Paulson Admits Pressuring Bank of America

In prepared remarks for a Congressional hearing obtained today by ABC News, former Treasury Secretary Hank Paulson admits telling Bank of America CEO Ken Lewis that the Federal Reserve could remove the bank's board members if they backed out of their proposed merger with Merrill Lynch last December.

On Thursday morning, Paulson will defend his actions before the House Oversight Committee in the last of three hearings that the panel has conducted on the controversial merger.

When Bank of America considered scuttling the merger last December after discovering a $12 billion loss at Merrill, Paulson told Lewis that such a decision, citing the "material adverse change" -- or MAC -- clause, would damage the entire financial system and could result in government-imposed changes in management.

"I mentioned the possibility that the Federal Reserve could remove management and the board of Bank of America if the bank invoked the MAC clause. I believe my remarks to Mr. Lewis were appropriate," he says.

Click Here To Read Paulson's Full Prepared Testimony

"I explained to him that the government was supportive of Bank of America, but that it felt very strongly that if Bank of America exercised the MAC clause, such an action would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch, and the financial system," Paulson continues. "I intended to send a strong message."

However, Paulson emphasizes that Fed Reserve Chairman Ben Bernanke never asked him to indicate "any specific action the Federal Reserve might take." Rather, Paulson says he was simply expressing what he believed was "the strong opinion" held by the Fed -- and shared by the Treasury -- that a Bank of America pull-out was "not a legally viable option … threatened significant harm to Bank of America and to the financial system … [and] would raise serious questions about the competence and judgment of Bank of America's management and board."

The distinction is crucial because Bernanke told the House panel on June 25 that he had never personally threatened to remove Lewis or the bank's board members. In what became to some extent a question of semantics, Bernanke acknowledged that he did have concerns about the bank's management. In response, Rep. Jason Chaffetz, R-Utah, stated, "I'm just not buying that. I think that's a threat."

So did the government's actions constitute a threat? An aide to the House panel's majority staff said that Paulson's testimony "supports the theory that Lewis was engaged in a shakedown."

In the panel's first hearing on the matter, held June 11, Lewis gave the committee his impression of the government's actions. "I would say they strongly advised and they spoke in strong terms, but I thought it was with good intention," he said. Ultimately, Bank of America agreed to proceed with the deal and eventually received another $20 billion in taxpayer bailout money.

Whatever took place, Bernanke, Lewis, and Paulson all appear to agree on one thing: the merger was the right move.

"It's protected our economy and it was a good deal for taxpayers," Bernanke told the committee last month. "I have nothing to regret about the whole transaction."

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