Paulson: Comments to B of A's Lewis on Firing 'Were Appropriate'

WASHINGTON — Former Treasury Secretary Henry Paulson plans to tell lawmakers he acted appropriately in warning Bank of America Corp. Chief Executive Kenneth Lewis that the firm's management could be ousted if it walked away from its deal to buy Merrill Lynch, saying such a move would have suggested a "colossal lack of judgment."

Paulson, in remarks prepared for an appearance before a House panel on Thursday, said that Bank of America had no legal basis to nix the Merrill deal in the wake of rising losses at the investment bank last December. Any attempt to cancel the merger would have threatened the viability of both Bank of America and Merrill, as well as the broader financial system, Paulson said.

"It would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment," Paulson's written testimony says, according to a copy obtained by Dow Jones Newswires.

Paulson's appearance before the House Committee on Oversight and Government Reform will mark one of his first public appearances since leaving office in January. With many questions still unanswered about the U.S. government's unprecedented intervention in the financial markets, his comments represent a rare attempt by the former Goldman Sachs Group chairman to defend his legacy.

Key to his effort could be public perception of the government's actions in dealing with Bank of America when the firm threatened to cancel its deal for Merrill Lynch last December. Tense negotiations over a series of weeks eventually salvaged the transaction, but only after the government committed an additional $20 billion in aid to the bank.

Investigators on the Oversight panel, chaired by Rep. Edolphus Towns, D-N.Y., have already heard testimony from Lewis and Federal Reserve Chairman Ben Bernanke. People familiar with the matter say investigators believe Lewis' statements before the panel, testimony to New York Attorney General Andrew Cuomo, and his public statements may be contradictory and are inconsistent. They hope to use Paulson's testimony to test that conclusion.

Paulson, in his prepared remarks, does not mince words regarding a Dec. 21 conversation he had with Lewis that has been at the center of questions about whether the government overstepped its bounds in dealing with the bank. Paulson said he mentioned the possibility that bank management and its board could be removed if the bank invoked a clause to get out of its deal for Merrill.

"I believe my remarks to Mr. Lewis were appropriate," Paulson said.

He said he told Lewis that the government was supportive of the bank, but that officials felt strongly that if if backed out of the Merrill deal "such an action would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch, and the financial system."

It "would call into serious question the judgment of Bank of America's leadership," Paulson said.

Despite the strong statements, Paulson said he did not believe that the negotiations with Bank of America "ever brought us close" to actually taking steps to remove management.

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