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House GOP: Paulson, Bernanke 'Put a Gun to the Head' of Bank of America to Force Merrill Lynch Merger

Fed Chairman Ben Bernanke and then-Treasury Secretary Hank Paulson placed "inappropriate pressure" on Bank of America to go ahead with its $50 billion acquisition of troubled brokerage Merrill Lynch last December, preventing a reluctant Bank of America chief executive Ken Lewis from backing out of the deal, according to a House Republican committee staff memo obtained by The Ticker.

Lewis is scheduled to testify before the House Oversight committee on Thursday at 10 a.m. as the committee probes the Bank of America-Merrill deal.

Under oath, Lewis testified to New York Attorney General Andrew Cuomo earlier this spring that he felt pressured by Bernanke and Paulson to go ahead with the Merrill deal for the good of the economy, and said that the feds implied that he should put off disclosing the $15 billion losses that came with Merrill.

Bank of America has received $52.5 billion in federal bailout money, including billions to help it swallow Merrill.

Bernanke has strongly denied Lewis's testimony, and the House Oversight Committee hopes to get to the bottom of the matter Thursday.

The Oversight Committee's Republican staff prepared the memo and circulated to its Republican members, after having reviewed internal Fed Reserve and Bank of America e-mails. It concludes:

"In December 2008, Paulson and Fed Chairman Ben Bernanke put a gun to the head of Bank of America’s CEO and Board of Directors in order to force through a merger with Merrill Lynch, even though Bank of America’s CEO felt it was his duty to his shareholders to try his luck in the legal system and back out of the deal. They did so in the name of the financial system as a whole, without any transparency or consultation with the American people or the Congress."

The memo asks five "key questions," which probably will be put to Lewis and any other witnesses Thursday:

1) Did the government overstep its authority in pressuring Bank of America not to back out of the Merrill Lynch merger?

The memo answers: "The unequivocal answer is yes. While government regulators are properly concerned with the overall health of the economy and the financial system, in the case of the Bank of America merger with Merrill Lynch, government officials crossed the line by applying inappropriate pressure on a private institution to go through with a business deal. This is extensively documented both in internal Federal Reserve emails and in the minutes of Bank of America’s board meetings."

2) Did the U.S. government seek to limit or control public disclosure of the mounting fourth-quarter 2008 losses at Merrill Lynch?

The memo answers: "While none of the documents reviewed by Committee staff at the Federal Reserve show that government officials explicitly instructed Bank of America employees to not disclose the dramatically accelerating losses at Merrill Lynch, internal emails reveal at least the intent to influence disclosure decisions in order to allow the government to manage the situation in an orderly manner."

3) Was a merger with Bank of America the last hope for Merrill Lynch?

The memo answers: "The answer is no. The ultimate position taken by Messrs. Bernanke and Paulson appears to have been that it was better to put taxpayers’ money down the Merrill Lynch 'black hole' if necessary to prevent Merrill from failing. Internal Federal Reserve emails indicate that the government fully intended to prop up Merrill Lynch even if Bank of America pulled out of the deal."

4) Did Bank of America conduct sufficient "due diligence" of Merrill Lynch's financial health before deciding to pursue a merger with it?

The memo answers: "The answer to this question is unclear but ultimately irrelevant, although the Committee Democrats are likely to spend a good amount of time trying to answer it anyway."

5) Were the government's actions in forcing through a Bank of America merger with Merrill Lynch and bailing out failing financial institutions at taxpayer expense unconstitutional and inappropriate?

The memo answers: "Trying to answer this question is very much an important public policy question that resides fully within the Committee’s jurisdiction and responsibility, yet unfortunately this hearing is an imperfect forum in which to answer it because not all the key players have been invited to testify."

-- Frank Ahrens
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By Frank Ahrens  |  June 10, 2009; 4:56 PM ET
Categories:  The Ticker  | Tags: Bank of America, Ben Bernanke, Hank Paulson, Ken Lewis, Merrill Lynch  
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