House panel grills Bank of America chief on Merrill deal

— -- The House Oversight and Government Reform Committee held a hearing Thursday to determine how what was supposed to be an all-stock deal ended up costing so much taxpayer money, and whether threats were exchanged between the Fed and Lewis. The committee subpoenaed the Fed for e-mails, in which Fed President Jeffrey Lacker said Bernanke told him "management is gone" if BofA were to back out of the deal.

Committee Chairman Edolphus Towns, D-N.Y., said the U.S. Treasury had provided a "$20 billion dowry for a shotgun wedding. ... But the question may be, who was holding the shotgun?"

The e-mails suggest that Lewis also threatened to back out of the deal unless he got the government's assistance. One e-mail from Lacker said Bernanke believed Lewis was using Merrill's mounting losses as a "bargaining chip" to get more funds.

While Bernanke will testify before the committee later, Lewis was grilled Thursday. Lewis acknowledged he was under pressure from the Fed, but insisted he didn't complete the Merrill merger because he was afraid of losing his job. Instead, Lewis said, he was driven by the Fed's suggestion that Merrill's failure could damage the financial system.

"It was the seriousness in which they made it, not the threat itself," Lewis said.

House members and the e-mails questioned Lewis' management skills and his motives. In an e-mail dated Dec. 23, Fed general counsel Scott Alvarez said: "Lewis should have been aware of the problems at (Merrill Lynch) earlier." Another Fed official, Mac Alfriend, said Lewis "knows he did not do a good job of due diligence ... and he is worried about his own job after cutting loose lots of very good people."

The Merrill acquisition was announced in September. However, within weeks, Lewis found out that losses at Merrill would be far greater than initially anticipated and were growing fast, at which point he contacted the Fed to say he didn't want to close the deal. The Fed promised to help, and on Jan. 16, BofA announced that Merrill's losses for the fourth quarter topped $13 billion and that the deal was financed with $20 billion from the government and extra federal guarantees on $118 billion of assets to protect from further losses.