Paulson and Bernanke Forced Bank of America Takeover of Merrill Lynch

By: Money_Morning

Jason Simpkins writes: Bank of America Corp. (BAC) Chairman and Chief Executive Kenneth Lewis said in testimony before New York's attorney general that Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry M. Paulson pressured him not only to move ahead with a merger with Merrill Lynch despite reservations, but also to stay quiet about the mounting losses at the crumbling investment bank, The Wall Street Journal reported.

Transparency has long been a cornerstone of both democracy and the free market, but Lewis's testimony that implies the CEO of one of America's largest financial institutions - an institution that received more than $20 billion in taxpayer money - neglected to alert investors and potential shareholders to the full scope of Merrill's losses prior to his company's acquisition. It also implicates two prominent government officials in that decision.

Lewis made the comments in testimony given before New York's attorney general as part of an investigation into bonus payments at Bank of America. The Journal reviewed a transcript of that testimony, the paper reported today. 

The merger, originally valued at $50 billion, was announced on Sept. 15, about an hour before Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt. Afraid the collapse of Merrill Lynch would cause further deterioration of panic-stricken markets, the government helped facilitate the deal with $25 billion of capital -$15 billion in October and another $10 billion in January - from the U.S. Treasury Department's $700 billion Troubled Asset Relief Program (TARP).

Shareholders of Merrill Lynch and Bank of America voted to approve the merger on Dec. 5.  Lewis said in his testimony that he first considered backing out of the deal on Dec. 13 when Bank of America Chief Financial Officer Joe Price informed him that projected after-tax losses were "about $12 billion," the Journal reported.

Merrill Lynch actually lost $15.84 billion in the fourth quarter. BofA posted a fourth-quarter loss of $1.79 billion, but was forced shift more weight to the U.S. taxpayer, as the government agreed to guarantee $118 billion of Bank of America assets, including commercial and real estate holdings and credit default swaps. Bank of America was required to absorb the first $10 billion of losses from its pool of assets.

Nearly 13% of the first $350 billion in TARP funds went to Bank of America.

"As we saw the anticipated loss accelerating, we reevaluated our rights under the deal," Lewis said in BofA's fourth-quarter conference call. "The government was under the view that walking away would cause significant concerns and serious systemic harm to the financial markets."

Lewis elaborated in his testimony, saying that while he was not explicitly instructed to keep quiet about Merrill's losses but that Paulson and Bernanke suggested his job would be jeopardized if he did.

"I was instructed that 'We do not want a public disclosure.'" Lewis said.

Lewis went on to describe the conversation he had with Treasury Secretary Paulson in which he expressed his desire to abandon the deal:

"I can't recall if he said, 'We would remove the board and management if you called it [off]' or if he said 'we would do it if you intended to.' I don't remember which one it was," Mr. Lewis said. "I said, 'Hank, let's de-escalate this for a while. Let me talk to our board.'"

When asked by investigators if Paulson was "really asking Bank of America shareholders to take a good part of the hit of the Merrill losses," Lewis said "Over the short term, yes."

BofA shares have lost three-quarters of their value since the Merrill Lynch acquisition was announced.

Bank of America shareholders will vote on whether Lewis will keep his position as chairman and CEO at their annual meeting on April 29.

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