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

July 16, 2009— -- 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 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."