WASHINGTON — Lawmakers took aim at Bank of America Corp. chief executive Kenneth Lewis and government regulators Thursday, fuming over internal Federal Reserve emails that suggest the bank should've known earlier about growing losses at Merrill Lynch & Co.
"Why did a private business deal, announced in September, and approved by shareholders in December, with no mention of government assistance, end up costing taxpayers $20 billion in January," Rep. Edolphus Towns, D-N.Y., said at a hearing featuring an appearance by Lewis on Capitol Hill.
The issue of disclosure was a touchstone for lawmakers, who pressed Lewis on why Bank of America did not inform its shareholders of its growing concerns with the losses at Merrill Lynch if the issue was serious enough for Lewis to fly to Washington and speak with federal officials about abandoning the deal by invoking the "material adverse change" clause.
"If there is an event that you consider so significant that it may allow you to invoke the [MAC] do you not think that same event is of interest of shareholders and requires you in your fiduciary duty to disclose it?" Rep. Peter Welch, D-Vt., said.
Lewis suggested his responsibility was limited.
"I leave that decision to our securities lawyers and our outside counsel ... I'm not a securities lawyer," Lewis said.
Rep. Darrell Issa, R-Calif., said Bank of America got itself "into a fix" with the acquisition of Merrill Lynch, where losses started to pile up throughout November and into December. But he said pressure from the Fed and the Treasury Department for Bank of America to close the deal in a series of tense negotiations last December should raise serious concerns for policy makers.
"This committee should be most concerned ... about financial vigilantes at the [Fed and Treasury] who are dictating extralegal government directives through threats and intimidation to private companies," Issa said in his prepared remarks.
Lewis sought to downplay the idea that he was threatened by the Treasury or Federal Reserve, though he acknowledged there were suggestions that Bank of America management would be replaced if they went through with a plan to step away from the Merrill Lynch acquisition. He said definitively that officials did not pressure the company to not disclose pertinent information to shareholders.
"He never said we should not disclose something that should be disclosed," Lewis said, referring to Bernanke.
The comments came at a hearing before the House Committee on Oversight and Government Reform, which has been investigating the details of Bank of America's deal for Merrill and the circumstances surrounding the government's $20 billion bailout of the bank in January to ensure the deal was closed. Towns, who chairs the committee, said the panel plans to invite former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke to testify on the issue in the near future.
Committee investigators have spent weeks poring through thousands of documents from Bank of America, the Fed and the Treasury. Internal Fed emails unearthed during the investigation suggest central bank officials were harshly critical of Bank of America's threat in mid-December that it may pull out of the deal for Merrill in the face of mounting losses at the investment bank.
Fed officials were skeptical that Bank of America was really caught off guard by the losses at Merrill and that the problems were isolated at the investment bank. Tim Clark, a senior banking supervisor at the Fed, openly questioned Lewis' arguments in a Dec. 19 email unearthed by investigators.
"Ken Lewis' claim that they were surprised by the rapid growth of the losses seems somewhat suspect," Clark wrote to top Fed officials. "At a minimum, it calls into question the adequacy of the due diligence BAC has been doing in preparation of the takeover."
Another document, a Dec. 23 email from an official at the Federal Reserve Bank of Richmond, suggested Lewis was concerned with lawsuits from shareholders.
"[He] knows they did not do a good job of due diligence and the issues facing the company are finally hitting home and he is worried about his own job after cutting loose lots of very good people," Malcolm Alfriend, senior vice president of the Richmond Fed, said in an email.
Rep. Dennis Kucinich, D-Ohio, who chairs a key subcommittee, questioned whether the bank's "mistakes and miscalculations, more than any other single factor, cause the experienced corporate dealmaker to be exposed to Merrill Lynch's predictably large losses."
Lewis, appearing by himself before the panel but flanked by a phalanx of aides, said that the bank and government regulators determined that going through with the deal was the "better course" to abandoning the transaction.
"This course made sense for Bank of America and its shareholders, and made sense for the stability of markets," Lewis said. "We viewed those two interests as consistent."
Pressed by lawmakers, Lewis also said he would have "strongly considered" invoking the "material adverse change" clause that would have allowed them to abandon the deal if the government was not part of the decision-making process. He also acknowledged that losses in November, not just in December, played into the forecasts that were behind the company's decision to consider abandoning the Merrill deal.
In a key line of questioning, however, he said he did not feel that federal officials had acted improperly in pressuring the firm to complete its acquisition.
"I do not. I would say they strongly advised and they spoke in strong terms, but I think it was with the best intentions," Lewis said.
