July 15, 2009— -- 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.
"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."