House lawmakers on Thursday accused former Treasury Secretary Henry Paulson of bending to the demands of a major bank and keeping negotiations of a hefty bailout secret in his rush to stabilize the financial markets last year.
Paulson, testifying for the first time since leaving office in January after putting in place a $700 billion bank bailout program, was defiant in his response and admitted no wrongdoing.
"No one was tougher than I was in trying to protect the American taxpayer," he told the House Oversight and Government Reform Committee.
Lawmakers are frustrated that despite hefty infusions of cash into the nation's largest banks, unemployment and home foreclosures are on the rise.
In one particularly testy exchange, Democratic Rep. Marcy Kaptur suggested Paulson — the former head of Goldman Sachs — needed to visit her home state of Ohio to see how bad the economy really is.
"I know how terrible it is, I'm telling it would have been worse" had the government not intervened, Paulson said.
Kaptur, who voted in favor of the bailout program, responded: "If that's your best argument, that's not good enough."
Paulson had been called to testify because of his role last year in Bank of America Corp's merger with Merrill Lynch & Co. Paulson acknowledged in his testimony that he pressured Bank of America CEO Kenneth Lewis to go through with the deal despite Merrill's mounting financial losses.
Paulson said he warned Lewis that Lewis could lose his job if he dropped the deal or tried to renegotiate because doing so would exhibit a "colossal lack of judgment."
At one point during the discussions, Paulson pledged government aid to help Bank of America absorb some of the losses from acquiring Merrill. Paulson said he declined to put that promise in writing because the details would have been vague and would have had to be disclosed publicly by the Treasury Department.
Paulson said he never told Lewis to hide potential losses from shareholders, but kept discussions private so as to prevent fluctuations in the market.
"We didn't want to overly scare people and make it worse," he said.
Bank of America, which went through with the merger, ultimately received $45 billion in federal aid, a sum that included $20 billion tied to the merger.
Republicans and Democrats alike blamed Paulson for keeping Congress in the dark. Rep. Jim Jordan, R-Ohio, accused Paulson of engaging in a "pattern of deception," while Rep. Dennis Kucinich, D-Ohio, said Paulson turned a blind eye to evidence that the bank was withholding information from its shareholders.
Rep. Edolphus Towns of New York, the panel's Democratic chairman, said Paulson was all too willing to promise Lewis money after Lewis threatened to back out on the deal.
"All of this happened against a backdrop of unchecked government power, with no transparency or accountability," Towns said.
Paulson said he believes his handling of the crisis, including the Merrill Lynch deal, was appropriate and saved the nation from "great peril." He told the panel that had the government not intervened and promised the cash cushion to banks, the economy would be much worse.
On the Bank of America bailout, Paulson said he would be "very optimistic that the taxpayer would get all that money back with a profit."
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 the House panel.
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."