Lawmakers blast Fed, Treasury, BofA over Merrill

By Kim Dixon and John Whitesides
WASHINGTON (Reuters) - U.S. lawmakers accused the Treasury and Federal Reserve on Thursday of using threats to force Bank of America to take over Merrill Lynch while criticizing Bank of America boss Ken Lewis for keeping shareholders in the dark about rising losses at Merrill.
At a hearing into the deal, brokered hastily during the worsening U.S. banking crisis in late 2008, lawmakers were torn over whether regulators exceeded their authority to enforce the marriage or had been browbeaten by Lewis into providing government aid to support the acquisition.
"The Treasury Department had provided a $20 billion dowry for a shotgun wedding," said House Oversight and Government Reform Committee Chairman Adolphus Towns, a Democrat. "But the question may be, 'Who was holding the shotgun?'"
Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson effectively put "a gun to the head" of Lewis to close the deal quickly, according to Republicans on the panel.
"This transaction took place in a climate of fear and intimidation by government officials," said Republican Jim Jordan of Ohio.
Lewis told his board the Fed and Treasury would remove the board and bank management if it did not complete the purchase of Merrill Lynch despite growing financial losses there, according to board minutes cited at Thursday's hearing.
"If that isn't a threat, I don't know what is," Democrat Elijah Cummings agreed.
Towns said Bernanke and Paulson would be asked to testify at a later date before the committee.
But Lewis was also hammered by lawmakers who said he must have known earlier than he claimed about heavy losses at Merrill, which lost $15.84 billion in the 2008 fourth quarter.
Lawmakers argued that if Bank of America went so far as to consider using a material adverse change (MAC) clause to scuttle the deal then it was important enough to inform shareholders.
"I'd leave that decision to our securities lawyer and our outside counsel," responded Lewis, the sole witness at the hearing, who generally kept his answers brief and even smiled and laughed at times during a three-hour of grilling.
Shares of Bank of America rose 8.3 percent to $12.97 on Thursday, aided by analysts at Keefe, Bruyette & Woods raising their rating to "outperform" from "market perform."
DEEPER MALAISE
Towns said the deal, pushed behind closed doors through "coded messages and private e-mails", was evidence of a deeper malaise in financial supervision.
"Basically, the regulators and the financial institutions seemed to be making up the rules as they went along," Towns said, adding that the incident should help shape financial regulatory reforms that Congress is exploring. Continued...
Source: Reuters