Fed, Treasury pressured BoA to buy Merrill Lynch

Top officials at the Federal Reserve and Treasury Department applied heavy pressure on Bank of America's chief executive, Kenneth Lewis, to complete the company's acquisition of Merrill Lynch at the height of the financial crisis last December, new documents unearthed by congressional investigators show.

Congressional Republicans argue that the regulators vastly overstepped their authority to do so. The House Committee on Oversight and Government Reform is holding a hearing on the issue on Thursday.

A Republican briefing memo obtained by The Hill highlights internal documents and e-mails at the Federal Reserve that show regulators, including Ben Bernanke, the head of the central bank, dismissing Bank of America's concern about mounting losses at Merrill and their intention to pull out of the deal. The pressure included consideration of the government replacing Lewis and bank management.

An employee of the Richmond Federal Reserve, one of the 12 regional bank members, said in an e-mail that Bernanke believed if the bank invoked a statute to pull out of the deal, "management is gone."

The Republican memo is based on information obtained under subpoena. Lewis will be the only witness at the hearing.

The memo indicates that Republicans view the pressure as an improper role for government regulators.

“While government regulators are properly concerned with the overall health of the economy and the financial system, in the case of the Bank of America merger with Merrill Lynch, government officials crossed the line by applying inappropriate pressure on a private institution to go through with a business deal,” the memo says.

Lewis contacted officials at the Federal Reserve and Treasury on Dec. 17 because of “significant, accelerating losses” at Merrill Lynch, according to Lewis's prepared written testimony to the committee. The projected fourth-quarter losses at that point had jumped in the span of six days from $9 billion to $12 billion and were expected to hit $15 billion. The bank considered declaring a “material adverse change,” which could have allowed the bank to avoid completing the deal.

But according to the Republican memo, Bernanke wrote in an e-mail that regulators viewed that move as “foolish” and a “bargaining chip.” Bernanke wrote that “regulators will not condone it,” according to the memo.

Regulators were concerned about the shock that a collapsed deal would have on the financial system.

The congressional committee has been plowing into the communications between Bank of America, Bernanke and then-Treasury Secretary Henry Paulson. New York State Attorney General Andrew Cuomo has also been zeroing in on the interaction.

According to a letter from Cuomo to Congress in April, Paulson applied heavy pressure on Lewis to stick with the deal. Cuomo said that on Dec. 17, Paulson told Lewis that the government could or would remove the board of the bank.

An internal Federal Reserve study undertaken in December and cited in the Republican memo said that Merrill Lynch “could not survive as a stand-alone entity.”

However, another e-mail from a Richmond Federal Reserve bank official to an official in the United Kingdom indicated that the U.S. government would have stood behind Merrill even if the deal with Bank of America was scuttled. In the e-mail, the U.S. official said that it is “reasonable to expect” that Merrill “would be provided support necessary to preclude significant systemic disruption.” Those supports could have included more Federal Reserve lending, according to the Republican memo.

Bank of America went ahead with the purchase, which was completed in early January. The bank has received roughly $45 billion in government bailout money to date.

In the written testimony, Lewis defended the purchase.

“There does not appear to be any debate that these acquisitions were in the best interest of the financial system, the economy, and the country,” Lewis said in written testimony.

Lewis said that Merill Lynch accounted for 75 percent of the $4.2 billion the Charlotte, N.C.-based bank took in during the first quarter of 2009.