WASHINGTON — Federal Reserve officials sharply criticized Bank of America and its chief executive, Kenneth Lewis, in emails to each other after the bank tried to pull out of its deal to buy troubled investment bank Merrill Lynch, according to documents unearthed by Congressional investigators.
During the December standoff between the big bank and top government officials, Federal Reserve Chairman Ben Bernanke dismissed the threat as a "bargaining chip," Fed attorneys called the bank's arguments "not credible" and a top examiner said Mr. Lewis's own position "seems somewhat suspect."
The emails and other documents, subpoenaed from the Fed as part of a Congressional investigation led by Rep. Edolphus Towns, D-NY, shed new light on one of the most controversial moments of the financial crisis. The emails confirm Mr. Bernanke was willing to threaten Mr. Lewis' removal as CEO if he reneged on the Merrill deal and later sought assistance. They also suggest Fed officials had a dim view of bank management, with the Fed's top lawyer noting at one point that Mr. Lewis "can be reckless."
The Fed didn't have an immediate comment.
"These were extremely difficult times in which all parties were working nights and weekends in an effort to prevent a severe financial collapse," said Bank of America spokesman James Mahoney, "and we believe it involved good people working with good intentions."
The question of who said what to whom became supercharged earlier this year as a result of testimony provided by Mr. Lewis to New York Attorney General Andrew Cuomo as part of a separate investigation. Mr. Lewis said then-Treasury Secretary Henry Paulson threatened to remove management and the board if Bank of America did not go through with its purchase of Merrill Lynch. Mr. Paulson later said he did so, in part, based on the Fed's position on the matter.
Mr. Lewis also said Mr. Paulson pressured him to not disclose publicly details about the government bailout talks, and suggested Mr. Bernanke concurred. Mr. Bernanke later denied pressuring Mr. Lewis over the disclosure issue.
The email correspondence uncovered by Congress shows that Fed officials were aware of the question of disclosure, but don't clearly support or contradict Mr. Lewis's assertion.
Mr. Lewis's accusations sparked the Congressional investigation that will reach a climax Thursday when the Bank of America chief is scheduled to testify in front of the House Committee on Oversight and Government Reform. Bank of America agreed to acquire Merrill in September at the height of the financial crisis. When the extent of the investment bank's losses became clear, the Charlotte-based banking giant tried to back out by invoking a "material adverse change," or MAC, clause. Federal officials, fearful such a move would lead to Merrill's collapse, pushed back hard. In the end Bank of America received a second federal bailout to cover some of the losses. The notes and emails from Fed officials provide a rare insight into the thinking of top central bank officials. In particular, they show how Mr. Bernanke himself played a central role in the Bank of America saga.