Ken Lewis says BofA was pushed into Merrill deal

NEW YORK -- In a sign of how deeply the government recently has been involved in decisions at individual banks, Bank of America CEO Kenneth Lewis said he was threatened with being removed from his job unless he completed a merger with Merrill Lynch, according to testimony made public Thursday.

According to a letter New York Attorney General Andrew Cuomo sent to lawmakers and transcripts of the testimony, Lewis said Treasury Secretary Henry Paulson told him "we would remove the board and management," if BofA decided to get out of an agreement to acquire Merrill.

Paulson on Thursday said through a spokeswoman he "intended to deliver a strong message," and that he was committed "to ensuring that no systemically important financial institution would be allowed to fail."

The BofA-Merrill merger was contentious because it was hastily arranged over a weekend under intense pressure, as the financial world seemed to be collapsing. Earlier the same month, investment bank Lehman Bros. filed for bankruptcy, and mortgage giants Fannie Mae and Freddie Mac were taken over by the government. "We were going through a period of panic and hysteria with banks collapsing, and the government moved as aggressively as possible to avert disaster, and this deal was part of that," says Richard Bove, analyst at Rochdale Securities.

However, within weeks, Lewis realized that Merrill's conditions continued to deteriorate. After what Lewis called a "staggering amount of deterioration," he wanted to invoke a clause to exit the deal. But Lewis says he capitulated after the Fed and Treasury offered to support the deal.

Still, shareholders remained in the dark about Merrill's mounting losses, which eventually reached $15 billion. That prompted several to call for Lewis to resign. Others have filed lawsuits.

"Does this confirm that he folded under pressure from regulators just to keep his job?" asks shareholder Jonathan Finger, a partner at Finger Interests, who wants Lewis to go.

In his testimony, Lewis says he was instructed by Fed Chairman Ben Bernanke and Paulson not to inform shareholders. "I was instructed that 'We do not want a public disclosure,' " Lewis testified.