TOPICS > Economy

Lawmakers Examine Bank Purchase of Merrill Lynch

June 11, 2009 at 6:25 PM EDT
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Officials from the Treasury Department and Federal Reserve pressed Bank of America into purchasing Merrill Lynch last year, the bank's chief executive Ken Lewis told a House committee. Spencer Michels reports on the hearing.
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JIM LEHRER: Next tonight: two takes on Bank of America’s
merger with Merrill Lynch, and the questions still surrounding the government’s
role in that deal. It was the subject of a congressional hearing today.

And that’s where we begin, with “NewsHour”
correspondent Spencer Michels.

SPENCER MICHELS: It was the height of the financial crisis
last September, when the hastily arranged takeover of the brokerage firm
Merrill Lynch by Bank of America was sealed with a handshake.

Just two months later, B-of-A and its CEO, Ken Lewis,
wanted out of the deal because of deeper-than-expected losses at Merrill Lynch.
In January, Merrill revealed over $15 billion in losses, and it was disclosed
the government had given Bank of America $20 billion to ensure the deal’s
completion.

Government pressure

SPENCER MICHELS: The role of the government and how much wasknown about Merrill's losses before they were made public were the subject of aHouse hearing today.

Lewis, the lone witness, was asked whether the governmentthreatened him if he invoked a clause to exit the deal -- a so- called MAC, ormaterial adverse change, provision.

REP. EDOLPHUS TOWNS, D-N.Y.: Did you move forward with theMerrill deal because of pressure from government officials, or because youthought it was in the best interests of Bank of America and its shareholders?

KEN LEWIS, chief executive officer, Bank of America: Yes,sir.

There's been a lot of lot of talk about the -- the pressurefrom the federal government. It is true that we were told that if we -- if wewent through -- or I -- I can't exactly remember the exact words, so pleasegive me license with word for word.

But, basically, if we -- if we went through with calling theMAC, that the government could or would remove management and the board. And Ihave -- I have said in the past that it was -- the threat -- the threat was notwhat gave me concern. What gave me concern, that they would make that threat toa bank in good standing.

REP. EDOLPHUS TOWNS: So, you were pressured?

KEN LEWIS: It -- it's hard to find the exact right word todescribe what I just described. So, I have found, as I have tried to havedifferent words, that it's best just to describe it, and let people come to aconclusion.

'Management is gone'

SPENCER MICHELS: According to an e-mail from a VirginiaFederal Reserve employee, Chairman Ben Bernanke made it clear that, if Lewisbacked out of the deal and needed government assistance -- quote --"Management is gone."

But Lewis resisted repeated efforts by lawmakers tocharacterize Bernanke's or former Treasury Secretary Henry Paulson's role asimproper.

REP. JEFF FLAKE, R-Ariz.: If this wouldn't be considered athreat, if I might just ask you, what would be considered a threat? I mean,kidnap the family dog, release -- release your college GPA scores? What -- what-- what is a threat, if this is not a threat, the firing and the firing of yourboard?

KEN LEWIS: I'm -- I'm just trying to describe thecircumstances and not put one word to it myself.

REP. JEFF FLAKE: Well, this -- it -- it seems -- from thisvantage point, it seems there's sort of a -- kind of a Stockholm syndrome thinggoing here. I mean, you're still regulated by these entities. And -- and itseems that you have identified with your captors, or your regulators, in -- insome way here.

Leveraging for taxpayer dollars

SPENCER MICHELS: Democrat Stephen Lynch of Massachusetts asked Lewis about a Decembere-mail in which Fed Chairman Bernanke characterized Lewis' move to pull out ofthe deal as a bargaining chip to get more government money.

REP. STEPHEN LYNCH, D-Mass.: They think you're -- you'rethrowing this out as a -- a red herring, and that they think what you're reallytrying to do, and what people suggest you might have been doing, is to leveragetaxpayer support by falsely putting this MAC out there. Did you use this --this MAC as leverage to force Bernanke and -- and Paulson to come in withtaxpayer support?

KEN LEWIS: This was not some wild bluff. We thought we hadthe real possibility of a MAC.

SPENCER MICHELS: Democrat PeterWelch wanted to know why B-of-A shareholders were not informed sooner of Lewis'concerns about the Merrill deal.

REP. PETER WELCH, D-Vt.: If there is an event that youconsider so significant that it may allow you to invoke the material adverseconsequence -- contract clause, do you not think that same event is of interestto shareholders and requires you, in your fiduciary duty, to disclose it?

KEN LEWIS: I would leave that decision to our securitylawyers and our outside counsel.

REP. PETER WELCH: You're not CEO?

KEN LEWIS: I'm not a securities lawyer.

SPENCER MICHELS: Committee Chairman Towns announced bothFederal Reserve Chair Bernanke and former Treasury Secretary Paulson would alsobe called to testify.