Paulson endures tough day on Hill about BofA, Merrill deal

WASHINGTON -- A congressional hearing Thursday on former Treasury secretary Henry Paulson's hard-nosed efforts to push through Bank of America's takeover of Merrill Lynch turned into a contentious inquisition into the government's emergency measures to rescue the financial system last fall and Paulson's leading role.

Some lawmakers suggested Paulson's handling of the BofA-Merrill deal was emblematic of overzealous government maneuvers last fall to rescue an armada of failing financial giants at the expense of taxpayers and besieged homeowners.

"Last year, at the height of the financial crisis, major decisions were made about who was going to live and who was going to die," said Rep. Edolphus Towns, D-N.Y., chairman of the House Committee on Oversight and Government Reform. "Lehman (Bros.) went down, but AIG aig was saved. ... In a way, the Bank of America-Merrill Lynch deal illustrates the danger of concentrating enormous power in only one or two individuals."

It was the committee's third hearing on Bank of America's bac acquisition of one of the country's largest investment banks, a deal that has become a lightning rod for congressional criticism of the government's handling of the financial crisis since last October's creation of a $700 billion fund to rescue financial firms.

Bank of America CEO Kenneth Lewis and Federal Reserve Chairman Ben Bernanke testified last month.

The hearings come at a pivotal time, with the Obama administration proposing to broaden the Fed's powers to head off future financial crises.

Paulson acknowledged pressuring Lewis last December to complete the planned acquisition of Merrill Lynch, despite Lewis' concerns about Merrill's unexpectedly deep fourth-quarter losses, because of the potential damage to the financial system if Merrill failed as Lehman had in September. The former Treasury secretary said he reminded Lewis that the Federal Reserve, as the bank's regulator, could remove Lewis and the board if the bank backed out of the Merrill merger.

Bank of America received $45 billion in federal aid, including $20 billion after it acquired Merrill Lynch to help it withstand Merrill's losses.

But Paulson denied he was acting at the behest of Bernanke or that he withheld vital information about Merrill's worsening financial status from the public and regulators.

"Our responses were not perfect," said Paulson, who often spoke haltingly. But they "were substantially correct" and "saved this nation from great peril."

Yet, several committee members were even more intent on grilling Paulson about his role in last fall's unprecedented Wall Street rescue. They accused him of hoodwinking Congress by using the bailout money to inject capital into flailing financial titans after promising to buy their toxic assets. The government is now beginning a joint program with private investors to purchase those assets.

Lawmakers demanded to know why Paulson and Bernanke decided to let Lehman fail — an event that spooked credit markets and worsened the crisis — while saving Bear Stearns and insurance giant AIG.

They suggested Paulson's ties to Goldman Sachs gs, which he headed before becoming Treasury secretary, influenced key decisions during the crisis. And they asked how a Republican free marketer could engineer such an extensive government initiative to meddle in private enterprise.

Better than alternative

Paulson said government officials had little choice but to take a series of extraordinary steps to avoid financial calamity. Those steps included the takeover of Fannie Mae and Freddie Mac and bailouts of AIG, Bear Stearns, Citigroup and BofA-Merrill as part of the $700 billion bailout plan.

"I came to the job believing in markets and free enterprise," he said. "We ended up doing things many of us found abhorrent, but they were better than the alternative."

The merger was announced in September as Merrill foundered. But by December, Lewis had learned that losses at Merrill would exceed $12 billion, far more than anticipated, and he told Bernanke and Paulson he wanted to invoke a legal clause to back out of the deal. In the end, he went ahead with the merger after the government cash infusion and other guarantees.

Lewis told the committee in June that government officials threatened to fire him and the board if he tried to scuttle the merger.

Lawmakers have said officials should not force a firm to hobble itself to save the financial system.

On Wednesday, Paulson conceded he pressured Lewis. "I don't characterize it as a threat," he said. "I told him the Federal Reserve could replace him and the board" if he tried to get out of the deal. "I intended to give a very direct, strong, clear message," he said.

In a letter to Congress, New York Attorney General Andrew Cuomo said Paulson told him he made the threat at Bernanke's request. Bernanke told the committee he never told Paulson to threaten Lewis.

On Thursday, Paulson said he "had no recollection of Ben Bernanke having ever talked to me directly about" removing BofA management. Noting he participated in several calls with Fed officials, he said, "I don't know whether someone in those conversations expressly said it or my understanding came from the tone or forcefulness."

Said Rep. Dan Burton, R-Ind.: "You're a very smart man, and I don't think anybody's buying what you're saying."

Lawmakers also criticized Treasury's failure to inform other regulators of Merrill Lynch's deteriorating financial condition.

"You kept the (Securities and Exchange Commission and the Office of Comptroller of the Currency) in the dark," said Rep. Jim Jordan, R-Ohio.

Paulson said that was the company's responsibility, not his or Bernanke's. "It's not a Treasury secretary's job to get between a company and the SEC, for instance," he said.

October promises

Other lawmakers reserved their sharpest arrows for Paulson's broader handling of the financial crisis. Several said he deceived lawmakers by persuading them to create the $700 billion bailout fund by saying the money would be used to buy troubled mortgage-backed securities that were languishing on financial firms' ledgers and clogging credit markets. Ten days later, officials decided to use the funds to invest in the companies.

"If you had said, 'I've got a plan to take $800 billion of taxpayer money and give it to nine of my biggest pals in Corporate America,' you would not have gotten a dime," Rep. Stephen Lynch, D-Mass., told Paulson.

Paulson said the plan evolved.

He said the distressed assets could not be purchased quickly. Many banks have been loath to sell their troubled assets at a steep discount.

Others asked Paulson why the government allowed Lehman to fail, dramatically deepening the crisis, while rescuing AIG and Bear Stearns. "We did not have the legal authority to do something in the Lehman Brothers' case," Paulson said.

He said the government did not yet have the bailout money to provide Lehman and was unable to find a buyer for it.

Rep. Cliff Stearns, R-Fla., said Paulson's Goldman Sachs ties influenced his decision to bail out AIG — which resulted in a $13 billion payment to Goldman — and allow Goldman rival Lehman to fail.

"I find your statement outrageous," Paulson said.

Some cited the crisis' human toll. Rep. Elijah Cummings, D-Md., said Wall Street firms that caused the chaos got bailed out, while "people in my district lost their homes."

"The thing that bothers you bothers me," Paulson said, "because the people that are paying the price had nothing to do with the problem. But the sad truth is, if these companies had gone down, they would be paying a bigger price."

Contributing: Michelle Walbaum