By Kim Dixon and John Whitesides
WASHINGTON (Reuters) - U.S. lawmakers accused the Treasury and Federal Reserve on Thursday of using threats to force Bank of America to take over Merrill Lynch while criticizing Bank of America boss Ken Lewis for keeping shareholders in the dark about rising losses at Merrill.
At a hearing into the deal, brokered hastily during the worsening U.S. banking crisis in late 2008, lawmakers were torn over whether regulators exceeded their authority to enforce the marriage or had been browbeaten by Lewis into providing government aid to support the acquisition.
"The Treasury Department had provided a $20 billion dowry for a shotgun wedding," said House Oversight and Government Reform Committee Chairman Adolphus Towns, a Democrat. "But the question may be, 'Who was holding the shotgun?'"
Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson effectively put "a gun to the head" of Lewis to close the deal quickly, according to Republicans on the panel.
"This transaction took place in a climate of fear and intimidation by government officials," said Republican Jim Jordan of Ohio.
Lewis told his board the Fed and Treasury would remove the board and bank management if it did not complete the purchase of Merrill Lynch despite growing financial losses there, according to board minutes cited at Thursday's hearing.
"If that isn't a threat, I don't know what is," Democrat Elijah Cummings agreed.
Towns said Bernanke and Paulson would be asked to testify at a later date before the committee.
But Lewis was also hammered by lawmakers who said he must have known earlier than he claimed about heavy losses at Merrill, which lost $15.84 billion in the 2008 fourth quarter.
Lawmakers argued that if Bank of America went so far as to consider using a material adverse change (MAC) clause to scuttle the deal then it was important enough to inform shareholders.
"I'd leave that decision to our securities lawyer and our outside counsel," responded Lewis, the sole witness at the hearing, who generally kept his answers brief and even smiled and laughed at times during a three-hour of grilling.
Shares of Bank of America rose 8.3 percent to $12.97 on Thursday, aided by analysts at Keefe, Bruyette & Woods raising their rating to "outperform" from "market perform."
Towns said the deal, pushed behind closed doors through "coded messages and private e-mails", was evidence of a deeper malaise in financial supervision.
"Basically, the regulators and the financial institutions seemed to be making up the rules as they went along," Towns said, adding that the incident should help shape financial regulatory reforms that Congress is exploring.
Lewis agreed there had been pressure to proceed with the purchase of Merrill but declined to characterize the stance of Bernanke and Paulson as improper or an undue threat.
"I would say they strongly advised and they spoke in strong terms but I thought it was with good intentions," he said. "It was in the context of them thinking it was in the best interests of Bank of America and the financial system."
Lewis said Bernanke and Paulson never asked him to keep information secret that the bank wanted to disclose to shareholders.
Bank of America is regulated by the Federal Reserve. A Fed spokesman had no immediate comment on the hearing.
Lewis said he was ultimately persuaded to do the Merrill deal, influenced by the strong opinion of the Fed and Treasury that there was no MAC event. "I also still thought we had a strategic reason to do Merrill Lynch despite the fact it had a financial issue."
Shareholders of Bank of America and Merrill voted in favor of the merger last December 5. The acquisition went ahead on January 1
but was followed later that month by $20 billion in taxpayer aid to help Bank of America absorb Merrill Lynch.
Lewis has said it was only later in December that he learned how fast Merrill was deteriorating, and then threatened to pull out of the merger, with officials of the Treasury and the Federal Reserve pushing for completion of the deal.
Towns, the panel chairman, said he would not draw any final conclusions until Bernanke and Paulson testified.
Democratic lawmaker Dennis Kucinich said Lewis, who testified under oath, might have committed perjury during the hearing over whether he had asked for explicit government backing for the takeover of Merrill Lynch.
Lewis said he did not recall seeking a letter ordering Bank of America to go forward with the deal, despite Kucinich citing Fed emails appearing to discuss such a request. Lewis said he remembered a request for something in writing about government assistance to do the deal.
Bernanke's term as chairman of the Fed expires at the end of January. Paulson, who headed Goldman Sachs before President George W. Bush named him treasury secretary, is now with Johns Hopkins School of Advanced International Studies.
In April, Bank of America shareholders voted to oust Lewis as chairman but the board expressed support for him to remain as chief executive.
(Writing by John Whitesides; Additional reporting by Mark Felsenthal; Editing by Tim Dobbyn)