Former Secretary Paulson's spokesperson also released a statement late Wednesday saying that issues of disclosure were left to Bank of America and that Paulson's role was to ensure that no important financial institution be allowed to fail
"By referring to the Fed's supervisory powers, Paulson intended to deliver a strong message reinforcing the view that had been consistently expressed by the Fed, as Bank of America's regulator, and shared by the Treasury that it would be unthinkable that Bank of America take this action for which there was no reasonable legal basis and which would show a lack of judgment," said Paulson's spokesperson.
In his deposition, Lewis attempts to explain why he did the deal in this exchange with Benjamin Lawsky of the Attorney General's office:
Q. Wasn't Mr. Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses?
A. (Lewis) What he was doing was trying to stem a financial disaster in the financial markets, from his perspective.
Q. From your perspective, wasn't that one of the effects of what he was doing?
A. (Lewis) Over the short term, yes, but we still thought we had an entity that filled two big strategic holes for us and over the long term would still be an interest to the shareholders.
Q. What do you mean by "short term"?
A. (Lewis) Two to three years.
Q. So isn't that something that any shareholder at Bank of America who had less than a three-year time horizon would want to know?
A. (Lewis) The situation was that everyone felt like the deal needed to be completed and to be able to say that, or that they would impose a big risk to the financial system if it would not.
This was "an extraordinary use of government power" in "unprecedented circumstances', according to Bob Mintz, former federal prosecutor specializing in financial cases. The government was "breaking new ground in terms of the level of government involvement in the marketplace," said Mintz, "making it up as they went along."
According to the Cuomo letter, when Lewis first learned of the "staggering amount of deterioration" at Merrill on December 14th and had decided it might warrant cancelling the deal, he notified Paulson and the Treasury Secretary asked him to fly to Washington that night.
There he met with Paulson and senior officials including Chairman of the Federal Reserve Ben Bernanke, and was asked "to not seek to rescind the merger agreement."
But his bank came under pressure from the government in a series of follow-ups to the meeting and Lewis after attempting to resist, appears to have caved.
On December 21st, when Lewis still considered using a "material adverse event" clause to squash the deal, he told Cuomo, according to the letter, that Paulson threatened to remove the management and Board of Directors of Bank of America. That ended Bank of America's attempts to exit the deal, the letter stated.
"There's no question that this was an extremely heavy handed threat, and there may have been advice here to forget about disclosure obligation which could be seen as aiding and abetting a federal securities law violation," said Professor John Coffee of the Law School at Columbia University.