Paulson says he pressured BofA chief to buy Merrill

House lawmakers accused former Treasury Secretary Henry Paulson on today of bending to the demands of a major bank and keeping negotiations of a hefty bailout secret in his rush to stabilize the financial markets last year.

Paulson was defiant in his responses and admitted no wrongdoing.

“No one was tougher than I was in protecting the American taxpayer,” he told the House Oversight and Government Reform Committee.

Paulson acknowledged in his testimony that last year he pressured Bank of America Corp. to go through with its plans to buy Merrill Lynch Co. despite mounting financial losses. Paulson said he had warned the bank’s CEO, Kenneth Lewis, that Lewis could lose his job if he dropped the deal or tried to renegotiate because doing so would exhibit a “colossal lack of judgment.”

At one point during the discussions, Paulson pledged government aid to help Bank of America absorb some of the losses from acquiring Merrill. Paulson said he declined to put that promise in writing because the details would have been vague and would have had to have been disclosed publicly by the Treasury Department.

Paulson said he never told Lewis to hide potential losses from shareholders but kept negotiations private so as to prevent fluctuations in the market.

“We didn’t want to overly scare people and make it worse,” he said.

Bank of America, which eventually made the merger, ultimately accepted $45 billion in federal aid, including $20 billion tied to the merger.

Republicans and Democrats alike blamed Paulson for keeping Congress in the dark about the Bank of America dealings. Republican Rep. Jim Jordan accused Paulson of engaging in a “pattern of deception,” while Rep. Dennis Kucinich, a Democrat, said Paulson turned a blind eye to evidence that the bank was withholding information from its shareholders.

Rep. Edolphus Towns, the panel’s Democratic chairman, said Paulson was all too willing to promise Lewis money after Lewis threatened to back out on the deal.

“All of this happened against a backdrop of unchecked government power, with no transparency or accountability,” Towns said.

Paulson said he believes his handling of the crisis, including the Merrill Lynch deal, was appropriate and saved the nation from “great peril.” He told the panel that had the government not intervened and promised the cash cushion to banks, the economy would be much worse.

“I think everyone here understands that government has been forced to do things,” Paulson said. “I think forced to do things not only because of an unprecedented crisis, but forced to do things because we didn’t have the tools we needed.”

On the Bank of America bailout, Paulson said he would be “very optimistic that the taxpayer would get all that money back with a profit.”

Federal Reserve Chairman Ben Bernanke has denied threatening to oust Lewis and said he never told anyone else to. Another Fed official suggested otherwise in an e-mail obtained by the House panel.

Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said in a December 2008 e-mail that Bernanke had planned to make “even more clear” that if Bank of America backed out on the deal, “management is gone.”

Paulson said Bernanke never asked him to relay the message. But, he added, he believed he was expressing the Fed’s opinion that dropping the deal “would raise serious questions about the competence and judgment of Bank of America’s management and board.”

Related Topics: Bank Of America Corp.