Bank of America Corp CEO Kenneth Lewis was pressured by senior federal officials Henry Paulson and Ben Bernanke to accept a merger with troubled Merrill Lynch & Co or lose his job, New York Attorney General Andrew Cuomo said on Thursday.
In a letter to senior members of congressional committees and the head of the U.S. Securities and Exchange Commission, Cuomo said Lewis met then U.S. Treasury Secretary Paulson and Federal Reserve Chairman Bernanke in Washington in mid-December.
Cuomo said the SEC, which is charged with protecting investor interests, appears to have been kept in the dark about talks between the banks and federal officials that followed.
During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement, Cuomo wrote. We do not yet have a complete picture of the Federal Reserve's role in these matters because the Federal Reserve has invoked the bank examination privilege.
A spokesman for Paulson said on Thursday that the Treasury and the Federal Reserve believed there was no reasonable legal basis for Bank of America to terminate the Merrill deal.
Lewis testified in a probe by Cuomo that Paulson wanted the Merrill acquisition to go through to stem a financial disaster in the financial markets.
He also testified that Paulson and Bernanke pressured him to keep quiet about losses at Merrill, which rose to $12 billion from $9 billion in a matter of days in December. The fourth-quarter loss reported ultimately totaled more than $15 billion.
No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure, Fed spokeswoman Michelle Smith said in an email on Thursday in response to a question.
The SEC said it has been actively reviewing the disclosure surrounding the merger between Bank of America and Merrill. An SEC spokesman said the issues identified in Cuomo's letter are part of its review.
Bank of America, which got additional government bailout money after the deal with Merrill, halted its attempt to scrap the merger on December 21, the attorney general said.
Cuomo, who released testimony by Lewis, said his office uncovered details during a probe into the circumstances of $3.6 billion of bonuses paid to Merrill executives before the completion of the Bank of America takeover on January 1.
As you will see, while the investigation initially focused on huge fourth quarter bonus payouts, we have uncovered facts that raise questions about the transparency of the TARP (Troubled Asset Relief Program), as well as about corporate governance and disclosure practices at Bank of America, Cuomo wrote.
Bank of America spokesman Scott Silvestri said in a statement: We believe we acted legally and appropriately with regard to the Merrill Lynch transaction.
The revelations are unlikely to relieve shareholder pressure on Lewis to give up his job as chairman, or even to step down as chief executive. A shareholder proposal at the bank's April 29 annual meeting calls for the bank to appoint an independent chairman to replace Lewis.
According to Lewis's testimony, made public on Thursday, Paulson told him the management and board of the bank would be replaced if it pulled out of the deal.
I can't recall if he said 'we would remove the board and management if you called' or if he said 'we would do it if you intended to,' according to the transcript.
Cuomo said that, in an interview, Paulson largely corroborated Lewis's account.
Secretary Paulson's threat swayed Lewis, Cuomo said. The letter also stated that Paulson has informed us that he made the threat at the request of Chairman Bernanke.
Researcher Beth Young of the Corporate Library corporate governance research group said if the government wanted influence, it needed to be transparent about it.
Ken Lewis is responsible to shareholders first, Young said. He is a fiduciary to the company, not the U.S. economy, and if the government wanted to replace him, he should let that happen.
Cuomo sent the letter to SEC head Mary Schapiro, U.S. Senate Banking Committee Chairman Christopher Dodd, U.S. House Financial Services Chairman Barney Frank and Congressional Oversight Panel Chairwoman Elizabeth Warren. It was copied to Neil Barofsky, the inspector general of TARP.
In Washington, Barofsky said he was looking into the reports that Bank of America faced pressure to minimize public disclosure about the takeover of Merrill.
(Additional reporting by Mark Felsenthal and Rachelle Younglai in Washington)
(Editing by Andre Grenon, Steve Orlofsky and Tim Dobbyn)