- The Washington Times - Thursday, July 16, 2009

Former Treasury Secretary Henry M. Paulson Jr., in defending the federal government’s push for a reluctant Bank of America to complete a planned takeover of Merrill Lynch late last year, said it would have been “unthinkable” and potentially illegal for the bank to scuttle the deal.

Mr. Paulson, who is set to testify Thursday morning on the merger before the House Oversight and Government Reform Committee, said in a prepared statement submitted to the panel that he “intended to deliver a strong message” to Bank of American Chief Executive Ken Lewis that backing out of the deal would be a “destructive action for which there was no reasonable legal basis.”

He added that such an action “would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch and the financial system.”

The committee is investigating claims that top government officials, including Mr. Paulson and Federal Reserve Chairman Ben S. Bernanke, inappropriately strong armed Mr. Lewis to complete deal because the bank had received $25 billion in federal bailout funds.

TWT RELATED STORY: Paulson takes responsibility in Merrill deal

Although Bank of America had reached an agreement in September to buy Merrill Lynch, Mr. Lewis has said that by December he had considered invoking a clause that would have canceled the deal due to concerns regarding Merrill Lynch’s increasing financial losses.

Mr. Lewis told the committee last month that when he approached federal regulators about his concerns, they advised him to stick with the deal because scraping it would further hurt the wounded U.S. economy.

The bank chief said that Bush administration and the Federal Reserve threatened to remove top executives of the bank unless the financial giant went ahead with the merger.

Mr. Lewis said that while the government pressure was not the deciding factor in the bank’s eventual decision to acquire the global financial services firm, “what gave me concern was that they would make that threat to a bank in good standing.”

Mr. Paulson said that he told Mr. Lewis that it was possible the Fed would remove management and board members if the deal fell through, adding that any bank board that “triggered such destabilization” could be subject to removal by the Fed under federal statute, “and should be.”

The former secretary, who stepped down in January with the arrival of the Obama administration, said Mr. Bernanke never asked him to tell Mr. Lewis any specific action the Fed might take.

Mr. Bernanke also has denied any wrongdoing, and has told committee that Mr. Lewis had the final say on the Merrill Lynch takeover.

Following the merger in January, Bank of America received an additional $20 million in federal bailout money.

Mr. Paulson denied accusations he placed the concerns of the nation’s overall financial system above those of a private institution its investors, saying that the interests of the nation and Bank of America were intertwined.

Mr. Paulson denied accusations that he told Mr. Lewis to keep quiet about his concerns over Merrill Lynch’s losses, saying “that simply did not happen.”

The former Bush cabinet member also applauded President Obama’s plan to create a central regulator for the nation’s financial systems.

“Had the government had such authority in early 2008, three of the important events that rattled markets — Bear Stearns, Lehman Brothers, and AIG — could have been handled very differently, with far less impact on the stability of our financial system and our economy,” he said.

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