TARP overseer: No undue pressure on BofA, Merrill Lynch

The nation's top financial officials did not exercise undue pressure on Bank of America to complete a controversial deal with Merrill Lynch at the height of the financial crisis last December, a top government watchdog has concluded.

Neil Barofsky, the Special Inspector General over the Troubled Asset Relief Program (TARP), said in a report on Monday that Federal Reserve and Treasury officials acted to bolster the country's financial markets. Barofsky oversees the $700 billion bailout package passed by Congress last October.

The deal has been the focus of numerous investigations, including by the Attorney General of New York and the House Committee on Oversight and Government Reform. Rep. Edolphus Towns (D-N.Y.), chairman of the oversight committee, and Rep. Darrell Issa (R-Calif.), the ranking member, have held numerous hearings about whether Fed and Treasury officials pressured or threatened Bank of America to complete the deal.

Barofsky concluded that federal officials "acted based on their concerns for the financial markets as a whole." Bank of America had contacted the government in mid-December after it became aware of mounting losses at Merrill Lynch. Bank of America was considering whether to terminate the deal, citing a material adverse change in Merrill's financial state.

Federal Reserve Chairman and then-Treasury Secretary Henry Paulson, according to Barofsky's report, believed that such a move could destabilize credit markets and hurt the financial system. They also believed it would be harmful to Bank of America.

Bank of America had received $25 billion in capital from the $700 billion bailout package. The government later provided the bank with an additional $20 billion and an asset guarantee program. Barofsky found that the government did not guarantee the bank that it would provide the additional $20 billion if it proceeded with the deal.

The report also concludes that there were no government efforts to instruct Bank of America to shield information from shareholders about the extent of Merrill's losses. Towns and Issa have raised concerns about this issue.
 
Barofsky's office "found nothing to indicate Treasury and Federal Reserve officials instructed Bank of America executives to withhold the public disclosure of losses, but that they agreed to provide financial assistance to ensure that Bank of America remained a viable financial institution after the acquisition out of concern for the financial markets as a whole."

The report also sheds light on how the first nine banks received money from the TARP program and why government officials shifted the intent of the program in favor of capital injections.

Paulson said on Oct. 14, 2008, that the government injected capital into nine banks because they were healthy and that such a move would bolster lending across the financial system. Similar statements were issued by other federal regulators.

But Barofsky concluded that federal officials had varying views about the health of the nine banks. "Their overall selection was far more a result of the officials’ belief in their importance to a system that was viewed as being vulnerable to collapse than concerns about their individual health and viability," according to the report. Citigroup and Bank of America required additional government aid after the first round of support.

Barofsky raised questions about the accuracy of the statements and said, "government officials should be particularly careful, even in a time of crisis, of describing their actions (and the rationales for such actions) in an accurate manner."

Herbert Allison, assistant Treasury secretary for financial stability, said in response to the report that any review of the statements from last fall "must be considered in light of the unprecedented circumstances in which they were made."

---