House lawmakers from both parties ridiculed Bank of America CEO Ken Lewis’s assertion Thursday that concerns that the government could remove him did not contribute to his decision to purchase Merrill Lynch.
Lewis acknowledged the federal government threatened to remove him and the company’s board if it pulled out of a deal to acquire Merrill Lynch in late 2008. But he said that threat did not influence his bank’s decision to buy the investment bank, which lost billions in 2008.
“What gave me concern [is] that they would make that threat to a bank in good standing. It showed the seriousness with which they thought that we should not call a MAC, and so as a result of that, that was a factor in our decisions.”
A MAC is a material and adverse change. Lewis said he had considered citing a MAC to pull out of the Merrill deal after he found out that the brokerage firm’s losses were dramatically rising.
Over a six-day period in late 2008, Merrill’s expected losses jumped from $9 billion to $12 billion, with the possibility that they would reach as high as $15 billion.
Lewis decided against citing the MAC, he said, after discussions with Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson.
Republicans on that panel released a memo Wednesday highlighting internal documents that suggest Bernanke and other federal regulators applied heavy pressure on Lewis to go forward with the deal despite misgivings.
On Thursday, Democrats and Republicans on the panel made it clear they believed the pressure contributed to Lewis’s decision.
“You just heard Republicans and Democrats say to some degree that whatever was said to you about losing your job and the board being dismissed — basically what we’ve said is we don’t buy it,” Rep. Elijah Cummings (D-Md.) told Lewis.
Rep. Darrell Issa (R-Calif.), the panel’s ranking member, said evidence suggests government officials pressured Lewis to finish the deal.
“We’re here because there has been a serious allegation and a number of pieces of evidence have arisen that make us believe that government officials felt necessary to use the power, influence and potentially threats in order to consummate this deal,” he said.
Republicans said pressure from federal regulators was inappropriate. Rep. Jim Jordan (R-Ohio) cited “troubling questions about potential abuses of government power,” and said the deal was consummated in “a climate of fear and intimidation by government officials.”
In particular, committee Republicans seized on notes that Joe Price, Bank of America’s chief financial officer, took at a meeting as the bank was considering the MAC.
The notes read, “Hank P: Fire board if you do it — Tim G agrees.” Lawmakers suspected, and Lewis acknowledged, that those names referred to Henry Paulson and Tim Geithner, then the head of the New York Federal Reserve.
Other lawmakers said they found it hard to believe that Lewis did not know about Merrill’s losses earlier than December, when they became public. They suggested he withheld that information from shareholders to get their approval for the deal. Other committee members wondered whether Paulson or Bernanke pressured Lewis to stay silent until the deal was done.
In arguing that the Fed pressured Lewis to go through with the acquisition, Republicans have also cited an internal Federal Reserve e-mail in which Bernanke describes the MAC threat as a “bargaining chip” for Bank of America to get government bailout money in return for going through with the deal.
Lewis disputed that claim at Thursday’s hearing.
“This was not some wild bluff,” he said. “We thought we had the real possibility of a MAC.”
Lewis acknowledged near the end of his testimony that there were discussions between Bank of America and government officials about not announcing Merrill’s losses until the acquisition — as well as a bailout package — was final. But he maintained that he did not know of Merrill’s losses until mid-December 2008.
“We were working on a goal of getting everything done at once so that we didn’t have an announcement of something that would cause more damage to the economy, but no one ever told us that we should not disclose a disclosable event,” Lewis said.
The federal government has given Bank of American $45 billion in bailout money. Stress tests run by the government in the spring determined it was not in a position to repay that money at this time.
Lewis has been battling shareholder groups, including unions that complain their pension funds lost significant value because of his decisions. Those groups have been pushing for Lewis’s ouster and pressing Congress and the administration to strengthen shareholder powers. The Service Employees International Union has called on Lewis to resign, citing his unfair compensation and the need for accountability in the financial collapse.