Afternoon Session Of A Joint Hearing Of The House Oversight And Government Reform Committee And Domestic Policy Subcommittee - Bank Of America And Merrill Lynch: "How Did A Private Deal Turn Into A Federal Bailout?"

Statement

Chaired By: Rep. Edolphus Towns

Witness: Kenneth Lewis, Ceo, Bank Of America

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REP. TOWNS: The committee will resume.

May I remind the witness that he is still under oath. At this time, I yield five minutes to the gentlewoman from California Ms. Diane Watson.

REP. DIANE WATSON (D-CA): Thank you Mr. Chairman.

And thank you, Mr. Lewis, for enduring all of this time.

In your testimony you stated that nine days after the shareholders vote approving the merger, you became aware of significant accelerating losses, the MAC at Merrill Lynch raising concerns that the Bank of America might want to avoid finalizing the deal due to the revelation of MAC.

However it is difficult to understand how this came as a complete surprise given reports by The New York Times that shortly after the deal was announced in September, B of A had quickly installed 200 people at Merrill Lynch to thorough review their books. Were any of the 200 Bank of America employees responsible for analyzing Merrill Lynch aware of the potential for the $12 billion loss before you allegedly discovered it in mid December?

MR. LEWIS: I apologize if I haven't been clear. We did have people there and we did know that there were losses and that was clear both at our company and theirs, we could see that that was happening and there were rumors on the street that that was happening across all financial institutions and we saw evidence of that after the fourth quarter close because we saw most everybody had losses.

The thing that caused us to be concerned was the acceleration that we saw when we got the numbers that we did on the 14th.

REP. WATSON: Did you feel that the reviews of Merrill Lynch's books were thoroughly adequate, were they researched and analyzed adequately?

MR. LEWIS: Yes, ma'am, I thought that due diligence was done adequately. We identified the instruments that we thought might have issues if you have credit deterioration but we did not expect the magnitude of the deterioration that occurred in the fourth quarter.

REP. WATSON: So you're saying that you really weren't aware the substantial loss before the shareholders meeting on December the 5th?

MR. LEWIS: No, ma'am, we saw losses but they seemed consistent with what we were hearing about in the marketplace and consistent with what we were seeing at our company. It was only when we saw the acceleration that when we got the reports when we did that that caused the alarm.

REP. WATSON: Well do you think if you had that knowledge before you would have proceeded with that merger differently?

MR. LEWIS: Well I can't, it's hard to predict what I would have done other than what we did when we have --

REP. WATSON: A scenario that I just gave you, if you were aware would you have proceeded differently?

MR. LEWIS: Well I don't know because it didn't occur that way.

REP. WATSON: In testimony to the New York State Attorney General Andrew Cuomo you stated that you had been advised by representatives from the Treasury Department and the Federal Reserve not to disclose details of Merrill Lynch's difficult financial position. So why do you believe that representatives from the federal government would not want you to disclose knowledge you have of Merrill Lynch's increasingly dire economic position?

MR. LEWIS: During all of that time there was never, ever a time that the Federal Reserve or the Treasury Department told me that we should not disclose something that we thought would be a disclosable event.

REP. WATSON: So there was never a time that you were told to hold back on this information?

MR. LEWIS: Not as regards as something that should be disclosed.

REP. WATSON: Okay. Remember you're under oath. Okay. Despite the fact that the plan for a merger was announced on September 15th,. 2008, there was no mention of the 20 billion capital injection from the government until January 16th. And what point during the negotiations between the B of A, Merrill Lynch and the federal government was it determined that this money would be necessary for the merger to be finalized?

MR. LEWIS: The discussions around the injection of the preferred stock took place after we went to the Federal Reserve and the Treasury on the 17th and so during that time we began to talk about various ways to inject capital in so called for the hole. We did not come to a conclusion about amounts and the nature of the structure until sometime well into that first few weeks of January of 2009.

REP. WATSON: Thank you. My time is up. Thank you.

REP. TOWNS: Thank you very much the gentlewoman from California.

I -- just before I move to the other members, let me just sort of ask a couple of other questions.

Mr. Lewis, did Merrill Lynch give you all the information that you needed to make an informed decision? Did you get all the material that you needed in order to be able to make an informed decision?

MR. LEWIS: Yes, sir, they did and we in fact not only were relooking at the data, but we had an outside firm that had looked at the data before, a company run by Chris Flowers who was looking at the data alongside of us and he had looked at their data some time ago, a few months before then, and so they had a very good knowledge of the various instruments and securities.

And so we actually had two sets of eyes looking at that. Again, sir, it was not the fact that we didn't identify the securities, it was that we did not expect the credit to deteriorate like it did in the fourth quarter.

REP. TOWNS: So do you agree that the decision on whether to proceed with the merger was ultimately yours? Was it yours?

MR. LEWIS: Well it was my recommendation to the board and it was mine and the board's decision to go forward, yes sir.

REP. TOWNS: All right. Thank you very much.

I understand that we got out of rotation here, I understand it was Mr. Connolly next and then go back to Mr. Jordan. Okay. Congressman Connolly, I was thinking didn't you have the -- (off mike) -- no, no, no then we go to Mr. Jordan has to -- you yield to him? Yeah.

REP. CONNOLLY: I thank my colleague --

REP. TOWNS: Briefly he said.

REP. CONNOLLY: I will be brief, I have to get back to the floor.

REP. JIM JORDAN (R-OH): That's fine.

REP. CONNOLLY: So I thank my colleagues and I thank the chair.

Mr. Lewis, if you look at the minutes of the Bank of America dated December 30th, it's a special meeting. Starting at the top of page three it reads, and I quote, "Mr. Lewis reported that management has obtained detailed assurances from the federal regulators with regard to their commitment and has documented those assurances with e- mails and detailed notes of management's conversations with the federal regulators".

It goes on to say that you discussed in detail, quote, "by commitment of the federal regulators to deliver assistance in the form of capital and asset protection to the corporation". In all, the word commitment in those minutes is used at least nine times. But just before the committee recessed for this vote in response to my question, you said there was no agreement in December, in fact you said that it was for lack of agreement in December that you decided to make the announcement in January and that all three parties, Treasury, Federal Reserve, and Bank of America agreed to that. How do you reconcile your testimony today with what you told the board on December 30th?

MR. LEWIS: Well we were working, we had an agreement that we would work toward a solution but during, even from December 30th until the time that we signed the agreement, there was back and forth in terms of amounts, in terms of structure, and in terms of securities to be included in what was then called the wrap. And so we had agreement for a solution but we didn't have any kind of agreement as I would think of it as a business person.

REP. CONNOLLY: Well what about commitment? What was your understanding of the commitment that word used nine times in those minutes?

MR. LEWIS: Commitment to work toward a solution.

REP. CONNOLLY: Well but it says that you received as part of that commitment detailed oral assurances from the federal regulators with regard to their commitment.

MR. LEWIS: Yes, sir. And you can --

REP. CONNOLLY: That sounds like more than a commitment to find a solution, that sounds like it's pretty detailed and we've already worked out the solution and I'm verbally sharing with you at the special meeting the nature of that commitment.

MR. LEWIS: Right. No, it was different structures had been talked about, different amounts had been talked about, and so there was a back and forth about different types of securities, different types of ways we could go about filling the hole, but there was never a specific agreement with specific numbers of that sort.

So it took several more weeks before we could actually come to terms as to exactly what it would look like.

REP. CONNOLLY: And it's your testimony that that failure to come to a specific agreement in December, that's the reason the announcement was put off until January?

MR. LEWIS: That and the desire by the Federal Reserve and the Treasury to have an objective of having all be able to be announced at one time so that it would not spook the capital markets because they were so fragile.

REP. CONNOLLY: Final question if I may, Mr. Chairman. Was there any intentional reason not to put the agreement in writing?

MR. LEWIS: No sir because there was not enough specifics to put into writing.

REP. CONNOLLY: But at some point there were?

MR. LEWIS: Yes, sir, and that was later, that was in the first few weeks of January, of the following year.

REP. CONNOLLY: But I want to be very clear under oath it is your testimony today there was no intentional evasion or reason to not put the agreement in writing? Nobody had a conversation with Treasury, the Federal Reserve, or at the Bank of America, let's not put this in writing right now?

MR. LEWIS: I can only speak to what was happening at the time, I mean I don't know what was said to everybody but the two things that I would continue to say is number one the goal was to get this done comprehensively so that it was one time and would not shock the markets with something that was dangling that was needed. And then secondly we had not come to a final conclusion and did not do so for several weeks.

REP. CONNOLLY: I yield back and I thank my colleagues for their indulgence.

REP. TOWNS: Thank you very much.

I now yield to Mr. Jordan, gentleman from Ohio.

REP. JORDAN: Thank you Mr. Chairman.

Mr. Lewis thank you I know sitting there for three hours and answering questions is not the greatest thing in the world to be able to have to do.

In my first round, I asked about whether you felt the government in connection with the TARP program exercises any, you know, excessive influence in day-to-day operations or undue -- and you said -- your answer is no.

I want to go back to -- and I'm taking this from a May 13th Bloomberg news story, documents obtained by Judicial Watch relative to a meeting that you had with Mr. Paulson, Mr. Bernanke, Mr. Geithner and Ms. Bair. Did you and eight other bank CEOs meet with those individuals here in Washington back in -- looks like October 13th?

MR. LEWIS: Yes, sir, we did.

REP. JORDAN: Okay. And tell us what happened at that meeting. Because what the documents indicate is that, you know, you had -- we had a lot of conversation and discussion about the threat that's been talked about here by just about everyone relative to the MAC clause, but it looks like that there was maybe threats there or at least strong suggestions that you initially partake in the -- you know, participate in the TARP program. So can you tell me about what took place at that meeting?

MR. LEWIS: Sure.

REP. JORDAN: And walk me through it, that October 13th meeting.

MR. LEWIS: The nine chief executives were called by Hank Paulson, or at least I was, and I --

REP. JORDAN: Let me interject, if I could, real quick. And you said earlier, I believe, too -- and I forget which member's questions -- that you initially thought your bank --- your board and you thought your bank did not need any infusion of cash or TARP money from the government.

MR. LEWIS: Yeah.

REP. JORDAN: Is that right?

MR. LEWIS: Yes, sir. And it was -- it was --

REP. JORDAN: What was that day? When did you make that decision as a bank? This was obviously prior to that.

MR. LEWIS: Well, the first reaction that I had to the fact that we were being offered 15 billion (dollars) was that we didn't need it. The prior week we had raised $10 billion in equity.

REP. JORDAN: Okay.

MR. LEWIS: And it could have been -- I'm speculating, but it could have been that's why we were offered 15 (billion dollars) and not 25 (billion dollars) like some of the other big banks were.

But the -- as you as you mentioned, the people that were -- that were there --

REP. JORDAN: Yeah.

MR. LEWIS: -- they were on the other side of the table. There were nine of us, the nine bank CEOs, and each of those people spoke about -- about the possibility of determination in the economy. Finally -- and I think it was -- it's a little gray with me, but I think it was Secretary Paulson then began to tell each bank what amount they should -- they should take.

REP. JORDAN: Were you required to sign a form at that meeting?

MR. LEWIS: Yes. What --

REP. JORDAN: What did the form say?

MR. LEWIS: It basically was a very short form that talked about the interest rate of the preferred and the -- and the amount. In fact, we wrote in the amount. It was a blank, and so each individual wrote in --

REP. JORDAN: You wrote in the amount, but it was suggested by the Treasury secretary?

MR. LEWIS: Yeah. We were told -- we were told what to write in, so to speak.

REP. JORDAN: Okay.

MR. LEWIS: And --

REP. JORDAN: Did you do it -- you did that at that meeting? You wrote in the amount at that meeting?

MR. LEWIS: Not until I had called my executive committee.

REP. JORDAN: Okay.

MR. LEWIS: So we talked about various things.

REP. JORDAN: So how long did this meeting last?

MR. LEWIS: It wasn't -- I think it was less than an hour, but again, it's been a while. The --

REP. JORDAN: Less than an hour and nine banks decided to take billions of dollars?

MR. LEWIS: Well, we ended up --

REP. JORDAN: Sign a form. Did you have to check with your board first before you signed the form?

MR. LEWIS: No, no. We -- we -- I ended up, at least, in a position -- and I think most -- I think most of my colleagues in the various banks ended up -- thinking that if this group of people, with the knowledge they have of the economy, were saying that this may be necessary, you should take it, that we felt like it was probably the right thing to do to have a healthy fear of the unknown. And so on that basis I called my executive committee and got permission to sign it.

REP. JORDAN: Okay. And did the events of that hour on that day in October -- did that weigh on your mind -- fast-forward a few more months in December, when you were deciding or think about -- I think your answer to me earlier was when you called Secretary Paulson and Mr. Bernanke and told them about the MAC clause, you said you were seriously considering. I think that was your answer to me earlier.

Did the events of October, that meeting, that one-hour meeting -- where they put a form in front of you and said, you need to sign this, you need to write in the amount, you're going to participate in this program whether you like it or not -- did that event -- those events impact your decision in December when they said we don't want you exercising this MAC clause?

MR. LEWIS: No, I didn't -- I didn't -- I didn't correlate or connect them in any way. I was -- I was never thinking about that in relation to the circumstances.

REP. JORDAN: Did you know -- if I could, Mr. Chairman -- when you walked in that meeting in October, October 13th --

REP. KUCINICH: Request unanimous consent to give the gentlemen another two minutes.

REP. TOWNS: Without objection, so moved.

REP. JORDAN: I thank the subcommittee chairman and the chairman.

When you walked in that meeting on the 13th, did you know what it was about? Did you know it was going to be, they're going to ask us all to take TARP dollars?

MR. LEWIS: No, sir, I did not.

REP. JORDAN: You had no idea. What did you think it would -- you thought it was about just the general concern of the economy?

MR. LEWIS: I didn't -- I didn't know, but --

REP. JORDAN: What was the rumors on the street? I think that's a term you used earlier about some other information you had -- you had --

MR. LEWIS: Yeah --

REP. JORDAN: -- gotten about Merrill Lynch. What were the rumors on the street amongst your colleagues in the other big lending institutions and banks --

MR. LEWIS: It was -- it was a weekend -- I think Monday was a holiday or something, and so I didn't hear a lot of things that -- in that time period. So I don't know if it ever got out as to what it was going to be, but I did talk to at least one other person and he did not know anything about it either.

REP. JORDAN: Did anyone in that meeting express any reservations about -- and forgive me, I don't have the data in front of me -- did anyone not sign?

MR. LEWIS: Not to my knowledge. I think everyone signed.

REP. JORDAN: Did anyone express reservations about not signing?

MR. LEWIS: One person expressed reservations.

REP. JORDAN: Did you?

MR. LEWIS: No, it was not I.

REP. JORDAN: Okay.

Mr. Chairman, thank you for the time, and I do have to run to a 1:00 meeting. And I want to thank the witness for his patience and his thoughtful answers.

REP. TOWNS: Thank you very much.

I now yield from the gentleman from Ohio again, this time Mr. Kucinich.

REP. DENNIS J. KUCINICH (D-OH): Thank you, Mr. Chairman.

Mr. Lewis, we would hope that a CEO would have both a good memory and the integrity to take responsibility for his decisions. Mr. Lewis, you stated in response to my previous question that you did not recall asking for a letter from the government stating that Bank of America was ordered to proceed with the purchase of Merrill Lynch. This is the linchpin of clarifying whether you were threatened by the Fed or whether the Fed was tough with you because you were threatening to be irresponsible.

I want to direct your attention to an e-mail response from the Fed's general counsel to Chairman Bernanke's e-mail, which I previously disclosed. "Mr. Chairman," it says, "I don't think it's necessary or appropriate for us to give Lewis a letter along the lines he asked. First, we didn't order him to go forward; we simply explained our views on what the market reaction would be and left the decision to him. Second, making hard decisions is what he gets paid for, and only he has full information needed to make the decision, so we shouldn't take him off the hook by appearing to take the decision out of his hands." I'm entering this into the record.

REP. TOWNS: Without objection.

REP. KUCINICH: Now, Mr. Lewis, is it still your testimony that you don't recall asking for a letter to absolve you of your responsibility for acquiring Merrill Lynch's huge losses?

MR. LEWIS: Congressman, what I do remember is calling Chairman Bernanke and asking him if he could give us something in writing along the lines of what the solution would be.

REP. KUCINICH: We're now updating Mr. Lewis's previous testimony.

MR. LEWIS: Sir --

REP. KUCINICH: This -- that may help you escape perjury, but it doesn't get away from the question of whether or not you were trying to absolve yourself of responsibility for acquiring Merrill Lynch's huge losses. I mean, we're talking about events that transpired only a few months ago, and the decision to withhold from Bank of America's shareholders material information about the deterioration of Merrill Lynch's finances was key here.

This isn't about a threat, it's about your responsibility and your failure to inform your shareholders could constitute a fundamental violation of security laws.

I have just given you documentation, Mr. Chairman, that Mr. Lewis tried to deflect the matter to the Fed by asking for a letter that they made him do it.

Now, I want to ask you, Mr. Lewis, our investigation finds that Mr. Bernanke believed that your threat to invoke a MAC was not credible. I want you to take a look at the following e-mail from Chairman Bernanke, dated December 21st, 2008. Quote: "I think the threat to use MAC is a bargaining chip, and we don't see it as a very likely scenario at all."

You did get a significant amount of financial assistance when you dropped the threat to back out of your deal. Isn't that true?

MR. LEWIS: Yes, we did.

REP. KUCINICH: Tell the committee what you received, how much money.

MR. LEWIS: Twenty billion dollars.

REP. KUCINICH: And you got the promise of 118 billion (dollars), didn't you? An asset-protected combination of Merrill and Bank of America toxic assets. Didn't you get that?

MR. LEWIS: We didn't -- we didn't' -- we hadn't settled on an amount until some time -- but the RAP was being considered, yes.

REP. KUCINICH: Now, that was in addition to the 15 billion (dollars) in TARP monies you received directly in October, 10 billion (dollars) in TARP monies you received upon acquiring Merrill. Isn't that right?

MR. LEWIS: We did not ever sign the agreement on the RAP.

REP. KUCINICH: Now, our investigation also finds that, contrary to your representations to the Fed, that you were concerned primarily about the losses at Merrill Lynch. Merrill's losses were less than half of the problem you faced. Losses originating at Bank of America itself were larger than the losses at Merrill.

Mr. Lewis, please look at the following e-mail dated December 18th, 2008, between officials at the New York Fed. One reports his findings, saying that, on the basis of -- "on a total of 30 basis points' deterioration of the tangible common equity ratio of the combined Bank of America/Merrill Lynch entity" they go on to say that 16 basis points of deterioration is due to Bank of America, 14 basis points due to Merrill Lynch. The other official described this discovery as a smoking gun.

Isn't it true that more than half of the decline in your all- important, tangible common-equity ratio evident in mid-December was not caused by Merrill Lynch?

MR. LEWIS: You're apples and oranges. The securities --

REP. KUCINICH: Well, maybe it's rotten apples and rotten apples, because isn't it true that you were told that if you went through with the MAC and if you later needed financial assistance from the government, you wouldn't get it? Isn't that true?

MR. LEWIS: I'm sorry. Repeat that, please.

REP. KUCINICH: That you, if you went through with the MAC and if you later needed financial assistance from the government, weren't you told you wouldn't get it?

MR. LEWIS: I think I have seen that in an e-mail, but I don't --

REP. KUCINICH: Were you told that? Yes or no.

MR. LEWIS: I do not recall being told that.

REP. KUCINICH: Isn't it true that, given the precarious state of your balance sheet, and especially your inadequate levels of tangible common equity, you believed at the time you could reasonably -- you reasonably could need financial assistance from the government in the future?

MR. LEWIS: The preferred stock does nothing to help your tangible common equity ratio.

REP. KUCINICH: Now, you wouldn't think about it? I mean, if you got $15 billion in October and you're going to come back two months later and ask for another $20 billion -- you got $15 (billion), and then two months later $20 billion -- doesn't it show that -- doesn't that show that it really increased your tier one capital ratio? Doesn't it show that?

MR. LEWIS: Not tangible.

REP. KUCINICH: Tier one.

MR. LEWIS: Tier one, yes.

REP. KUCINICH: Now, Mr. Lewis, the government believed that you knew or should have known about the Merrill losses long before you said you did, based on data that Bank of America possessed and had reasonably reviewed. The government believed you could be in violation and breach of security laws.

The government didn't believe you that Merrill was the primary cause of your problems, but thought that Merrill losses were less significant than the losses that Bank of America was experiencing as a stand-alone entity. The government even thought that you were making the threat to use MAC as a bargaining chip and that it was not credible. The government had already given you $25 billion before you approached it about Merrill Lynch.

If the government believed all of that about you and your management team, were you surprised that the Fed arranged for you to receive considerable additional financial support in January? Did that surprise you?

MR. LEWIS: We received $15 billion, not $25 billion, from the original TARP package. It did not surprise me they were willing to give us more, because we had talked about coming to a solution to get the Merrill Lynch deal done.

REP. KUCINICH: Well, there was a final crisis, and they thought it was necessary for --

REP. TOWNS: (Off mike.)

REP. KUCINICH: Unanimous consent for two more minutes, and then I should wrap it up.

REP. TOWNS: Without objection.

REP. KUCINICH: There was a financial crisis, and they thought it was necessary for the system for the deal to go through. If there's one thing about your record that's clear, it is that you have experience negotiating deals. What do you believe your leverage with the government was at the end of 2008?

MR. LEWIS: The only leverage I would say we had was that two honorable people trying to come to the right solution had given me their word that they would try their best to find a solution.

REP. KUCINICH: Isn't it true that it was because Bank of America is a big bank, and if you hadn't been the CEO of the largest bank in America, if you'd been the top executive, let's say, at a mid-size or small regional bank and you'd been acquiring another similarly sized bank during the fall of 2008, do you think the federal regulator would have behaved in the same way?

MR. LEWIS: Well, sir, I don't think I was such a favorite son from some of the memos -- some of the e-mails that you've just read.

REP. KUCINICH: Well, wouldn't you have, if you were a small institution, been taken over and liquidated?

MR. LEWIS: I can't speculate on that, sir.

REP. KUCINICH: It's fair to say we have a large financial institution, Mr. Chairman, that doesn't face the same consequences for management as small ones. And the Fed had an opinion that there was considerable evidence of mismanagement. And, you know, there's been a misconception here that the government put a gun to the head of Bank of America, when it's quite possible that it was the Bank of America that put a gun to the head of the Fed by threatening to invoke the MAC.

And I think that this whole idea, Mr. Chairman, about Mr. Lewis somehow being a victim here flies in the face of the fact that you were CEO of the largest bank and that you are pretending that you didn't ask for help from the government to take the burden off your back, that you didn't ask for a letter.

You're going to have to excuse me, but this is not credible. You're trying to change the scenario from you as a victim to you as a powerful CEO who made a decision that denied your stockholders, your shareholders, material information that they needed prior to a vote on a merger. And I think that is the central point of this hearing. And I'm sorry that you haven't been forthcoming enough about that central point.

I yield back.

REP. TOWNS: Well, one thing's for sure, that it was a shotgun marriage; you know, a shotgun wedding. There's no question about that.

Let me just sort of raise this issue. On December the 22nd, 2008, Mr. Lewis, you sent an e-mail to your board. And let me just quote. It says, "I just talked with Hank Paulson. He said that there was no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure, which of course, we do not want." Do you remember that?

MR. LEWIS: Yes, sir. I do, yes, sir.

REP. TOWNS: You know, and that's sort of -- and I was just raising this because of the answer that you gave to my colleague from Virginia, Mr. Connolly. I didn't get that point that you actually sent that memo. I mean, it seemed to me that in his questioning, that didn't come out.

MR. LEWIS: May I give you the context?

REP. TOWNS: Sure.

MR. LEWIS: I had called Mr. Bernanke and said, "Is there something you can give us in writing? Because my board is concerned that everything is verbal, and then we have nothing concrete, and we're going in toward the end of the year and about to have to consummate this deal without anything in writing."

And he said, "Let me think about it." And the next call I got was from Hank Paulson, and he told me that, first of all, if they gave us any kind of agreement, it would be so watered down that the board would not find it satisfactory, and secondly, that they did not want disclosure.

He was talking about the government not wanting to create a disclosable event and have to disclose, not Bank of America.

REP. TOWNS: You sure didn't make that clear with my colleague from Virginia. But let me just move on now.

MR. LEWIS: Well, I apologize. I would have.

REP. TOWNS: Let me -- Congresswoman Kaptur from Ohio.

REP. MARCY KAPTUR (D-OH): Thank you, Mr. Chairman, very much.

Mr. Lewis, I've been here since this morning and find your testimony a bit disquieting today for some of the following reasons.

Bank of America owns 49.9 percent of Black Rock, but you seem not to know anything of its activities.

Number two, you were the person who was in charge when Bank of America acquired Countrywide over a year ago, but you apparently weren't aware of its books and the losses inherent in that purchase.

Number three, you were the CEO of the largest bank in the country, and you seemed to present yourself as having a rather hands- off relationship with the Federal Reserve and the Treasury. I find that somewhat incredulous.

So let me ask some follow-up questions. In terms of the purchase of Black Rock that was a part of your Merrill Lynch, it's my understanding that Black Rock now is valued at over $1.3 trillion and that they've just received five no-bid contracts from the Federal Reserve, among them managing troubled subprime mortgages in the Freddie Mac and Fannie Mae portfolios. The people of the United States, through the Fed, have propped up Fannie and Freddie now to the tune of over $200 billion.

For the record, can you provide the contract that Black Rock has with the Fed, particularly the one regarding the management of Fannie Mae and Freddie Mac's portfolios?

MR. LEWIS: I don't know if I can, because, again, we don't run Black Rock. We have two or three seats on the board, but not -- we don't have a CEO or chairman, and he does not report to anybody in Bank of America/Merrill Lynch.

REP. KAPTUR: And yet you own 49.9 percent of it. Isn't that a rather strange relationship?

MR. LEWIS: We don't own 51 percent. That would be the difference.

REP. KAPTUR: Do you know how much Black Rock will earn from that contract with the Federal Reserve to manage Fannie and Freddie paper?

MR. LEWIS: No. Possibly some of our board members would, but I don't.

REP. KAPTUR: Let me mention, The New York Times wrote the following: "Can a company that is being paid to price and sell troubled assets for the government buy the same kinds of assets for private clients without showing preference? And should the government seek counsel from a company whose clients stand to make or lose billions if those policies are enacted?"

Can you outline for us how the Bank of America will avoid conflict of interest in its mortgage portfolios and insider dealing charges as mortgage portfolios are resolved and Bank of America mortgages are involved, when Black Rock is actually the designee to manage the Freddie and Fannie portfolios on behalf of the Federal Reserve?

MR. LEWIS: Black Rock would have to manage those, and with the client would have to manage anything like that.

REP. KAPTUR: But obviously Bank of America, some of your mortgages are held by Fannie Mae and Freddie Mac.

MR. LEWIS: And --

REP. KAPTUR: You were the acquirer of Countrywide, the largest subprime abuser in the country. So you must have a pretty healthy portfolio there that's going to undergo scrutiny.

MR. LEWIS: And Black Rock would have to take that into account, yes.

REP. KAPTUR: Can you provide for the record the documents that you may have at Bank of America that contain or record the conflict- of-interest review undertaken by Bank of America to ensure proper ethics as these mortgages are resolved?

MR. LEWIS: The conflict would be with Black Rock and the client, which would be Fannie Mae. And, by the way, Countrywide is doing quite well, and we have changed the policies dramatically to become one of the most responsible lenders in the country.

REP. KAPTUR: Well, you know, I think there's a whole hearing that could be held just on Countrywide, and --

MR. LEWIS: It would be pre-Bank of America.

REP. KAPTUR: And are any of the former Countrywide staff on your staff now at Bank of America?

MR. LEWIS: There are some staff, but nobody in executive management.

REP. KAPTUR: I beg your pardon?

MR. LEWIS: Nobody in executive management. (I sent ?) our CEO to run the company -- (inaudible).

REP. KAPTUR: You know, Mr. Chairman, it wouldn't be bad to hold a hearing on the interrelationship between Bank of America, Black Rock Countrywide, the Federal Reserve, Fannie Mae and Freddie Mac, and explore these interlocking, rather shadow relationships that you claim have no bearing on activities within your institution but which sound very unusual, as you state them before the committee today.

I wanted to just, in my second question here, relating to Superior Bank, which had the largest settlement in American history at the FDIC in 2001 -- over $450 million as the result of their subprime activities in Chicago and beyond, including servicing by Merrill Lynch -- which is how you would acquire the Superior loans, troubled loans.

Let me ask you: When Bank of America acquired those loans, did you audit them prior to reselling them to investors?

MR. LEWIS: I'm not sure of that transaction, so I'd have to get you somebody who was more familiar with the transaction.

REP. KAPTUR: Well, then explain to us as head of this massive and important bank in our country, what is your plan for dealing with bad loans, such as the Superior loans that came to you through the FDIC Merrill acquisition?

MR. LEWIS: Well, to the extent that you have loans you can rehabilitate, you do. To the extent that you can sell loans for a discount you do; to the extent that you can't do either, you hold them on your books and at some point write them off.

REP. KAPTUR: But if you sell them to knowing investors and they were bad loans, what happens?

MR. LEWIS: Well, you would take a massive discount -- the banks selling them would take a massive discount.

REP. KAPTUR: Well, I would certainly like the paper trail, the audit trail on those Superior loans that your bank has been handling.

I thank you, Mr. Chairman.

REP. TOWNS: Right. Thank you very much. I thank the gentlewoman from Ohio.

I now yield --

REP. KAPTUR: But Mr. Chairman -- may I ask the chairman to yield for just a second?

May I place in the record an article from The Atlantic Monthly, May 2009, on the financial crisis, please?

REP. TOWNS: Without objection.

REP. KUCINICH (?): I ask unanimous consent all the e-mails that I offered on the screen there for the record.

REP. TOWNS: Without objection.

The gentleman from Maryland.

REP. ELIJAH CUMMINGS (D-MD): Thank you very much, Mr. Chairman.

And Mr. Lewis, I'm confused. Just picking up on some things that the chairman and Mr. Kucinich were just asking about: I can kind of understand your reaction to discovering that there was a $12 billion loss suffered by Merrill Lynch, especially when it's coming after a shareholders' vote to purchase Merrill Lynch.

I can understand you telling the Fed and Secretary Paulson at Treasury that you were thinking of backing out the deal. I can understand that and I think that was based upon your expertise and your experience.

I cannot understand the agreement that you reported that you made with Treasury and the Fed, which they both deny to disclose the $12 billion loss.

If the loss made this a horrible business deal to acquire Merrill Lynch, why'd you still do it? And I know you've told us over and over again, but you know, let's be frank. I mean, and I'm wondering at what -- how do you determine what it is you must disclose?

I mean, we have shareholders here who are concerned. You're about to go into a deal with a company that is worse off than is made to believe. And it just seems to me that a person with your experience -- there are a lot of people in this situation -- and I don't care what Paulson may have said; I don't care what Bernanke may have said -- they would have said, the Hell with you. They would have said, I'm going to stand on principle. And my principles tell me that there's a MAC here. There's a real problem. And if I go down, I go down, but I'm going down with principle.

And I just want to give you an opportunity to tell us, because I've got tell you: I mean, I'm kind of concerned, because I think there are some serious credibility issues. And I think Mr. Kucinich has raised some things that if I were your lawyers, I'd be concerned about. So help me.

MR. LEWIS: You're referring to the fact that despite the fact we thought we could have a MAC, we relied on the --

REP. CUMMINGS: Yeah. And I'm also going to the point that I believe that when you said to -- you don't just go and tell the Feds and you don't tell Paulson, look, I smell a rat here. Somebody of your stature -- I could understand if you were some guy that just came off the streets six months ago and the thing you did was, you know, you were a bank teller -- no offense to bank tellers -- but that's all you did. You were a major player and when you speak people listen.

And so I'm trying to figure out -- you've got -- I mean, you said, there is a problem here. But then, you let these folks, I mean -- and all due respect to Bernanke, all due respect to the Feds, all due respect to Paulson -- you're the head of this bank. You're the head of Bank of America. They're not. They may be (O&I ?) but you've got to answer to the shareholders.

And I'm trying to figure out why -- and this is stuff that, I mean, it seems to me if I had this kind of information, I wouldn't even want my shareholders to be voting on something and they did not have full disclosure. And I'm trying to figure out where does the disclosure come in, why weren't things disclosed?

I get the impression that there was insufficient due diligence. I know you were dealing with a crunch time. I know it was only a matter of hours that you were trying to turn all of this over, I got that.

But a man of your stature -- I refuse to believe that you sat integrity, honesty and transparency to the side for expediency. I just don't believe it. And I just want -- I'm trying to give you an opportunity to explain this to us.

Now, if you don't want to, that's up to you. But I'm asking you to.

MR. LEWIS: Yes, sir. Well, if you ask, I will do my best.

I don't know what else I can say other than we were influenced by the strong nature of the wording from the Federal Reserve and the Treasury in the sense that they obviously felt very strongly that we did not have a MAC. I also still felt we had a strategic reason to do Merrill Lynch, despite the fact it had a financial issue.

And then third, I thought the downside of calling the MAC and not winning was pretty severe. And so all of those factors were factors in me making that decision. But if I had thought that it was a MAC and all those other things didn't matter, I would have called a MAC -- we would have called a MAC.

REP. CUMMINGS: I see my time is up, Mr. Chairman.

REP. TOWNS: Let me -- I thank the gentleman from Maryland.

And let me say that as we come to the conclusion of this hearing, it is important to remember that we have heard only one side of the story today. The committee needs to hear from Mr. Paulson and Mr. Bernanke before we draw any hard and fast conclusions. I do believe in fairness.

However, I do think it is fair to observe that a flawed financial regulatory process was at work in this case. We see closed-door meetings, coded messages, motives questioned in private e-mails. Basically, the regulators and the financial institutions seemed to be making up the rules as they went along.

As Congress considers financial regulatory reform, one of the lessons from this case is that we need much more transparency and accountability in the financial regulatory and oversight process.

The American taxpayer and -- (inaudible) -- deserve no less. They need to know what's going on.

Let me again thank you, Mr. Lewis, for being here today.

Before we adjourn let me state that this committee has and will continue to protect the American taxpayers and will continue to make sure the taxpayers' dollars are spent in a transparent and wise manner.

Without objections, I enter this binder into the committee record.

And without objection, the committee stands adjourned. (Sounds gavel.)

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