Former Treasury Secretary Henry M. Paulson Jr., in prepared testimony to be presented Thursday, deflects the blame from Federal Reserve Chairman Ben S. Bernanke and says he is the one who told Bank of America CEO Kenneth Lewis that he would be removed if he didn’t go through with his acquisition of Merrill Lynch in December.
It was only one of many times President George W. Bush’s last Treasury secretary knocked heads of top bank executives as he combated the worst financial crisis since the Great Depression. Among his strong-arm tactics, Mr. Paulson in October forced the nine biggest banks to accept $125 billion of federal funding to ensure they did not become victims of the crisis like Merrill Lynch & Co. Inc., though Goldman Sachs Group Inc., JP MorganChase & Co. and other banks did not want the cash and later returned it.
In late December as Bank of America Corp. was considering backing out of the Merrill deal because of mounting losses on bad loans, Mr. Paulson said he told Mr. Lewis that the bank’s principal regulator, the Fed, might oust him and the bank board if they failed to complete the takeover, the Treasury chief disclosed in written testimony to be presented to the House Committee on Oversight and Government Reform on Thursday. Copies of the testimony were made available to reporters.
“I intended to deliver a strong message … that it would be unthinkable for Bank of America to take this destructive action, for which there was no reasonable legal basis and which would show a lack of judgement,” Mr. Paulson said, adding that was also the “strong opinion of the Federal Reserve,” which is the bank’s principal regulator. He cited a Dec. 20 e-mail from Jeffrey Lacker, president of the Fed’s Richmond reserve bank, which oversees the Charlotte, N.C., bank, that said “management is gone” if the bank walked away from the transaction and ended up needing another federal bailout.
Mr. Paulson said his threat to Mr. Lewis was legal and “appropriate” under the circumstances. But the bank walking away from the deal was “not a legally viable option” and would have shown “a colossal lack of judgement and would jeopardize Bank of America, Merrill Lynch, and the financial system,” he said.
Republican members of the committee have questioned whether the Fed or Treasury had legal authority to threaten Mr. Lewis as long as the bank remained viable, while Democrats on the committee maintain the regulators did not go far enough and should have removed the bank chief.
In several previous hearings focusing on the Merrill Lynch deal, committee members have accused Mr. Bernanke of threatening Mr. Lewis — something the Fed chief adamantly denied. But Mr. Bernanke said the Fed would have been justified in removing Mr. Lewis if the bank’s cancellation of the Merrill deal had resulted in further market turmoil and another bailout of the bank.
On a related matter, Mr. Paulson said he never discouraged Mr. Lewis from making disclosures to bank investors about the mounting losses at Merrill, as required by securities law. The bank did not disclose the problems at Merrill until Jan. 16, two weeks after completing the Merrill acquisition.
To help the bank carry through with the deal, Mr. Paulson in early January provided it with a $20 billion cash infusion and the Fed agreed to share losses on $118 billion of souring loans, bringing the total value of its federal bailout to about $50 billion.