Paulson and Congress Go Over BOA 'Threats' One More Time

Time and time again, members of Congress today asked former Treasury Secretary Hank Paulson to pull his microphone closer to him.

"We're having problems hearing you," noted House Oversight Committee chairman Ed Towns, D-N.Y.

Was it a microphone problem? Or as the old movie line goes, was it "a failure to communicate?"

Paulson and lawmakers argued over the still unsettled question of whether or not the government had improperly threatened Bank of America CEO Ken Lewis to prevent the bank from backing out of a merger with Merrill Lynch. Paulson allegedly threatened to remove the bank's board members last December, when Bank of America mulled pulling out of the deal, by exercising their "material adverse change" -- or MAC -- clause.

"I don't characterize it as a threat," Paulson said.

"I explained to him that the Fed could remove management," sighed Paulson, clearly frustrated at today's hearing. "I've told you three times."

Three times was not enough. Lawmakers weren't buying it.

"I don't think there's anyone in this room who believes that you guys didn't intimidate Mr. Lewis," argued Rep. Jim Jordan, R-Ohio.

Call it an explanation, intimidation or a threat. Whatever it was, a more important question then, one not bogged down in semantics, is: Was the government pressure justified because a failed merger could, in its opinion, have jeopardized the stability of the overall financial system?

Paulson said yes.

"I believe it was appropriate for me to explain to Mr. Lewis that the government was supportive of Bank of America," Paulson said, "and that it felt very strongly that if Bank of America exercised the MAC clause, that would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch, and the financial system."

Ultimately, Bank of America went through with the merger, and Lewis kept his job. The government gave them $20 billion in TARP bailout money. Crisis averted. So did the ends justify the means?

Many lawmakers said no.

"It looks like a marriage of convenience," said Towns. "Ken Lewis got what he wanted. And the Treasury and the Fed got what they wanted. All of this happened against the backdrop of unchecked government power, with no transparency or accountability."

He added bluntly, "In my view, this is unacceptable."

Many panel members also found it unacceptable that Paulson said he could not remember if his pressure on Lewis was the result of an explicit request by Fed chairman Ben Bernanke or merely his own impression of the Fed's position.

"You know, you're a very smart man," Rep. Dan Burton, R-Ind., told Paulson. "I don't think anybody's buying what you're saying right now."

Not only was there back-and-forth on Paulson's dealings with Bank of America, but also his overall actions to save the country's economy -- specifically, the implementation of the controversial $700 billion Troubled Asset Relief Program.

Paulson told lawmakers that he knew the situation last fall was dire, but attempted to avoid being too explicit in public.

"We didn't want to overly scare people and make it worse," he said, but the government feared that "a meltdown of the system could lead to chaos."

And so ensued the massive taxpayer bailout. But rather than purchase toxic assets off the banks' balance sheets -- as the program was originally designed to do -- Paulson quickly shifted gears and instead injected money into financial institutions.

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