Paulson says he pressured Bank of America CEO

WASHINGTON -- Former Treasury Secretary Henry Paulson testified today that he pressured Bank of America Corp. last year to go through with its plans to buy Merrill Lynch but didn't tell the bank's chief to hide potential losses from shareholders.

Paulson acknowledged that he warned the bank's CEO, Kenneth Lewis, that Lewis could lose his job if he dropped the deal. Paulson also said he pledged government aid to the bank but declined to put that promise in writing because the details would have been vague and would have to be disclosed publicly by the Treasury Department.

Paulson said negotiations were kept private to protect investors.

"We didn't want to overly scare people and make it worse," Paulson told the House Oversight and Government Reform panel.

Paulson's testimony comes as Congress debates whether to expand the Federal Reserve's power to monitor large, influential institutions like Bank of America.

Rep. Edolphus Towns of New York, the Democratic chairman of the House Oversight and Government Reform Committee, said he believes Lewis squeezed money out of the government by threatening to back out on the deal. The government ultimately gave $20 billion to the bank to blunt losses tied to the acquisition.

"All of this happened against a backdrop of unchecked government power, with no transparency or accountability," Towns said.

In testimony to the committee, Paulson said he told Lewis last year that reneging on his promise to purchase Merrill Lynch would show a "colossal lack of judgment."

Paulson said that "under such circumstances," the Federal Reserve would be justified in removing management at the bank.

"By referring to the Federal Reserve's supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America's regulator, and shared by the Treasury, that 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 said.

Paulson said he believed his remarks to Lewis were "appropriate."

Federal Reserve Chairman Ben Bernanke has denied threatening to oust Lewis and said he never told anyone else to, either. But another Fed official suggested otherwise in an e-mail obtained by House investigators.

Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said in a December 2008 e-mail that Bernanke had planned to make "even more clear" that if Bank of America backed out on the deal, "management is gone."

Paulson said Bernanke never asked him to relay the message. But, he added, he believed he was expressing the Fed's opinion that dropping the deal "would raise serious questions about the competence and judgment of Bank of America's management and board."

-- The Associated Press