The Federal Deposit Insurance Corp resisted pressure from the administration of President George W. Bush to extend assistance to Bank of America
Bair said the agency continued to raise questions about whether further assistance was really necessary and about the potential exposure for the FDIC.
The FDIC's board ultimately was persuaded that BofA's condition presented a systemic risk, Bair told a House oversight panel examining Bank of America's acquisition of investment bank Merrill Lynch.
The hearing is the fifth in a series looking at the government's role in the merger, which was announced late last year during the height of the financial crisis, and whether Bank of America misled investors about Merrill's looming losses as well as bonuses paid to Merrill employees.
Bank of America is defending itself on multiple fronts over the Merrill deal -- against shareholder lawsuits and civil charges from the U.S. Securities and Exchange Commission.
On Friday, the SEC's chief enforcer, Robert Khuzami, told the oversight panel that the agency will continue to vigorously pursue charges that Bank of America misled investors over the Merrill bonuses.
The SEC has been forced to go back to the drawing board after a federal judge rejected a $33 million settlement between the bank and it. Khuzami said the SEC is further pursuing facts and determining whether to seek additional charges.
For months the oversight panel has been trying to figure out when the bank knew Merrill was on its way to a $15.8 billion loss and whether Bank of America was prepared to try to stop the merger or seek government help to finish it.
Bair, who has been a vocal opponent of poorly underwritten government bailouts, said the FDIC was told by the Federal Reserve and Treasury near December 21, 2008, that Bank of America had expressed reservation about completing the Merrill deal.
The FDIC continued to raise questions about whether further aid was really needed, despite former Treasury Secretary Henry Paulson indicating that he hoped the FDIC would provide asset guarantees similar to those it provided for Citigroup, Bair said.
Over the following days, she said, the FDIC requested detailed information about where Bank of America's exposures resided, particularly how much of the risk was housed in BofA's insured depository business.
The FDIC board ultimately agreed on January 15, 2009, that Bank of America's condition posed a systemic risk that a ring fence transaction involving asset guarantees from the FDIC would mitigate, Bair said.
The government wanted to wall off, or ring fence, the risky assets in the merged Bank of America-Merrill company so that insured deposits would not be affected.
An asset guarantee deal and a capital infusion were announced on January 16, but the ring fence transaction was never finalized and was ultimately terminated.
Federal Reserve Chairman Ben Bernanke, Paulson have already been blasted by oversight committee members for how they handled the merger.
The panel has also ripped into two Bank of America directors and Brian Moynihan, one of the bank's leading contenders to replace outgoing CEO Ken Lewis. Moynihan, currently Bank of America's retail bank head, was the bank's general counsel when the deal closed in January.
(Reporting by Karey Wutkowski, Kim Dixon and Rachelle Younglai; Editing by Andrea Ricci and Steve Orlofsky)