BofA’s CEO Ken Lewis: The Fed Made Me Do It!

Early Thursday, Kenneth Lewis, CEO of Bank of America (BAC) was testifying before a government oversight committee with respect to his company’s January 1, 2009 acquisition of Merrill Lynch.

Considering recent announcements by the company, we would suspect there will be several more inquiries in the future for Mr. Lewis.

Members of the Oversight and Government Reform Committee and the House Oversight and Investigations subcommittee hammered for a rationale as it appeared to them that Mr. Lewis failed to file the appropriate information prior to the December 2009 shareholder vote with respect its then-acquisition target Merrill Lynch, and known widening losses as of November 2009 - thereby demonstrating that B of A neglected to meet the government’s disclosure rules.

The House Oversight and Investigations subcommittee’s brought to light that Mr. Lewis was aware of the acceleration of the substantial losses at Merrill Lynch, but did not make the information available to its shareholders before approving the transaction.

In a December 22, 2008 e-mail to agency staff from Federal Reserve Chairman Ben Bernanke, Mr. Lewis was indicated as potentially pressing the agency to “use as a defense” against shareholder lawsuits that the government ordered him to consummate the deal for systemic reasons.

However, other e-mails and comments submitted by Mr. Lewis indicated he was pressed to complete the acquisition. Mr. Lewis stated that after shareholders had approved the transaction (but had not closed), officials from the Treasury and Fed approached him in mid-December 2008 to discuss the idea of breaking up the deal, given is concerns about the acquisition — and that he was asked to delay any such action, even though he expressed significant concerns about pursuing such an endeavor given the systemic consequences and risks to Bank of America.

Mr. Lewis stated that in February 2009, he alerted New York Attorney General Andrew Cuomo that he was pushed by Ben Bernanke and then-Treasury Secretary Henry Paulson to complete the deal. At this point of time, Messrs. Paulson and Bernanke deny counseling Lewis to finish the acquisition despite his reservations. As the hearing on the acquisition progresses, Bernanke and Paulson are expected to testify at some point of time.

In order to complete Bank of America’s acquisition, the Treasury invested $20 billion in Bank of America and also guaranteed $118 billion of assets late last year. In January 2009, Bank of America received another $20 billion in government bailout funds, bringing the total amount of Treasury funds received to $45 billion through the Troubled Asset Relief Program (TARP).

To date, regulators have yet to permit Bank of America the ability to use $45 billion in TARP funds it received. So far, the Treasury required Bank of America to raise $33.9 billion in funds by November to act as an additional capital buffer against potential future losses, of which Bank of America recently issued $7.6 billion in long-term debt not guaranteed by the Federal Deposit Insurance Corp.

While the ability to raising funds without government assistance continues to be a major requirement to be able to repay TARP funds, we would expect that the Treasury could require Bank of America as well as other financial institutions - such as but not limited to Citigroup (C) and Wells Fargo (WFC) to raise additional capital to create an additional buffer against potential future losses.

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