WASHINGTON — Federal Reserve staff discussed getting a "pound of flesh" from Bank of America Corp. management in return for government aid to help close its deal for Merrill Lynch & Co., internal documents show, highlighting the tense deliberations over the $20 billion rescue eventually provided to the bank.

The documents, unearthed by congressional investigators, show that Fed officials faced skepticism from both inside and outside the central bank on providing government assistance. FDIC Chairman Sheila Bair, writing to Fed Chairman Ben Bernanke just two days before the government aid was unveiled, said there was "strong discomfort with this deal at the FDIC," referring to a plan to have the FDIC backstop losses on Bank of America assets.

"My board does not want to do this," Bair wrote in the Jan. 14 email discussing what role the FDIC would play. Two days later the FDIC announced it would provide protection from losses on approximately $118 billion of Bank of America assets.

The documents also show top Federal Reserve officials were in touch with now Treasury Secretary Timothy Geithner at the height of negotiations with Bank of America in late December. Geithner emailed Fed Governor Kevin Warsh on Dec. 20 to ask "are you getting what you need from the troops" at the Federal Reserve Bank of New York.

Warsh, responding two hours later to Geithner, said that "your troops" were preparing information for top Fed officials. Warsh also said the bigger issue facing policy makers was at the Treasury, which is "undermanned and less than crisp in their view."

Geithner was chosen as President Barack Obama's pick for Treasury Secretary in late November and at that time recused himself from all "institution-specific decisions," according to Treasury spokesman Andrew Williams.

"It was perfectly appropriate that the incoming Treasury Secretary would be kept apprised of key developments, but he was not making decisions for the government," Williams said.

Fed staffers were highly critical of bank management when discussing the terms of the government bailout, according to the documents. Malcolm Alfriend, senior vice president of the Fed Bank of Richmond, provided in a Dec. 20 email "preliminary thoughts on getting a pound of flesh out of Lewis," referring to Bank of America CEO Kenneth Lewis. Subsequent emails showed Fed staff wanted Bank of America to have a "price to pay" for any government assistance.

"Personally, I think management should be downgraded, no more acquisitions, raise some 'real' capital," Deborah Bailey, then the deputy director of the Fed's division of banking supervision and regulation, wrote to Alfriend. She noted that Bank of America had paid a premium for Merrill Lynch when the acquisition was announced.

"How do you pay a premium and now ask for help? This will not go over well at all," Bailey added.

The documents were subpoenaed from the Fed as part of an investigation by the House Committee on Oversight and Government Reform, and led by Reps. Edolphus Towns, D-N.Y., and Dennis Kucinich, D-Ohio. A transcript of the documents, assembled by congressional investigators, was obtained by Dow Jones Newswires from sources familiar with the documents.

Bernanke is scheduled to appear before the Oversight panel on Thursday, testifying just two weeks after Lewis was grilled by lawmakers over his negotiations with the government last December after the bank threatened to pull out of its deal in the face of mounting losses at Merrill Lynch.

Lawmakers are expected to question Bernanke on testimony given by Lewis to New York Attorney General Andrew Cuomo that the government pressured him to not disclose details about the discussions with the government, and that federal officials made clear that they would consider ousting Bank of America management if the bank did cancel the Merrill deal and then later sought assistance.

Documents reviewed by investigators suggest that the ongoing negotiations with Bank of America were not discussed with high-level officials at the Securities and Exchange Commission until early January. Fed Bank of New York official Arthur Angulo, in a Jan. 11 email to the Fed's top lawyer, said he had been contacted by Erik Sirri, then the director of the SEC's division of trading and markets. A voicemail left by Sirri suggested "he knows something is up," Angulo wrote to Fed General Counsel Scott Alvarez.

"I want to check to how much (if anything) has been shared with the SEC," Angulo wrote to Alvarez.

Alvarez, responding soon after, said he had "not discussed this with the SEC," but said Bank of America had complained that someone had alerted the SEC and that securities regulators had called the bank to inquire about the situation. Alvarez advised Angulo to give Sirri "broad and tentative outlines" of the government's plans and to note that the Fed considered the matter of "systemic importance."

"Erik has been very helpful in the past with SEC enforcement and very discrete about sharing supervisory info we give him," Alvarez wrote.

A memo put together by Republican lawmakers, excerpts of which were shared by sources familiar with the information obtained by the committee, also cites a Dec. 19, 2008, email from a Fed employee that suggests they did not want to share information with the Office of the Comptroller of the Currency.

"Given the presence of the OCC on the call, I think we should not discuss or reference the call with Ken Lewis and [then-Treasury Secretary Henry] Paulson," Brian Peters of the Fed Bank of New York said in the Dec. 19 email cited in the GOP memo. Rep. Darrell Issa, the ranking Republican on the Oversight panel, said the documents raise serious concerns about the Fed's behavior. "The Federal Reserve also engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies," the California Republican said in a statement provided by his office.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.