Fed Says Didn't Advise BofA's Lewis on Disclosure

No one at the Federal Reserve advised Bank of America chief Kenneth Lewis on any disclosure issues, Fed spokeswoman Michelle Smith said on Thursday.

"No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure," Smith said in an e-mail responding to a question. "It has long been the Federal Reserve's view that questions of this nature are best addressed by individual institutions and their legal counsel, as they are in a position to understand clearly their obligations and responsibilities."

AP Ken Lewis

New York Attorney General Andrew Cuomo said on Thursday that Lewis was pressured by senior federal officials Henry Paulson and Ben Bernanke to accept a merger with troubled Merrill Lynch or lose his job.

The government helped orchestrate the acquisition of the investment bank by Bank of America over the same weekend in September that another investment bank, Lehman Brothers, went under, setting off one of the most intense periods of the financial crisis.

Bank of America acquired New York-based Merrill Lynch on Jan. 1.

Meanwhile, a spokesman for Paulson said he was delivering his own message, and not the Federal Reserve's, when he told Lewis that the bank was in a binding merger contract with Merrill Lynch.

"Secretary Paulson's words were his own," the spokesman said. "(Fed) Chairman (Ben) Bernanke did not instruct him to indicate any specific action the Fed might take," the spokesman for Paulson said in a statement.

Bank of America has repeatedly defended its purchase to shareholders and investors amid revelations of huge losses at Merrill Lynch before completion of the deal.

"We believe we acted legally and appropriately with regard to the Merrill Lynch transaction," Bank of America spokesman Scott Silvestri said on Thursday.

Representatives from the Treasury Department had no immediate comment.

The February testimony came in response to questioning by the attorney general's office about bonuses paid to Merrill Lynch employees in December, just before BofA completed its acquisition of the investment bank. The attorney general's office was trying to determine the timing of the bonuses and whether BofA had failed to provide adequate disclosure to shareholders about them before the deal was completed.

The investigation's focus has since broadened to encompass the transparency of the government's $700 billion bailout program, which it launched last fall to help unclog credit markets.

Bank of America has received $45 billion from the government's Troubled Asset Relief Program. As part of that money, the bank received $20 billion in January after Lewis requested it to help offset mounting losses at Merrill Lynch.

Neil Barofsky, the special government inspector general assigned to oversee the Troubled Asset Relief Program, said Thursday he will be issuing audits of various bailout transactions, including government assistance provided to Bank of America in connection with its acquisition of Merrill Lynch. He said his office is also conducting an investigation involving Bank of America.

"I would caution anyone from leaping to too many conclusions about what Secretary Paulson or Chairman Bernanke said until we've looked at all the facts and reported on them," Barofsky, who said he witnessed Lewis' testimony, told the economic panel. "The conclusion that one may draw that it's black and white that there was an order from the United States government not to disclose this information, I don't think it's as crystal clear."

Lewis has admitted in recent months that he had trepidations about completing the purchase of Merrill Lynch. In December, just before it was sold to Charlotte, N.C.-based Bank of America, Merrill Lynch said it lost more than $15 billion in the fourth quarter.

According to the testimony, Lewis had several discussions with government officials over his concerns about the deal, including his desire to scuttle it. Purchase deals typically allow companies to back out if there are significant changes in operations or performance.

But Secretary Paulson advised Lewis in late December that if Bank of America terminated the deal, the company's management and board would be replaced.

Lewis told the attorney's general's office during his testimony that Secretary Paulson said to him: "I'm going to be very blunt, we're very supportive on Bank of America and we want to be of help, but ... we would remove the board and management if you called it."

Just a few weeks after the deal was completed, Bank of America's fourth-quarter earnings report showed the major hit its balance sheet took on the Merrill Lynch transaction, making Lewis the target of much shareholder fury. In January, Bank of America reported a $2.39 billion fourth-quarter loss.

Two of the nation's largest state pension funds are seeking to lead a class action lawsuit against Bank of America, alleging the bank's management "misstated or omitted" important information about Merrill Lynch's financial health before the deal was completed.

And Finger Interests Number One, which owns about one-fifth of one percent of Bank of America stock, is asking shareholders to vote against re-electing Lewis as well as lead director O. Temple Sloan Jr. and director Jackie Ward during the bank's annual meeting next week in Charlotte.

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On Monday, Bank of America warned of worsening loan default problems even as it posted a first-quarter profit of $2.81 billion. The amount of its problem loans more than tripled to $25.7 billion, and Lewis said he couldn't predict when the bank's credit morass would end.

—AP & Reuters contributed to this report.

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