'Frontline' Investigates Bank of America Deal

CHARLES DUHIGG: I believe that's when Ken Lewis felt, you know what, I made a mistake here. And this is happening at a time when Bank of America doesn't have a lot of excess capital to offset those losses. So, it's very, very bad news.

ANDREW ROSS SORKIN, The New York Times: Ken Lewis wanted out of the deal. I think there was a view that there truly was what they called a MAC, a material adverse change. Something material had changed that they did not see coming.

NARRATOR: Ken Lewis told Paulson he was considering invoking the MAC to get out of the Merrill deal. Paulson was stunned. He told Lewis to come to Washington immediately.

DAN FITZPATRICK, The New York Times: So, Lewis goes to Washington, D.C., on December 17 to meet with Bernanke and Paulson, and tells them: We can't do this. The losses are too big. We're going to pull out.

KEN LEWIS: I can't say a lot about the negotiations. But what I would say is, they had their view of both what that would do to Bank of America and what that would do to the financial system.

MAN: Hank Paulson and Ben Bernanke say, if you do that, you will destroy the tiny shard of a banking system that we still have left remaining. You can't pull out of this deal.

SUSANNE CRAIG, The Wall Street Journal: Keep in mind, these are men who had been through Lehman Brothers. They don't want this. They don't need it. And it can't happen.

NARRATOR: Lewis' options were limited. His new powerful partner, the secretary of the treasury, was calling the shots.

JOE NOCERA, The New York Times: The government already had $20 billion inside -- in Bank of America. It's its regulator. It's a bank. It's really kind of hard to tell the government to go shove it when it says: We need you to do this deal.

SUSANNE CRAIG: He is in a really tough spot. He's almost damned if he does and damned if he doesn't.

NARRATOR: Paulson got tough.

ANDREW ROSS SORKIN: He's got a very strong voice, got a very strong will. And I think he could convince anybody -- and, in this case, Ken Lewis -- that, if you don't follow along, if you don't go along with the program, you won't be part of the program anymore, meaning: We will toss you right out.

MAN: You have to buy Merrill. And we will make sure that happens, up to and including removal of management, removal of the board.

SUSANNE CRAIG: From where Ken Lewis sat, I have had several people describe to me that Bank of America thought it was a threat and they needed to do this.

KEN LEWIS: There was a time where that discussion was held. And -- but we -- we, in fact -- we, in fact, decided, on our own, not -- not anything to do with that, that it was the best interests of all -- all involved to go ahead and -- to go forward.

DAN FITZPATRICK: Ken Lewis blinked. The full force of the government is being brought upon him. The rules of the game had changed. You know, Ken Lewis is on top of the financial services world, but he's not in charge. The government holds all the cards, at the end of the day.

NARRATOR: Paulson then explained the offer that Lewis could not refuse: another $20 billion and a promise to cover another $118 billion on Merrill's toxic assets. The deal was kept a secret -- from stockholders, from Wall Street, and the taxpayers, for almost one month.

JIM LEHRER: You can watch the full "Frontline" program, "Breaking the Bank" on most PBS stations on Tuesday. Please check your local listings for the time.