Published June 12, 2009

Did Fed put a gun to BOA chief's head?

Takeover of Merrill Lynch was forced upon the bank, Republicans say

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(WASHINGTON) Merrill Lynch was bought before it went under, but the fallout now threatens to tarnish Federal Reserve chairman Ben Bernanke and then-Treasury secretary Henry Paulson.

The charge? That the Fed threatened to force the ouster of Bank of America (BOA) chief executive Kenneth Lewis if he did not follow through with plans to buy Merrill Lynch.

House Republican staffers, preparing for a hearing on the issue, also said there was evidence the government tried to restrict information related to the merger from being made public. This, despite the fact that Merrill was in a financial mess and went on to report a loss of US$15.8 billion in the fourth quarter.

However, none of the documents showed that the government explicitly instructed Bank of America to hide Merrill Lynch's losses from shareholders, Republicans said.

The House Oversight and Government Reform Committee is investigating claims that top government officials, including Mr Paulson and Mr Bernanke, urged Mr Lewis to go through with the acquisition and not disclose to shareholders details of Merrill Lynch's deteriorating financial state.

Mr Bernanke and Mr Paulson will be asked to testify before Congress on their role in Bank of America's acquisition of Merrill Lynch, Edolphus Towns, the Democratic chairman of the key House panel, said.

'We will be looking for some answers to puzzling questions,' said Mr Towns.

'Did Paulson and Bernanke abuse their authority by ordering Lewis to go through with the Merrill acquisition, or did Lewis threaten to back out in order to squeeze more money out of the federal government?' Mr Towns asked.

Mr Lewis, the sole witness at the hearing, had told New York state investigators in February that the two had pressured him in December to go through with the deal.

He said the Federal Reserve threatened to remove top executives at his bank if it reneged on its promise to acquire Merrill Lynch, despite Merrill Lynch's crumbling financial state.

'But it was in the context of them thinking it was in the best interests of Bank of America and the financial system,' he said.

'The threat was not what gave me concern. What gave me concern was that they would make that threat to a bank in good standing,' Mr Lewis added.

Bank of America has received US$45 billion from the government's US$700 billion Troubled Asset Relief Program (TARP). As part of that money, the bank received US$20 billion in January after Mr Lewis requested it to help offset mounting losses at Merrill Lynch.

According to an internal memo prepared by the committee's Republican staff, Mr Paulson and Mr Bernanke 'put a gun to the head' of Mr Lewis and Bank of America's board of directors to force the merger even though Mr Lewis 'felt it was his duty to his shareholders to try his luck in the legal system and back out of the deal'.

As proof, Republicans cite several documents including an e-mail by an employee at the Richmond Federal Reserve who said Mr Bernanke had made it clear that if Bank of America backed out and needed financial assistance, 'management is gone'.

Just a few weeks after the deal was completed, Bank of America's fourth-quarter earnings report showed the hit taken by its balance sheet because of the Merrill Lynch transaction, which made Mr Lewis the target of shareholder anger.

In January, Bank of America reported a US$2.39 billion fourth- quarter loss, and Merrill Lynch disclosed a loss of more than US$15 billion.

'Shareholders should have known that the government was trying to purposefully have Bank of America shareholders absorb the losses for the take-over,' said Tim Yeager, an associate professor of finance at the University of Arkansas. -- AP, Reuters Bloomberg