The Guardian | April 23, 2009
By Andrew Clark in New York

The US government threatened to eject the entire board of Bank of America if the firm pulled out of a $50bn (£34bn) take­over of troubled Merrill Lynch in December, according to new documents set to inflame a bitter shareholder dispute at America's wealthiest bank.

In potentially explosive testimony to regulators, Bank of America's chief executive, Ken Lewis, has claimed the US treasury ordered him to press ahead with a buyout of Merrill and to keep quiet about the Wall Street brokerage's mounting losses.

Lewis's account was revealed today in a letter to Congressional law­makers from New York's attorney general, Andrew Cuomo, who has raised concern that Bank of America's shareholders were kept in the dark about liabilities inherited from Merrill.

The purchase has been enormously expensive for Bank of America, which is the largest US bank in terms of deposits. The issue has sparked an investor rebellion forcing Lewis into a fight for his job at a potentially acrimonious annual meeting next week.

The takeover was struck in a lightening deal agreed over a weekend at the height of Wall Street's financial meltdown in September. The bank's shareholders approved the transaction on 5 December but Lewis testified that a week later, he learned of a "staggering amount of deterioration" in Merrill's finances with quarterly losses jumping from $9bn to $12bn in six days.

After consulting lawyers, Lewis said he wanted to invoke a "material adverse event" clause to terminate the buyout. But the former treasury secretary Henry Paulson stepped in, saying he would use the government's bail-out powers to sack Bank of America's board unless it completed the deal.

Lewis testified: "I can't recall if he [Paulson] said 'we would remove the board and management if you called it [a material adverse event]' or if he said 'we would do if you intended to'."

In an allegation which has sparked questions about an over-reach of government power, Lewis maintains that Paulson and the Federal Reserve's chairman, Ben Bernanke, told him to keep Merrill's losses to himself: "I was instructed that 'we do not want a public disclosure'."

The saga sheds new light on feverish behind-the-scenes negotiations as government officials scrambled to stabilise the financial system in the wake of the collapse of Lehman Brothers and Bear Stearns. Merrill has been attacked for distributing $3.6bn in bonuses to its staff in spite of its losses.

Paulson confirmed to Cuomo's office that he threatened to oust Bank of America's board. However, the former treasury secretary denies telling Lewis to keep silent about Merrill's losses, insisting that he was simply referring to the treasury's own disclosure obligations.

A union-backed investor group, Change to Win, condemned Lewis's conduct: "Assuming Mr Lewis's version of the Paulson and Bernanke discussions is accurate, he and his board violated their legal duties to shareholders in order to protect their own employment interests. Their failure to provide timely disclosure of Merrill's troubled condition ultimately has had devastating consequences for shareholders."