Bank of America CEO Tells of Fed Threats to Buy Merrill Lynch

Testifying before the House Oversight Committee today, the CEO of Bank of America, Ken Lewis, said that federal regulators threatened to fire him and the bank's board of directors if the bank failed to complete a planned acquisition of then-teetering investment bank, Merrill Lynch.

Lewis testified that during Bank of America's purchase of Merrill in December 2008, a last-minute report of massive losses at the investment bank raised enough red flags for the bank's leadership that it began a legal process to back out of the purchase, but federal officials objected.

"If we went through with the (cancellation of the sale)," Lewis said, federal officials told him "the government could or would remove management or the board. The threat was not what gave me concern. It was that they would issue a threat to a bank in good health."

Lewis said the threats were not the only reason the bank decided to complete the acquisition. But, he added, "That was a factor in our decision, given the fact that the government felt that strongly."

Internal e-mails between regulators show that they balked at Bank of America's move to cancel the purchase and would use their authority to influence Bank of America's decision.

In one e-mail, a Federal Reserve staffer recounted a conversation with Federal Reserve Chairman Ben Bernanke. "Just had a long talk with Ben," the e-mail reads. "Says they think the threat (to cancel the sale) is irrelevant because it is not credible. Also, intends to make it even more clear that if they play that card and then need assistance, management is gone."

Another e-mail described negotiations between the Federal Reserve and Bank of America, in which Bank of America officials said they would need more TARP money to make up for losses that Merrill Lynch would add to Bank of America's balance sheet. The staffer wrote, "I reminded them that they would look equally bad in the eyes of market and regulators if they terminated the transaction." Bank of America eventually received $45 billion in TARP funds.

During the hearing, frustration grew among committee members as Lewis refused to say whether he felt "pressured" or "threatened" by then-Treasury Secretary Henry Paulson, Bernanke or other federal officials, despite his earlier description of threats.

When Rep. Elijah Cummings (D-Md.) asked, "So you were pressured?" Lewis said, "It's hard to find the right word to describe what happened, so I find it best to let other people find the word."

Rep. Jeff Flake (R-Ariz) responded, "It seems completely incredulous. If this isn't considered a threat, what would be considered a threat? Kidnap the family dog? Release your college G.P.A. score?" Flake then suggested Lewis might have some variation of Stockholm syndrome. "You're still being regulated and it seems you've identified with your captors or regulators here." Flake half-jokingly asked Lewis to send him a secret signal to reveal what he was really thinking. "I don't know, can you wiggle your pinkie finger?"

Several members attempted to extract confirmation from Lewis that he felt threatened, to which he eventually said, "Whatever you want to call it, I wouldn't change the way I described it."

Before ending the questioning, Rep. Darrell Issa (R-Calif.) said, "Nowhere in the TARP does it give Henry Paulson or Ben Bernanke the power to force shotgun weddings."

"We are arguing over whether you were threatened or whether you felt threatened. But I think we've seen there was a threat."