WASHINGTON — The Federal Reserve Board sought to keep the Office of the Comptroller of the Currency and Securities and Exchange Commission in the dark about its role in pressuring Bank of America Corp. to complete its deal for Merrill Lynch & Co., according to documents obtained by American Banker
In an e-mail exchange late last year, Fed officials said they planned to avoid mentioning the Fed's negotiations with B of A chief executive Kenneth Lewis on a conference call with OCC officials.
At the time, Lewis was actively considering invoking a "material adverse condition" clause that would have let him abandon the Merrill deal. Treasury Secretary Henry Paulson called Lewis with a message from Fed Chairman Ben Bernanke: Go through with the merger or lose your job.
"Given the presence of the OCC on the call, I think we should not discuss or reference the call with Ken Lewis and Paulson," wrote Brian Peters, an official at the Federal Reserve Bank of New York, in an e-mail dated Dec. 19.
In response, Jennifer Burns, an official at the Federal Reserve Bank of Richmond, replied: "Agree. Also not the MAC discussion."
The e-mails were part of a memo drafted by Republican staff of the House Oversight and Government Reform Committee, which is scheduled to hear testimony Thursday from Bernanke about his role in the merger.
How Bernanke responds to questions from the committee will be crucially important on several fronts, including whether Congress will go along with the Obama administration's regulatory reform plans and hand the central bank significant new powers. Bernanke's term expires in January, and his reappointment could also hang in the balance.
The GOP memo, which includes several e-mails the committee obtained through a subpoena, says the Fed also sought to keep the SEC in the dark. The SEC did not officially learn of the Lewis call until Jan. 11 — three weeks after it took place. The SEC called B of A after it caught wind of the bank's concerns.
Despite the e-mails, a spokesman for the OCC insisted the agency was aware of the situation.
"We were kept apprised of the situation," the spokesman said.
Though Bernanke has said his message to Lewis was that B of A should disclose whatever it was required to, the documents show other central bank officials pressed for a delay.
A December message from Merrill chief financial officer Nelson Chai to its CEO, John Thain, said Fed officials' "hope is that there is no disclosure prior to" B of A's first-quarter earnings report.
The e-mails also make clear that Timothy Geithner, then the president of the New York Fed and now Treasury secretary, was kept in the loop. Geithner has denied being involved in the negotiations. "B of A/ML can't MAC," Geithner wrote on Dec. 20. "Have to close."
The same day, Geithner e-mailed Fed Gov. Kevin Warsh to ask: "Are you all over" the B of A deal, "and are you getting what you need from the troops?"
Federal Deposit Insurance Corp. Chairman Sheila Bair, meanwhile, was objecting to giving B of A more government support as Fed officials continued to negotiate with the company.
"Strong discomfort with this deal at the FDIC," wrote Bair in a Jan. 14 e-mail to Bernanke. "My board does not want to do this, and I don't think I can convince them to take losses beyond the proportion of assets coming out of the depository institutions."
Ultimately, the FDIC did support entering into a loss-sharing agreement with B of A on a $118 billion portfolio, but it was unclear how the deal changed during negotiations.
Republicans were already arguing Wednesday that the e-mails prove Bernanke engaged in a "cover-up" to prevent disclosure of the growing problems at Merrill Lynch.
"The evidence is that he was part of the pressuring of Ken Lewis," Rep. Darrell Issa, the panel's top Republican, told CNBC on Wednesday. "The fact is, Bernanke has to be held accountable for how he handled this wreck both publicly and privately, and right now there's serious doubt about whether privately he handled it correctly."
But Democrats were expected to argue that the Fed did not go far enough in making changes at BofA before it gave it more government aid. Rep. Dennis Kucinich, D-Ohio, said Wednesday documents showed the Fed found that BofA failed to do proper due diligence in acquiring Merrill, and doubted Lewis was really considering invoking the MAC.
"Senior officials at the Fed believed that Bank of America could be in violation of securities laws for failing to inform shareholders about the Merrill losses known in mid-November," Kucinich said. "Furthermore, they believed that Ken Lewis's threat of invoking a MAC was a 'bargaining chip' and was not credible, that Bank of America was experiencing its own losses independent of Merrill Lynch and needed to be bailed out itself."
Despite this, the Fed "attached no meaningful conditions to the money," he said.