 B Discount Window Available For Armageddon Scenario.”

The documents appear to contradict testimony made by Mr. Paulson to the House investigative panel this summer in which he told lawmakers that he and bank executives had not agreed on a dollar amount of TARP funds before the transaction.

“I said, ‘Ken, we do not have any kind of a specific agreement here … we haven’t decided on the size of the program, the dollar amount,’” Mr. Paulson said, adding that because there was no agreement, there was thus no need to disclose publicly any Treasury commitments.

A spokeswoman for Mr. Paulson did not immediately respond to a request for comment.

Kurt Bardella, a spokesman for Rep. Darrell Issa, California Republican and the senior GOP member on the House committee, said the merger was the outcome of “a collaborative effort orchestrated by Ken Lewis, Henry Paulson, Ben Bernanke, Timothy Geithner and Larry Summers.”

“As a result of this collaboration, the taxpayers ended up footing the bill so Bank of America didn’t have to absorb Merrill Lynch’s losses,” Mr. Bardella said. “It’s clear now that this ‘shotgun wedding’ began when Bank of America told government officials that they intended to exercise the MAC clause, well before Hank Paulson and other officials first made their threat to have the board and management removed.”

Bank executives said they had assurances that a change in administration would not jeopardize the deal. They asked for a written guarantee that they would receive TARP funds for not invoking the MAC clause but instead had to rely on the word of the outgoing and incoming administrations.

“He indicated that we had the strongest assurances (Fed Chairman that will survive the administration change, current UST Secretary, their representations that Tim Geithner, incoming UST secretary was in agreement, etc.) that they were all aware and in agreement with the representations made to [Ken Lewis],” Mr. Price said in a Dec. 29, 2008, e-mail to other executives, referring to a conversation with Mr. Warsh of the Fed.

The reference is one of several that suggest Mr. Geithner had signed off on the deal — in apparent contrast to statements made by Mr. Bernanke to congressional investigators this summer.

But Mr. Bernanke told the House panel on June 25 that Mr. Geithner “had already been designated as the Treasury secretary nominee, and therefore he recused himself from detailed intervention or involvement in such transactions. We did give him basic information so that he would be informed, but he was not involved in the details of the — of the package that was put together for Bank of America.”

A Fed spokeswoman referred questions about Mr. Geithner’s involvement to a Treasury spokesman.

“After being named as Treasury secretary nominee, Geithner was recused from any issues involving individual banks, including Bank of America,” spokesman Andrew Williams said. “It was perfectly natural and appropriate that the incoming Treasury secretary would be kept apprised of key developments, but he was not making decisions for the government.”

A spokesman for Bank of America did not respond to a request for comment.

A spokeswoman for Rep. Edolphus Towns, New York Democrat and chairman of the House oversight panel, did not respond to a request for comment.

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