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Morning 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?"

Chaired By: Rep. Edolphus Towns

Witness: Kenneth Lewis, CEO, Bank Of America

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REP. TOWNS: Good morning. Thank you all for being here today.

On September the 15th, 2008, when the financial crisis was at its height, Bank of America announced that it was purchasing Merrill Lynch, creating one of the nation's largest financial institutions.

At the time, Bank of America's CEO, Mr. Lewis, called the merger a great opportunity for Bank of America shareholders. When it was announced on September the 15th, this merger was a marriage negotiated between two willing parties. It was designed for the exclusive benefit of private shareholders, and it was to be paid for exclusively with private money.

Four months later, on January the 16th, 2009, after a merger was consummated and the quarterly earnings were announced, the world woke up to a different kind of marriage. The American people discovered that Merrill Lynch had experienced a $15-billion fourth-quarter loss. Most importantly, we found out that the merger had taken place only after the federal government had committed to give Bank of America billions in taxpayers' money.

What happened in the interim? When Bank of America urged its shareholders to approve the acquisition of Merrill Lynch on December the 5th, 2008, there was no public disclosure of any problems with the transaction. Having -- in a deposition taken by New York Attorney General Cuomo, Mr. Lewis testified that, just nine days after the shareholders' vote, he discovered a $12-billion loss at Merrill Lynch.

Mr. Lewis said he told then-Treasury Secretary Hank Paulson that he was strongly considering backing out of the deal. According to Mr. Lewis, Paulson ultimately told him that if he didn't go through with the acquisition, he and the board would be fired.

I have -- internal e-mails we have obtained from the federal government indicate officials there were very skeptical about Mr. Lewis's motives in threatening to back out of the Merrill deal. Federal Chairman Ben Bernanke thought Lewis was using the Merrill losses as a bargaining chip to obtain federal funds. Other e-mails revealed that federal analysts found it suspect that Mr. Lewis claimed to be surprised by the rapid growth of Merrill's losses, given the clear signs in the data. They noted that, at a minimum, it calls into question the due diligence process Bank of America had been doing in preparation for the takeover.

In short, the Treasury Department had provided a -- $20 billion for a shotgun wedding. But the question may be, what was -- who was holding the shotgun?

At today's hearing we hope to better understand what happened in the four months between September the 15th, 2008, when the merger was announced, and January the 16th, 2009, when the public learned that Bank of America had received $20 billion in taxpayer money. We will be looking for answers to some puzzling questions.

Why did a private business deal announced in September and approved by shareholders, in December, with no mention of government assistance, end up costing taxpayers 20 billion in January?

Did Paulson and Bernanke abuse their authority by ordering Mr. Lewis to go through with the Merrill acquisition? Or did Mr. Lewis threaten to back out, in order to squeeze more money out of the federal government?

Did the federal government tell Mr. Lewis to keep quiet, about the escalating Merrill Lynch losses and the government's commitment to provide billions in federal funding?

I'm sure there will be other questions as well. To get to the bottom of these issues, we also intend to invite Mr. Paulson and to invite Mr. Bernanke to testify at a future date. The committee's willingness to issue subpoenas should clarify our expectation of full cooperation by prospective witnesses.

I want to thank Mr. Lewis for being here today. And I look forward to his testimony. At this time, I yield to the ranking member of the committee, Mr. Darrell Issa of California.

REPRESENTATIVE DARRELL ISSA (R-CA): Thank you, Mr. Chairman. And thank you for holding this important bipartisan hearing today.

It is important that those of use who see -- those who see this hearing today recognize that we are not here to evaluate the value of Bank of America or Merrill Lynch or their transactions, whether it was a good deal then or a good deal today, for either of the parties.

We're here because there's been a serious allegation. And a number of pieces of evidence have arisen that make us believe that government officials felt necessary to use the power, influence and, in fact, potentially threats in order to consummate this deal.

When Congress envisioned the TARP -- (audio break) -- we did so in a way that was intended to make dollars available to help lessen the impact, as we unwound in credit markets around the world.

Nowhere in the legislation did it suggest that Hank Paulson, Ben Bernanke or anyone else operating, on behalf of the United States government, was given the power to force shotgun weddings.

Today, we're going to hear from -- we'll hear from Ken Lewis, CEO of Bank of America, a man who has spent decades understanding the value of financial institutions.

We undoubtedly will hear that in fact at the beginning of this transaction, the ratios determined for a stock trade-type merger were in fact considered to be reasonable. As the chairman has said, rightfully so, the federal government played a clear part in this, but the American people should understand their dollars were not given to any party in this transaction but in fact loaned at an amount substantially greater than the interest rate paid by the Federal Reserve.

As such, Ken Lewis and all the parties involved had an obligation to recognize they were going to have to pay this money back and that they had to receive value in this transaction.

Allegations have been made throughout the press and will undoubtedly be reiterated here today that the value that was being questioned by Bank of America had something to do with getting more money from the federal government. That may be true. Having done acquisitions myself, more often it is in fact the ratio being paid between the buying company and the selling company that is more at stake.

Had Bank of America had to pay a greater amount in the stock trade than it did, the stock -- the value of the Bank of America to the existing stockholders would have been reduced. Had -- on the other hand, instead of a roughly 8-to-10 ratio, had it been a 5-to-10 ratio, the stockholders of Merrill Lynch would have had a significantly lower value to their stock.

We are not here, though, today to deal with any of that. We are clearly here today as the Government Reform and Oversight Committee to deal with the question of whether or not allegations made and evidence that has arisen lead us to believe that those operating under the color of our government's seal used any unreasonable influence or threats in order to consummate this or any other deal.

Mr. Chairman, I thank you for holding this hearing. I appreciate the fact that this is clearly the first of two hearings that will be necessary. Today we have part of the story. When we have Mr. Bernanke and Mr. Paulson, then we will have the other half of it. I look forward to this first hearing and yield back.

REP. TOWNS: Thank you very much.

I now yield five minutes to Mr. Kucinich, who is the chair of the subcommittee.

REP. DENNIS KUCINICH (D-OH): Thank you very much, Mr. Chairman, members of the committee.

Bank of America became the largest commercial bank in the nation, the 11th-largest corporation in the United States, and the 23rd- largest company in the world through the aggressive acquisition of other financial institutions, including the purchase of Merrill Lynch last year.

But something went terribly wrong with the Merrill Lynch acquisition, nearly enough to bring Bank of America down. Taxpayers now own $45 billion in preferred shares and warrants in Bank of America.

That money was committed by the Treasury Department and the Federal Reserve, and Mr. Lewis is here today, as the CEO of Bank of America, thanks to the commitment of those funds through a series of events that unfolded through the end of December 2008 and into early January 2009.

Due to the secretive and unaccountable conduct of the Fed throughout its interventions addressing the current financial crisis, many questions about the Bank of America-Merrill Lynch deal and bailout have, until today, remained unanswered.

Some of the key questions have been: Were the Merrill Lynch losses that precipitated Bank of America's distress call to the Treasury on December 17th the first such accelerating losses Bank of America observed at Merrill Lynch since agreeing to purchase the company? Did the government believe that Bank of America had a credible case for abandoning the deal? Did the Federal Reserve compel Bank of America to complete the deal against its will? Or did Bank of America's mistakes and miscalculations, more than any other single factor, cause the experienced corporate deal maker to be exposed to Merrill Lynch's predictably large losses?

Did the government believe that Bank of America knew or should have known about those losses before its shareholders ratified the merger? Did the government have an opinion about whether Bank of America could be liable for securities fraud, for withholding from its investors material information it possessed about a significant deterioration in Merrill Lynch's balance sheet?

Did Bank of America, in effect, negotiate an extraordinary deal for billions of additional dollars from taxpayers to continue its growth as the nation's largest commercial bank?

This hearing today will help to answer those questions. This committee's ongoing investigation and subsequent hearings will answer the following questions, among others: Did the Federal Reserve, in attempting to protect the system, apply well-established remedies when it engineered billions of dollars in subsidies to Bank of America to complete its deal with Merrill Lynch? Or did the Federal Reserve pursue an untested experiment in banking regulation, at variance with traditional remedies, in committing billions of dollars in taxpayer funds to a corporate management that the Federal Reserve believed had failed in major ways?

Mr. Chairman, members of the committee, this committee has sifted through tens of thousands of pages of documents -- produced by Bank of America, the Department of Treasury and the Federal Reserve. Our investigation will help set the record straight about Bank of America and Merrill Lynch.

Furthermore, the story of Bank of America's merger with Merrill Lynch and its huge taxpayer-provided subsidy helps to answer broader questions about how the corporate management of very large financial institutions operate with virtual impunity for their mistakes. The documents we will reveal today provide the public a rare look into the disconnection between the Fed's ability to analyze financial problems and its ability to remedy them when they involve very large financial institutions.

Finally, Mr. Chairman, before Congress rushes to revise the banking regulatory framework, we would do well to incorporate the lessons of the Bank of America/Merrill Lynch episode that this committee's hearings over the coming weeks will draw.

I yield back. Thank you.

REP. TOWNS: Thank the gentleman from Ohio.

Now we would yield to the ranking member, Jim Jordan, also from Ohio.

REP. JIM JORDAN (R-OH): Thank you. Thank you, Mr. Chairman, for holding today's hearing. I want to thank you and the -- Ranking Member Issa, and also the chairman of the subcommittee for his tireless efforts to get to the truth about this issue.

I believe today's hearing is an important first step in learning about the full extent of the government's manipulation of the banking industry. This committee's investigations of the Bank of America/Merrill Lynch transaction has raised troubling questions about potential abuses of government power. As both the chair and the ranking member have indicated, we've learned that at a minimum, Secretary -- then-Secretary Hank Paulson threatened to remove Mr. Lewis and Bank of America's board of directors if Mr. Lewis exercised his legal option to attempt to back out of the deal to acquire Merrill Lynch.

In addition, we've learned that the Department of Treasury and the Federal Reserve were involved in discussions about when and how the financial condition of Merrill Lynch was to be disclosed to the two companies' respective shareholders.

We've also learned that this transaction took place in a climate of fear and intimidation by government officials. For example, we now know that in October of 2008, Mr. Paulson brought the CEOs of the largest private banks in America to the Treasury Department and demanded that they accept the partial nationalization of their banks in exchange for an amount of money of the government's choosing.

Mr. Chairman, I understand the significant challenges that our economic system faced last fall. I understand Mr. Paulson and Mr. Bernanke's intention to do what they thought was in the best interest of the economic system as a whole. But in our constitutional system of government, the rule of law restricts the government's ability to do whatever it wants. You must understand the full story of what happened in the process of the government taking over much of the banking industry, so that when the next crisis occurs, we can understand the proper limits of government action in a free and civil society.

I'm grateful that Mr. Lewis -- for Mr Lewis's willingness to appear before the committee today.

In addition to important questions regarding Bank of America's transaction with Merrill Lynch, I also hope Mr. Lewis can shed light on his personal interaction with government officials. And I intend to ask him about the participation in -- about his participation, in the initial capital injections, and to what extent they were forced upon Bank of America. And as someone who comes from automaking country, I also would like to know the extent to which the government is currently involved in day-to-day operations of the company.

A full and complete investigation that underscores the facts, surrounding the Bank of America-Merrill Lynch transaction, requires the government's decision-makers in this case, Mr. Paulson and Mr. Bernanke, to appear before this committee, to answer the tough questions that the American people demand to be answered. And I know that the chairman and the ranking member talked about that. And we look forward to that happening, in a bipartisan fashion, in the near future.

Again thank you, Mr. Chairman, for this opportunity to make the opening statement. And with that, I would yield my time, if I could, to Mr. McHenry to introduce our witness.

REP. TOWNS: Mr. McHenry.


Today, I have the privilege of introducing our witness, whose company is headquartered in Charlotte, North Carolina, which my district is just to the west of. And as the only member of the committee from the Carolinas, I think, it's my duty and privilege to introduce our witness.

Kenneth D. Lewis is currently the chief executive officer of Bank of America. He's responsible for more than 55 million consumer and small-business relationships and $1.7 trillion in total client assets.

With various business and institutional clients in more than 150 countries and business relationships with 98 percent of U.S. Fortune 500 companies, Mr. Lewis oversees one of the largest financial services corporations, in the world. And it's one of the largest institutions headquartered in North Carolina, in fact is the largest institution headquartered in North Carolina.

Born in 1947 in Meridian, Mississippi, Mr. Lewis earned a Bachelor's Degree in Finance, from Georgia State University, and a graduate of the Executive Program at Stanford University.

Arriving at NCNB in 1969, which was Bank of America's predecessor, he's served more than 30 years within the bank and in 2001 attained his current position as CEO of Bank of America.

Throughout his career with Bank of America, he's secured millions of new customers and paved the way for future expansion. He was named in 2007 as one of the 100 most influential people in the world, by Time magazine.

He's been twice named Banker of the Year by the American Bankers Association.

He has been the former chairman of the National Urban League and has been involved in every possible community cause in Charlotte, large and small, and for that, we do thank you for your leadership for our community.

Bank of America's presence is certainly felt in western North Carolina, in my district, and across North Carolina generally. And the 10th District has become particularly hard-hit in this economic recession. And Bank of America employs about 17,000 North Carolinians, many of whom are my constituents and are proud to work for a strong institution, and we look forward to stronger days ahead.

Thank you for your testimony here today, and thank you for your presence.

REP. TOWNS: Thank you very much, Mr. McHenry.

It's a long-standing tradition that we swear all of our witnesses in. So, Mr. Lewis, will you please stand and raise your right hand? (Administers the oath to the witness.)

Right. You may be seated. Let the record reflect that the witness answered in the affirmative -- affirmative.

You may now -- let me just sort of explain as to the light situation here -- first of all, that you have five minutes to summarize your statement and then the yellow light will come on. That means you have one minute. And then after the yellow light comes on, then there's a red light. And of course that means stop. And of course after that then we allow the members an opportunity to raise questions, you know, with you.

So you may begin.

MR. LEWIS: (Off mike.)

REP. TOWNS: Turn your mike on. Push that button.

MR. LEWIS: Thanks. Chairman Towns, Ranking Member Issa, Subcommittee Chairman Kucinich and Ranking Member Jordan, as has been said, my name is Ken Lewis, and I'm chief executive officer of Bank of America.

This committee is reviewing important issues, and I hope my remarks will be helpful to you.

Let me tell you a little bit about Bank of America. Our business lines include deposits, wealth and investment management, corporate investment banking, credit cards and mortgages. We have a deep commitment to serving all the communities in which we operate. We have committed to lend and invest $1.5 trillion in low- and moderate- income communities over the next 10 years.

As everyone here is aware, the financial services industry underwent considerable turmoil in 2008. Bank of America was affected by that turmoil but nonetheless earned a profit of $4.2 billion for the year. We also made two significant acquisitions, Countrywide and Merrill Lynch.

There does not appear to be any debate that these acquisitions were in the best interests of the financial system, the economy and the country. The failure of Countrywide would have caused a massive loss to the Deposit Insurance Fund and could have destabilized an already crippled mortgage market.

The failure of Merrill Lynch, particularly on the heels of Lehman's failure, could have caused systemic havoc or necessitated an AIG-style government bailout.

These acquisitions, though, were also in the best interests of Bank of America and its shareholders. Certainly the Merrill Lynch acquisition in particular came with risk, some of which materialized in the fourth quarter of 2008, when Merrill Lynch recognized significant losses. The Merrill Lynch acquisition, however, also came with a promise of significant long-term rewards, rewards Bank of America and its shareholders were already beginning to reap.

Through the acquisition of Merrill Lynch, we have put together what looks to be the preeminent investment bank and brokerage firm in the world, an organization that is already producing substantial profits, not losses, for our company. Understanding that fact is absolutely critical to understanding why we acquired Merrill Lynch.

When we bought Merrill Lynch, we really bought two businesses. The first is the world's most productive brokerage force, currently 14,000 Merrill Lynch financial advisers. Merrill Lynch has more financial advisers listed in Barron's top 100, top 1,000, and top 100 women financial advisers than any other firm.

The second major business of Merrill Lynch was investment banking and serving institutional investors. The results here are nothing short of remarkable. As of the first quarter of 2009, Bank of America and Merrill Lynch was first in U.S. equity-related underwriting, first in underwriting high-yield debt, second in underwriting investment- grade corporate debt, third in global equity and equity-related underwriting, and fifth in global M&A and U.S. M&A.

In the first quarter of 2009, Bank of America earned $4.2 billion. Merrill Lynch contributed 3.7 billion (dollars), or 75 percent of that first-quarter profit.

We continue to go about the business of lending. In the first quarter of 2009, Bank of America issued $85 billion in first mortgages, extended $3.9 billion in new credit to small businesses and provided $31 million in community-development loans, bolstering country's most -- the country's most underserved people and businesses. I also want to stress that we have paid $1.1 billion in dividends to the Treasury on the TARP preferred.

While Bank of America earned $4.2 billion in 2008, that performance did not meet our expectations. As a result, neither I nor my senior team received any bonus. For the next level down, the bonus pool was cut by 80 percent from the previous year, and the level below that by 70 to 75 percent.

Now, let me briefly walk you through the decision to purchase Merrill Lynch. We made that decision in September 2008. We did so because we saw the potential benefits I've just described, and we did so without any promise or expectation of governmental support. In mid-December, I was advised that Merrill Lynch had significantly raised its forecast of its losses, and we contacted officials at the Treasury and Federal Reserve to inform them that we had concerns about closing the transaction.

At that time, we were considering declaring a material adverse change, which, as a matter of contract law, can, if upheld, allow an acquirer to -- consummate a deal. Treasury and Federal Reserve representative(s) asked us to delay any such action, and expressed significant concerns about both the systemic consequences and the risk to Bank of America in pursuing this coast -- this course.

We and the government explored government support as a way to limit the risk of proceeding with the transaction. We both were aware that the global financial system was in fragile condition and that a collapse of Merrill Lynch could hasten the crisis.

For its part, Bank of America concluded that there was serious risk to declaring a material adverse change and that with -- proceeding with the transaction with governmental support was the better course. This course made sense for Bank of America and its shareholders, and it made sense for the stability of the markets.

I believe that committed people of good intentions, in both the private sector and the government, worked desperately hard in late 2008 to prevent a collapse of the global financial system that would have resonated throughout the whole global economy. Even six months later, it is easy to forget just how close to the brink our system came.

I will never forget, and I believe those efforts will be well- remembered long after any current controversy is forgotten.

With that, sir, I will conclude my remarks.

REP. TOWNS: Thank you very, very much for your statement.

Let me begin the questions --

REP. : (Off mike.)

REP. TOWNS: I'd like to ask unanimous consent that we have 10 minutes on each side, initially, which would include the -- and then after that five minutes for each member. And of course, if we need a second or third round, you know, we will do that as well. So without objection, so moved.

One of the key questions is when you discovered the massive losses at Merrill Lynch, Mr. Lewis. You have said that you learned of them late, and they came as a big surprise. But the e-mails from the Fed tell a different story. Tim Clark from the Fed said that your claim to be surprised seemed somewhat suspect. The Fed governor Kevin Warsh wrote that this claim is not credible. And there are more like this.

It is clear that the Fed think you either knew or you should have known about these losses sooner. I have to say, everything that was happening in the financial markets last fall, your claim that you had no idea about Merrill's loses until December is remarkable. The Fed seem to think that you are either not being forthcoming about that or you were completely clueless about the merger and the situation on Wall Street.

Let me -- my question is, when exactly did you know about these losses, and why didn't you know about them sooner?

MR. LEWIS: Yes, sir, thank you for the question. The financial markets in the fourth quarter of 2008 suffered a massive credit meltdown, something that probably had not been seen during most -- or had not been seen, actually, during our lifetimes. And we saw that happening in September and in October, and we knew that that was -- we saw things that was evidenced in our own book that suggested that things were getting -- were bad and getting worse. We also had heard rumors on the street that other banks were suffering losses as well.

So that particular -- the losses at that particular time were not concerning, because they were consistent with others in the marketplace and what we were seeing as well. But then, in mid- December the forecast losses accelerated dramatically. And so it wasn't that the loss -- that we didn't know about losses; the concern was the fact that these losses accelerated, and that was what gave us the grave concern.

REP. TOWNS: Let me put it this way. Did you move forward with the Merrill deal because of pressure from government officials, or because you thought it was in the best interest of BankAmerica and its shareholders?

MR. LEWIS: Yes, sir, there's been a lot of -- lot of talk about the -- the pressure from the federal government. It is true that we were told that if we -- if we went through -- or I can't exactly remember the exact words, so please give me license with word-for- word. But basically, if we went through with calling the MAC, that the government could or would remove management and the board. And I've said in the past that it was the threat -- the threat was not what gave me concern. What gave me concern, that they would make that threat to a bank in good standing. So it showed the seriousness with which they thought that we should not call a MAC -- a material adverse change. And so, as a result of that, that was a factor in our decisions, because here your regulators and the federal government was saying, we don't think calling the MAC is the best thing for you or the financial system.

But there were also other considerations. You weren't assured you'd win the MAC. If in fact you lost the MAC, you were subject to severe lawsuits and severe amounts of money that you'd have to pay. And so we thought, given the fact that the government felt that strongly and the fact that there was a risk that you wouldn't get the -- you would not win the MAC, and then finally that you might end up not getting Merrill Lynch in any sense, even after paying the fines -- we felt like, because of all those factors, that it was in our best interest -- that is, Bank of America shareholder best interest -- to go through with the merger.

REP. TOWNS: So you were pressured.

MR. LEWIS: But it -- it's hard to find the exact right word to describe what I just described. I've found, as I've tried to have different words, that it's best just to describe it and let people come to a conclusion.


I yield to the gentleman, the ranking member, for the rest of my minutes.

REP. KUCINICH: Thank you very much, Mr. Chairman.

Mr. Lewis, in our review of the Fed's documents, it reveals that, in contrast to your representations to us today, Fed officials concluded that you must have known about the accelerating losses at Merrill much earlier, as early as mid-November, when your shareholders could have voted to disapprove the merger.

Now, an e-mail from a senior adviser sent to -- sent to Assistant to Chairman Bernanke on December 13th, 2008 -- and it's up there on the board for everyone to see -- writes of "clear signs in the data we have that the deterioration at Merrill Lynch has been observably under way over the entire quarter, albeit picking up significantly around mid-November. Ken Lewis's claim that they were surprised by the rapid growth of the losses seems somewhat suspect," unquote.

Another memo: Restricted Federal Reserve analysis of Bank of America and Merrill Lynch merger, dated December 21st, 2008. "BAC management's contention that the severity of Merrill's losses only came to light in recent days is problematic, and implies substantial deficiencies in the due diligence carried out in advance of and subsequent to the acquisition" -- talking about Merrill's losses -- "were clearly shown in Merrill Lynch's internal risk management reports that Bank of America reviewed during their due diligence," unquote.

And then there's an e-mail from the Fed general counsel to Chairman Bernanke on December 23rd, 2008. Quote: "Lewis should have been aware of the problems at Merrill Lynch earlier, perhaps as early as mid-November, and not caught by surprise. That could cause other problems for him around the disclosures Bank of America made for the shareholder vote."

Now, Mr. Lewis, I'm going to ask you a series of simple questions, and if you're not forthcoming, I'm not going to have any choice but to interrupt you and ask -- I'm asking for your cooperation. Isn't it true that Bank of America examined Merrill Lynch's book of business before signing the merger agreement, and then received detailed financial reports every week from Merrill Lynch after signing the merger agreement on September 15th?

MR. LEWIS: That is true.

REP. KUCINICH: And isn't it true that the Merrill losses of mid- December that you claim motivated you to go to the government were not the largest week-to-week losses at Merrill you observed since agreeing to purchase the company? In fact, wasn't the week-to-week loss experienced in mid-November larger than the one in mid-December?

MR. LEWIS: The losses that were -- that were causing this forecast to increase were partly based on losses in November. So I'm not saying that the losses in that time frame were what caused the increase. It was the increased projections of the losses, based on some of those losses in November.

REP. KUCINICH: Mr. Chairman, I move to insert into the record a bar graph representing the week-to-week losses reported by Merrill Lynch to Bank of America, which clearly shows that the mid-November loss exceeded the one in mid-December.

REP. TOWNS: Without objections.

REP. KUCINICH: And I also move to insert an analysis by a statistics expert finding that the mid-November loss should have alerted Bank of America to an accelerating deterioration in Merrill Lynch, and the loss evident in mid-December merely confirms a trend apparent in mid-November.

Now, Mr. Lewis, isn't it true that you understood the composition and performance of Merrill's portfolio because it was similar to your own, in that it was a portfolio that contained complex structured derivative products? Isn't that true?

MR. LEWIS: It is true. The issue, though, is nobody predicted a meltdown that -- like occurred in the fourth quarter of 2008.

REP. KUCINICH: But you were getting -- you were getting weekly reports. And you certainly understood Merrill, because of the similarities in the composition and performance of their portfolio.

Now, our investigation found that the Fed believed you should have understood the potential for losses at Merrill because your own portfolio was similar to Merrill's. I want you to look at the following from the Fed's restricted analysis of Bank of America and the Merrill Lynch merger, dated December 21st, 2008. Quote, "the potential for losses from other risk exposure cited by management, including those coming from leveraged loans and trading in complex structured credit derivative products -- what they also call correlation trading -- should also have been reasonably well understood, particularly as Bank of America itself is also active in these products," unquote.

Now, Mr. Lewis, how do you explain the apparent contradiction, between your sworn testimony and the Fed's findings that you knew about the acceleration in losses and the potential for future losses as early as mid-November?

MR. LEWIS: I can only tell you what I just said, that part of the November losses were causing this projection that we were getting in December. And so they were a factor in the increased projection.

REP. TOWNS: My time has expired. So let me yield now to the ranking member from California, Congressman Issa, for his 10 minutes.

REP. ISSA: Thank you, Mr. Chairman. And Mr. Chairman, at this time, I'd like to ask unanimous consent that all opening statement, by all members, be allowed to be inserted in the record.

REP. TOWNS: Without objection, so ordered.

REP. ISSA: Mr. Chairman, I'd also ask unanimous consent that the minority background memo as well as documents referred to in it be included in the hearing record.

REP. TOWNS: Without objection.

REP. ISSA: Thank you, Mr. Chairman.

Mr. Lewis, in your 35 years, how many acquisitions, including stock trades, would you say you have been involved in roughly, including boards you sat on or, you know, were involved in, in some tangential way?

MR. LEWIS: Off the top of my head, 10.

REP. ISSA: Okay, and probably hundreds that you've looked at, in your review of other people's -- competitors' transactions and so on.

Isn't it true that it is fairly common to get down the road, in a -- particularly in a stock transaction, and find that the original anticipated ratio is changed either favorably or not favorably?

And it's often written into the contracts that there are certain breakpoints, based on a material change in stock trading or other material facts, such as you had in your MAC agreement, right?

MR. LEWIS: Yes. That is not uncommon.

REP. ISSA: Okay.

So the Fed should not have been surprised that that would be questioned, as this very turbulent market continued to have a number of changes, in what was going on at B of A and what was going on at Merrill Lynch.

MR. LEWIS: I can't -- it's hard for me to speak. I shouldn't --

REP. ISSA: Well, let me just say this.

Were you at all surprised that there were day-to-day, week-to- week changes that you had to evaluate and forecast what they really meant, over a much longer period, during this turbulent time?

MR. LEWIS: No, and the way I would characterize it would be that -- not speaking for the Fed, but somebody on the outside, who was familiar with mergers and acquisitions, had that person known that we had not strongly considered a material adverse change, they would have thought we were asleep at the switch.

REP. ISSA: And as a fiduciary to your corporation -- now the combined, but at that time B of A -- didn't you have a responsibility to weigh that and in fact, when in doubt, assert the possibility -- in other words, if you had to err, you had to err on the side that you had to look for the material adverse change, not assume it wasn't there; you had to assume that it could be there and you had to look for it?

MR. LEWIS: Well, particularly when we saw the acceleration, yes, sir.

REP. ISSA: Okay. So -- because I'm trying to -- I don't want to spend a lot of time on that part of it, because I think it's beyond the purview of this committee, but on December 17th, when you called Chairman Bernanke and Secretary Paulson to tell them that you were thinking of exercising the MAC clause, which, again, you had an obligation to at least consider, were you motivated to do so because of your fiduciary obligation to your stockholders?

MR. LEWIS: I was, sir.

REP. ISSA: And I'm going to ask a question that perhaps shows too much of my background off the dais, but to the extent that you were borrowing or potentially borrowing money from taxpayer money, was that really -- let me put it this way: That was still borrowed money. It wasn't a gift. You were not trying to renegotiate a gift from the government, or even the amount of money coming from them. If you had cited and they had said yes, go ahead and exercise that clause, would the more likely outcome change had been a difference in the purchase price of Merrill Lynch relative to B of A?

MR. LEWIS: That is one possibility, but I can't predict the future, obviously.

REP. ISSA: Okay. And when you looked at the material adverse clause, and particularly the losses that were building up, did you do so as an officer of a regulated company who, if your capital dropped below a certain point, could be in fact closed by the FDIC? In other words, were you protecting B of A's position that you not take an anchor that could lead to insolvency of your own company?

MR. LEWIS: Yes, that was a factor.

REP. ISSA: So we have a combination of what was Merrill really worth relative to what they were getting in B of A stock and, as a regulated entity, the real risk, if you did not ensure that B of A's capital base was sufficient -- we've recently had the stress test, obviously -- sufficient for you to be a going concern?

MR. LEWIS: Right. The -- I want to at least make sure I get full disclosure here. We had -- if we had done this deal, at least our Tier 1 ratio, which is the one that the regulators look at the most, would have still been over well capitalized, but it would have been well under our internal objective and would have been a relatively low ratio in this environment.

REP. ISSA: Okay. So today's hearing, at least from this member's standpoint, is really about whether or not the government asserted either strong influence that would be outside the ordinary influence one would expect from a neutral party, or/and whether or not you felt that there was a(n) implied threat, either to yourself, your board or your company, in any of the verbal or written correspondence you had with government officials, including Bernanke and Paulson.

MR. LEWIS: Well, there was the -- there was the strong vise that I just -- you know, that I just mentioned. I do --

REP. ISSA: I realize that you don't want to characterize it as a threat or any one word, but did you feel that you were being pressured to go through with the deal at least as strongly as that salesman trying to sell you the car and get you to close, or the insurance salesman? You know the pressure I'm talking about. Were they advocating strongly and using both positive and negative forces to do so in those conversations?

MR. LEWIS: Yes, sir, but I think it was in the context of them thinking that was in the best interest of Bank of America and the financial system.

REP. ISSA: I -- I'm going to call you to task a little bit. You said "the best interest of Bank of America and the financial system." I'm not going to quibble over their motives on the financial system, but why do you say Bank of America? Were they -- did you believe that they really believed this was a good deal for Bank of America, even though you were seeing a change which would have affected your arm's- length negotiation of a price?

MR. LEWIS: Well, their concern obviously was from the top, and that is for the financial system. But we are so intertwined with the financial system, I think they thought that by us -- by all of this happening, and the uncertainty coming back in the financial system, that, in fact, that would hurt the system and us.

REP. ISSA: Okay. So when you say "and Bank of America," you really mean the financial system, and as a member of the financial system you would be affected.


REP. ISSA: But if they went and sold it to -- to somebody else, or lowered the price and packaged it up, or they -- or if Merrill Lynch had gone through a bankruptcy and been offered to you free and clear, all of those alternatives, strictly relative to Bank of America, would have been either better or, at least, no worse.

MR. LEWIS: Yes, I can't speak to that, but those would be options. But I can't speak to whether it would be better or worse or --

REP. ISSA: Okay. My last question, then I'm going to yield to one of the other members: If you did not have the government at the table -- and I know that's hypothetical -- but if you did not have the government at the table, would you have, A, asserted the clause, and B, either walked away or substantially changed the deal?

MR. LEWIS: I -- it didn't happen that way, and so it's hard for me to project what I would have ultimately done, but obviously we were strongly considering it.

REP. ISSA: So it would be somewhere between possible and likely.

MR. LEWIS: I don't know how to characterize it. I just -- I'll stick at what I just -- how I described it, I think.

REP. ISSA: Thank you. And your constituent, Mr. McHenry, will yield -- control the balance of my time.

REP. MCHENRY: Thank you. Thank you, Ranking Member Issa.

Mr. Lewis, you've been with Bank of America and its predecessor companies for how long?

MR. LEWIS: September, it will be 40 years.

REP. MCHENRY: Forty years. How many mergers or acquisitions have you personally been involved with in your career?

MR. LEWIS: I would have to take a few moments and count them up, but obviously -- probably more than one less, than 10.

REP. MCHENRY: Okay. Okay. Would this be the largest merger- acquisition that your company and the predecessor companies have taken?

MR. LEWIS: No, the NationsBank-Bank of America acquisition would have probably been -- I would have to think back to the market caps and things, but that would be the biggest. And this would be one of the biggest, however.

REP. MCHENRY: Certainly. Now in terms of how you analyze these deals, do you have a process within your bank to analyze appropriate growth measures in acquiring other institutions or merging with other institutions?

MR. LEWIS: We do.

REP. MCHENRY: You do? And did you conduct that same method with this Merrill acquisition?

MR. LEWIS: Yes, we did. We used the same methodology.

REP. MCHENRY: Okay. Thank you. My time has expired, and I've got other questions in that regard later. Thank you.

REP. TOWNS: Thank you very much. And let me -- I yield to the chairman of the subcommittee, Mr. Kucinich, for five minutes.

REP. KUCINICH: (Off mike) -- Mr. Chairman and members of the committee.

Our investigation, Mr. Lewis, also finds that Fed officials believed that you were potentially liable for violating security laws by withholding material information in your possession from shareholders before the vote to approve the merger with Merrill Lynch on December 5th, 2008.

Mr. Lewis, please look at the following e-mail from the Fed's general counsel to Chairman Bernanke on December 23rd, 2008. Quote, "A different question that doesn't seem to be the one Lewis is focused on is related to disclosure. Management may be exposed if it doesn't properly disclose information that is material to investors. This potential liability here will be whether he knew or reasonably should have known the magnitude of Merrill Lynch losses when Bank of America made its disclosure to get the shareholder vote on the Merrill Lynch deal in early December," unquote.

Mr. Lewis, did Bank of America supplement the proxy solicitation it sent to shareholders with what the company learned in mid-November about the rapidly mounting losses and potential for future losses at Merrill Lynch before the shareholder vote on December 5th?

MR. LEWIS: Congressman, if -- we take disclosure very, very seriously. If any --

REP. KUCINICH: Well, were there supplements?

MR. LEWIS: If any legal --

REP. KUCINICH: Can you say, were there supplements?

MR. LEWIS: If anybody in our legal group had suggested we do anything of that nature, we would have done it.

REP. KUCINICH: There were no supplements; isn't that right?

MR. LEWIS: There was no suggestions to have a supplement.

REP. KUCINICH: There were no supplements. Okay. So, Mr. Lewis, look at the following e-mail that circulated among officials at the Richmond Fed on December 23rd, 2008. Quote, "I think he's worried about stockholder suits, knows they did not do a good job of due diligence, and the issues facing the company are finally hitting home and he's worried about his own job after cutting loose lots of very good people," unquote.

Now, Mr. Lewis, was your decision to tell the government you were considering invoking a MAC -- which, of course, refers to a clause in a merger agreement that allows the acquirer to abandon the deal if a material adverse change is judged to have occurred -- was your threat to invoke a MAC in fact a strategy you deployed to protect yourself from shareholder lawsuits?

MR. LEWIS: No, it was not.

REP. KUCINICH: Isn't it true, Mr. Lewis, that during the course of your conversations with Chairman Bernanke and Secretary Paulson, you in fact requested a letter from the government saying that the government ordered you to close the deal to acquire Merrill?

MR. LEWIS: No, that was not what I asked for. Our board was concerned --

REP. KUCINICH: Your answer is "No"? Are you sure that's your answer?

MR. LEWIS: Our board was concerned that we had verbal assurances, but had nothing in writing about getting some assistance. And so I called Chairman Bernanke and asked him --

REP. KUCINICH: But you're referring to a different letter.

I'm talking about a letter. You requested a letter from the government saying that the government ordered you to close the deal to acquire Merrill. Wasn't there such a letter?

MR. LEWIS: I don't recall such a letter.

REP. KUCINICH: You're under oath, but your answer is you don't recall.

MR. LEWIS: I do not recall --

REP. KUCINICH: Isn't it true that your request of that letter was motivated by your desire to protect yourself from your shareholders?

MR. LEWIS: Sir, if I can't recall it, I can't answer the second question.

REP. KUCINICH: Well, our investigation reveals that Chairman Bernanke believed that your request for such a letter was motivated by a desire to protect you from shareholder lawsuits, as demonstrated in this e-mail from Chairman Bernanke to the Fed's general counsel on December 23rd, 2008. And I quote: "He" -- speaking of you, Mr. Lewis" -- said he now fears lawsuits from shareholders for not invoking the MAC, giving the deterioration at Merrill Lynch. He" -- speaking of you, Mr. Lewis -- "still asked whether he could use as a defense that the government ordered him to proceed for systemic reasons. I said no," unquote. This is from Chairman Bernanke.

Mr. Lewis, is Chairman Bernanke's e-mail describing his call with you an accurate statement of your concerns and of Bank of America's situation?

MR. LEWIS: I can't recall the exact e-mail, but we did have -- we did have concerns, and we wanted some assurances that they would support our position.

REP. KUCINICH: I yield back, Mr. Chairman.

REP. TOWNS: Thank you very much.

I now yield to the ranking member, of Ohio, Mr. Jordan.

REP. JORDAN: Thank you, Mr. Chairman.

Let me go back to this so-called threat concern here, Mr. Lewis. And I just want to be clear. On December 17th when you called Mr. Paulson and Mr. Bernanke, did you -- I just want to know the nature of your call. Did you say "We are going to exercise the MAC laws," or did you say "We are thinking about exercising the MAC laws"?

MR. LEWIS: Again, it seems like a long time ago, but to the best of my recollection, I said we are strongly considering a MAC.

REP. JORDAN: So in other words, the response you then got changed your decision. You were going to exercise the clause. You felt that was the best interest of your -- of your bank, of your shareholders. You were going to do it. And then what the government told you -- based on what the government told you, you took a different course.

MR. LEWIS: No, sir. It was a factor because they felt so strongly, but it was not the only factor in making the decision. We also thought, after a lot of consideration, that there was downside risk in not winning the MAC.

REP. JORDAN: Let me change directions, because we've talked about this a lot. And I want to get to just a big concern I have with the unprecedented level of involvement the government now has in the private sector in way too many industries, in my judgment.

And let me provide a little context. I was on a conference call a week ago Sunday with members of the auto task force, talking about the GM situation. I happen to come from car country, as I said in my opening statement. We had a GM plant that was closed a week ago Monday, 800 jobs, 800 families, and a whole community impacted, as you would expect.

The night before that announcement, we were on this conference call. Members of the task force talked about what was going to happen.

And one member of the auto task force indicated, he said, we are not going to run General Motors. We will only get involved if there's a major event. You know, major event was the language he used. And they explained the whole deal.

I asked a question. I said -- it was Mr. Sperling who made that statement. I said, Mr. Sperling, define major event. Define what's major. And I said, because it's going to be pretty major tomorrow, in our district, when 800 people find out they're not going to have a job.

And he didn't have a definition. In fact, he said, we don't have a working definition. It would be something along the lines of a merger, a major change in corporate strategy. Which basically told me, it could be any darn thing they wanted it to be.

So my question to you is, what day-to-day involvement does the government have in decisions you are making, relative to TARP funds, relative to any -- talk about -- if any. Talk about that, if you would, please.

MR. LEWIS: Well, there is the -- there is an oversight committee, a TARP committee that actually does look at our lending and seeing if we're using the TARP funds to lend money. And so that is a report we just requested.

There obviously is the involvement of our regulators, as they normally would be. But in terms of --

REP. JORDAN: I'm talking over that, more than that.

MR. LEWIS: All right.

The only involvement that would be explicit would be, after we were ordered to attain more capital, as a part of this stress test, they did suggest to all banks that were raising that capital to relook at their boards, for financial expertise, and to look at their management and succession as a part of this process. And we have been doing that, but no day-to-day decision's made by regulators.


Talk to me about TARP dollars, TARP funds you have, any kind of undue influence you felt there, in relation to when you initially accepted TARP dollars.

MR. LEWIS: No undue influence, no, sir.


I'll be happy to yield to the ranking member.

REP. ISSA: Thank you.

And just a couple of follow-ups.

Although the threat seems to have been stated, whether or not it influenced you, to your understanding, under U.S. law, and I realize we're not asking a banker to be a lawyer. But does the Federal Reserve chairman have the right to fire you or any member of your board?

MR. LEWIS: I have -- I think there's something called a cease- and-desist, which gives them power to make -- to do things like that. But I've been told that although I haven't read it myself.

REP. ISSA: Okay, and the U.S. Treasury secretary, any similar power?

MR. LEWIS: No, sir. I don't think he would have the power.

REP. ISSA: Okay, but when acting in concert, you would perceive that threat to be real, that he could execute on that threat of having you and/or your board relieved.

MR. LEWIS: My perception was that he was speaking on behalf of himself and the regulators.

And my perception was, in concert, they would have that power.

REP. ISSA: Thank you.

REP. TOWNS: Thank you very much. I now yield to the gentleman from Pennsylvania who's been working on these issues for more than 20 years, Congressman Kanjorski.

REP. PAUL KANJORSKI (D-PA): Thank you very much, Mr. Chairman.

Mr. McHenry made a comment in his introduction to you that Bank of America has business relations with 98 percent of the Fortune 500 companies. What I want to know is, what are the 10 companies that aren't doing business with you? (Laughter.)

MR. LEWIS: (Laughs.) I don't know, but it's a very interesting question.

REP. KANJORSKI: Get home and check that, all right?

Mr. Lewis, in some regard -- we have important questions that we're trying to resolve with reforming regulatory authority in the United States, so to that extent, these hearings are helpful.

But I don't hear anything thus far, either by my colleagues or yourself, in responding that there was some perceived threat or abusive action on the part of federal regulators. So I'm going to ask you directly: Do you think Mr. Bernanke or anyone working under the Federal Reserve chairman took unauthorized, illegal or improper action toward you or the Bank of America during these trying times?

MR. LEWIS: I do not.

REP. KANJORSKI: All right.

MR. LEWIS: I would say they strongly advised, and they spoke in strong terms, but I thought it was with good intention.

REP. KANJORSKI: If I had to characterize it, I was thinking that if the Titanic were going down, and some of us were in the life rafts, it sounds like an argument between the captain and someone that's in the water, and they're refusing to get on board, and he's ordering them to get on board. Is that not too dissimilar to what happened here on this mid-September to December period of time, when all of us admittedly had our hair on fire?

MR. LEWIS: Yeah. And I think they saw -- probably, with their perspective, they saw rougher seas that no one institution would be able to see.

REP. KANJORSKI: All right. The one thing -- because my subcommittee in Financial Services is charged with looking at the reform of regulation -- is there anything that you could see that in, granted, extreme circumstances, such as that weekend of September 15th and the failure of Lehman Brothers and what was happening in the implosion or collapse of the financial system -- is there anything that we could do in reforming the regulations to provide for faster disclosure? For instance, the 8-K requirements that were not carried out precisely in this case, and that -- disclosures by the company were not necessarily made within the four days.

I know there's an argument as to whether or not they legally had to, or were defined as required, but is there something we could do to assure shareholders who do get at risk as a result of, not forced, but encouraged acquisitions such as this -- is there anything we in the federal government can do to clarify that problem and to make it clear, that would help the banking institutions in future events of this sort?

MR. LEWIS: Sir, you're speaking to the Lehman or to the Merrill Lynch --

REP. KANJORSKI: No, to the requirement of your filing for disclosure and notice to your shareholders when all of this was pending.

MR. LEWIS: Okay.

REP. KANJORSKI: You didn't necessarily precisely follow what could be considered a notice requirement.

MR. LEWIS: I think -- I think clarity is always better. That's where I would -- that's -- if it were left up to me, I would go to clarity first.

REP. KANJORSKI: So what would you recommend that we do? Go into that area and declare more disclosure as to what's happening or how it's happening, or would we -- should we put you on the Net, or what?

MR. LEWIS: (Laughs.) No, I don't -- I'm not sure I'm following you in terms of the disclosure that you're speaking to, so I'm a little shaky on your question, frankly.

REP. KANJORSKI: Okay. Well, do you know of any disclosures, or do you have any feelings of any disclosures that could be made. At those, you know, highly-charged, extreme circumstances that you were operating under, is there anything that we could create in the reform of our regulatory requirements on acquisitions or mergers?

MR. LEWIS: It's hard -- it would be -- it would be difficult, because you don't have an event many times, because you're still looking at alternatives and negotiating -- in Lehman or the Merrill Lynch/Bank of America situation. And then, it could be well into the morning before you actually get a signed deal, and then you do announce it the next day, for instance. And so the ebb and flow of the circumstances would make it very difficult to describe it as an event, because it just may not happen that way.

REP. KANJORSKI: Now, I understood in your testimony you pointed out that the Merrill Lynch acquisition was responsible for 75 percent of your last quarter's profits. Are you aware of shareholders that are complaining about that acquisition as a result of that?

MR. LEWIS: No, sir -- not now.

REP. KANJORSKI: Okay. Thank you very much. I yield back.

REP. TOWNS: Thank you very much.

I now yield to Mr. Chaffetz, the gentleman from Utah, for five minutes.

REP. JASON CHAFFETZ (R-UT): Thank you, Mr. Lewis. I appreciate you being here. I'm looking at some notes here, dated December 31st. These are your notes.

Also looking at some notes taken by Joe Price, the CFO at Bank of America, that were taken on December 21st of 2008, about the attempt to pull -- you know, use the MAC clause and get out of the Merrill Lynch transaction.

In those notes, it says, fire board of directors; if you do it, irresponsible for country; Tim G. agrees. Tim G., I would assume, would be Timothy Geithner.

MR. LEWIS: Those are Joe Prices notes.


MR. LEWIS: I would have to assume with you because, you know, they're his notes.

REP. CHAFFETZ: Based on your recollection of what was going on, and based on the notes that we see, from the CFO that was there -- fire board of directors; if you do it -- was that your understanding?

MR. LEWIS: The -- that is probably a reference to the conversation I mentioned, that I had with Secretary Paulson. But again those are his notes.

REP. CHAFFETZ: But based on your personal recollection, was that your understanding, that the board of directors would be let go, if this MAC clause was invoked?

MR. LEWIS: You know, I mentioned that -- (inaudible) -- whether he said could or would. But basically the premise was that the management and the board would be removed if, in fact, we did call a MAC.

REP. CHAFFETZ: Including yourself.

MR. LEWIS: Correct.

REP. CHAFFETZ: And so if the suggestion from the federal government was to have your job removed, as well as the board of directors, can it be looked at any other way, other than a threat?

MR. LEWIS: Well, actually we didn't -- we didn't actually have much of a reaction to the comments themselves, as it related to us being removed. Again what impressed us was, here was the government telling a bank in good standing that they would do something like this.

And so it was the seriousness with which they -- the seriousness of it which caused us to believe that they really did believe that there was an issue here, with the MAC and not calling it, that did influence us. But it wasn't the threat to have us lose our jobs. It was the seriousness. It was because they made it, not the threat itself.

REP. CHAFFETZ: I'm sorry, I didn't catch the last part of that.

MR. LEWIS: It was the seriousness with which they made it, not the threat itself.

REP. CHAFFETZ: Tell me about your discussion. You call at one point, as I'm looking at the timeline here, and Mr. Paulson is taking a bike ride, I guess, on December 21st.

Tell me specifically what was going on in that conversation.

MR. LEWIS: Well, I called him to get an update. And I think that was the Sunday -- I'm pretty sure that was the Sunday that I called him. And as I recall the conversation, he said, "I want to -- I want to -- I want to give you some blunt language, and I first want to start out by saying that we are very supportive of Bank of America," and then went one step further and, you know, said what I've already said, that --

REP. CHAFFETZ: Repeat --

MR. LEWIS: Okay. He said, "But we feel very strongly that you should not call the MAC. And if, in fact, you do" -- and again, I think he said "would," but it was "would" or "could," as I recall -- and "remove the board and management."

REP. CHAFFETZ: Well, that certainly sounds like a threat to me, and an amazing use of power, there.

Tell me about your interactions with Timothy Geithner. I -- how early in this process was he involved and engaged in this process?

MR. LEWIS: I had no -- after the confirmation hearings or once he excused himself from the New York Fed, I had no contact with Mr. Geithner.

REP. CHAFFETZ: But he was involved before he was named and brought in as the Treasury secretary, correct?

MR. LEWIS: Well, he had been involved in the original TARP money, yes.

REP. CHAFFETZ: Right. And tell me about Mr. Summers, the interaction and place of involvement that he had in this process.

MR. LEWIS: I personally had no involvement with Mr. Summers.

REP. CHAFFETZ: He was not engaged in any of these?

Mr. Chairman, I'd ask unanimous consent that Mr. Price's notes from December 21st, 2008 and Mr. Lewis's notes from the conversation with Ben Bernanke on December 31st, 2008 also be entered into the record.

REP. TOWNS: Without objection, so ordered.

REP. CHAFFETZ: Thank you.

Tell me about the interaction that you continue to have and the -- with Mr. Bernanke and Mr. Geithner at this point.

MR. LEWIS: Well, I've had very little conversation with -- in fact, I can't recall of a conversation that I've had with Mr. Bernanke, in terms of being one-on-one. I'm a member of a council called the Federal Reserve Advisory Council, and we -- there are 12 of us, and we have a dialogue with the Federal Reserve, including Mr. Bernanke, but that's in a group setting. And so there are no --

REP. CHAFFETZ: Any interaction with the administration at all about your testimony --

REP. TOWNS: And the gentleman -- may I say --


REP. TOWNS: The gentleman from Utah, your time has expired.

REP. CHAFFETZ: My apologies, Mr. Chairman. Thank you.

REP. TOWNS: All right. I now yield five minutes to the gentleman from Maryland, Mr. Cummings.

REP. ELIJAH CUMMINGS (D-MD): Mr. Lewis, I've listened to your testimony very carefully. You know, I understand -- and I've read a lot about you. You're a great man. But I think one of the things that you have tried to do today is to walk a very thin line.

You just heard Republicans and Democrats say to some degree that whatever was said to you about losing your job and the board being dismissed -- basically what we've said is we don't buy it.

Let me -- I assume the minutes are accurate from your board meetings.

Are these things you vote on, the minutes from board meetings?

MR. LEWIS: Yes, sir. We -- we do --

REP. CUMMINGS: Very well. I'm talking about -- this is December 22nd, 2008.

MR. LEWIS: Right.

REP. CUMMINGS: Let me read something to you. It says -- you've apparently -- Mr. Lewis reported a series of calls. But let me go down to -- and you talk about a number of things, but this is one thing that I found very interesting, the second point. It says that -- this is what you told your board. It says the Treasury and the Fed stated strongly that, were the corporation to invoke the material adverse change, or MAC, clause in the merger agreement with Merrill Lynch and fail to close the transaction, the Treasury and the Fed would remove the board and management of the corporation.

If that isn't a threat, I don't know what is. If I say I'm going to fire you if you don't do what I tell you to do -- not only am I going to fire you, but I'm going to fire your board -- it just goes -- I mean, what you said -- and I know that you were caught in a difficult situation. I know that after this merger was done, your folks benefitted tremendously. And I know that Bank of America is doing fine now. But I'm here to tell you that, no matter how great Bank of America is doing today, the end does not -- the means does not justify the end (sic).

In other words, throughout these transactions, we must have honesty, integrity and transparency. Period. And so what I'm saying to you is, I don't -- I know you're trying to be nice, but here we've got a situation where apparently Mr. Paulson has told you "Do it." Sort of like the Nike commercial -- (laughter) -- "Just do it." And then you come in here trying to tell us, oh, no, I was worried -- sky was falling -- I'm just -- I was just so upset -- I was just -- and that's -- and we don't buy it. So I'm going to give you another chance. You didn't feel threatened?

MR. LEWIS: Well, I -- I --

REP. CUMMINGS: I mean, don't get us to describe it. We're trying to figure out what you were feeling. And you know why we want to know? Because we want to straighten out this mess.

MR. LEWIS: I have a -- I've been pretty consistent, as you've just described it as it happened.

REP. CUMMINGS: Yeah, well, maybe you need to be inconsistent, and tell us how you felt.

MR. LEWIS: Well, I did -- I did, as I think I have said at some point in time, maybe not today -- I was -- it was a strong influence on my decision, but it wasn't the only influence.

REP. CUMMINGS: I understand. Now, so apparently you're going to -- okay. Now, let me ask you this. Did Mr. Bernanke have any influence with regard -- I mean, I understand you just answered the question, but did he ever say that you should not disclose certain information, you should do the deal? I mean, did that ever come to you in any kind of way from Bernanke?

MR. LEWIS: No, sir. Well, the -- he never said we should not disclose anything that was disclosable. That would be our decision, and I never heard from him on the issue of us not disclosing something.

REP. CUMMINGS: All right, well, anything else? You look like you're trying to go somewhere. Go ahead.

MR. LEWIS: Well, the second piece I thought that you asked me, sir, was the issue of him not wanting us to call the MAC. And he did express that to us.

REP. CUMMINGS: And so when did he do that?

MR. LEWIS: He expressed it on more than one occasion. I don't recall which dates, but several times.

REP. CUMMINGS: And last but not least, you are an experienced man. I understand you have great judgment. Apparently, when you thought about this MAC thing, it was based upon your own experiences; was it not?

MR. LEWIS: Yes, sir.

REP. CUMMINGS: You just don't say, I think we may have a MAC here, I mean, out of the clear blue sky. What were you thinking?

MR. LEWIS: I was thinking that the losses had accelerated to a point that they were out of line with other institutions and our institution.

REP. CUMMINGS: And so you still -- now, if you were to go back, you still -- do you think there was not a MAC situation?

MR. LEWIS: I wouldn't change my decision. But I can't say that there wasn't a MAC because, you know, we never called it. So we just don't know.

REP. CUMMINGS: Very well.

I see my time is up.

(Cross talk.)

My time is up.

REP. TOWNS: The gentleman's time has expired.

I now yield to Congressman Flake from Arizona, Congressman Flake, for five minutes.

REPRESENTATIVE JEFF FLAKE (R-AZ): Thank you, Mr. Chairman.

I just want to share my colleagues' skepticism here about whether or not this was a threat. It just seems completely incredulous that this wouldn't be considered a threat.

If this wouldn't be considered a threat, if I might just ask you, what would be considered a threat? I mean, kidnap the family dog. Release your college, you know, GPA scores.

What is a threat if this is not a threat, a firing and the firing of your board?

MR. LEWIS: Look, I'm a -- I'm just trying to describe the circumstances and not put one word to it myself.

REP. FLAKE: Well, it seems -- from this vantage point, it seems, there's sort of, kind of a Stockholm Syndrome thing going here. I mean, you're still regulated by these entities. And it seems that you've identified with your captors, your regulators in some way here.

But we'd like to have a candid answer here. And I don't know if you can wiggle your pinkie finger at us or something, or give us some sign that nobody else will see.

(Cross talk, laughter.)

The big grin, maybe that gives it away. But it just -- let me just tell you, from this vantage point, it just seems very difficult to accept that that would not seem threatening behavior.

Again from the note that, I believe, Mr. Price the CFO took, during one of these meetings; identifies Hank P., Hank Paulson here. Fire board; if you do it, invoke the MAC, irresponsible for the country; Tim G. agrees.

I mean, it just seems like there's no other explanation here. And I can understand maybe from the smile and whatnot that you agree but can't say it here.

But let me just say -- if you learned later on that there was 12 billion (dollars) in losses that you didn't know about, but you said that they were (compelling ?) -- it wasn't so much what they said, but how they said it, the seriousness of which they explained the need for your to move forward with this merger. If not 12 billion (dollars), where's the threshold that you would have said, "Can't do it"? Can you enlighten us there a bit?

MR. LEWIS: I can't. I -- because I've dealt with the circumstances that -- you know, that existed. And I don't know if there's a -- I don't think there's a rule of thumb or whatever to cause that to happen.

But to your point, even if you -- whatever you want to call it, I wouldn't change how I described it. So I'll let you put the word to whether it was a threat or whatever, but the circumstances that I describe remain the same.

REP. FLAKE: Well, how compelling was the seriousness of that conversation? Would it have compelled you if the losses were twice as big as you didn't understand that they were, at 24 billion (dollars) instead of 12 (billion dollars)?

MR. LEWIS: Well, at some point you couldn't have -- you couldn't have made it a viable deal. So there is at some point a number that you -- that the hole would have been just too big.

REP. FLAKE: But if the taxpayers backfill, 24 (billion dollars) is just as easy as 12 (billion dollars).

MR. LEWIS: No, sir, because you would all of a sudden have -- I mean, this was 8 percent after-tax dividends that you're paying. At some point you couldn't -- you know, you just couldn't bear the burden of that kind of cash flow drain.

REP. FLAKE: But the 12 billion (dollars) was within the range.

MR. LEWIS: Within the -- I mean, it was painful, and it caused us to have to push out our horizon in terms of accretion for the deal to work. But it was -- it was workable.

REP. FLAKE: Thank you.

I would yield to the gentleman from California.

REP. ISSA: I'd like to associate myself both with your comments and the gentleman from Maryland when you are a little incredulous that when it has been previously stated under oath before the New York attorney general that in fact the gentleman was threatened, we are, oddly enough, arguing over when you're threatened, you feel threatened, but we're not arguing over whether in fact there was a threat. I think we've made that pretty clear today. And I appreciate your sticking to a position of not further indicting those who regulate you, but it is our job to get to the truth, and I think we have.

Yield back.

REP. TOWNS: Thank you very much.

I now yield to the gentleman from Massachusetts, Mr. Lynch.

REP. STEPHEN LYNCH (D-MA): Thank you, Mr. Towns. I want to thank Chairman Kucinich, as well, along with Ranking Member Issa and Ranking Member Jordan.

(Audio break) -- there was a significant indicator that Merrill Lynch was in rapid decline. And rather than focus on November of '08, we can go all the way back to fall of '07 when they announced an almost $8 billion loss and Mr. O'Neal was forced into retirement. I mean, there's a long history of decline here, albeit it accelerated to some degree around the time of your purchase. But there was significant evidence that they had overloaded with collateral debt obligations and other complex derivatives, and they were in pretty tough straits for a while.

Isn't that true?

MR. LEWIS: Yes, sir, it is true.

REP. LYNCH: Well, let me ask you -- there's a couple of e-mails, and unfortunately they're very, very small up there, but let me try to help you. One is from Chairman Bernanke to a selection of the Board of Reserve governors. And this is December 21st, 2008, around the time that you're thinking about this material adverse change being existent or not. And this is a quote. It says -- this is from Chairman Bernanke. "I think the threat to use the MAC" -- which is the material adverse change -- "is a bargaining chip, and we do not see it as a very likely scenario at all. Nevertheless, we need some analyses of that scenario, so that we can explain to Bank of America with some confidence why we think it would be a foolish move and why regulators will not condone it."

The other e-mail is actually -- it sort of reinforces that. And that is from Jeffrey Lacker, who was the president, I believe, of the Federal Reserve Bank of Richmond at the time.


REP. LYNCH: And he's a -- I think he's a member of the Federal Open Markets Committee now, a voting member.

This e-mail was also CC'd to the chairman, I believe. And it says, "Just had a long talk with Ben" -- Ben Bernanke, I presume -- "says they think the MAC threat is irrelevant because it's not credible; also intends to make it even more clear that if they" -- meaning Bank of America -- "play that card and then need assistance, management is gone," period, and in parenthesis says, "Forgot to tell him that K.L." -- I believe that's you, Ken Lewis -- "is near retirement," close parenthesis.

So there's a different dynamic going on here. I mean, there is the -- remember -- remember the context of all this is the sky is falling, as Mr. Cummings said, and tremendous pressure on everyone. And they think you're playing a game. They think you're throwing this thing out as a red herring and that -- they think what you're really trying to do and what some people suggest you might have been doing is to leverage taxpayer support by falsely putting this MAC out there; the fact that you're going to let this deal crash, walk away, even asserting you don't have to win the MAC -- as you said before, you don't have to win it; you -- this deal just needs to stop.

And then I think the weight of all the forces at play there with Lehman and everything else -- you know, we're in some pretty deep trouble.

So what I'm asking you is, was that your -- was that your strategy here? Did you use this MAC as leverage to force Bernanke and Paulson to come in with taxpayer support? And I also want to note that you -- your own firm was in pretty tough shape at the time. Everybody seemed to think there was a perception that you were the white knight here, and you were the strong party, but I think, as Mr. Kucinich has indicated, you know, Bank of America had its problems too at this time.

But tell me what your strategy was in your negotiations there. And what was the motivating force behind your decision to put forward this MAC?

MR. LEWIS: Thank you. And thanks for reminding us about the -- we were in the middle of a pretty bad financial crisis. And I do think we had people of good intentions, despite what they've said about me. The -- we grew more and more convinced that there was a distinct possibility that we had a MAC as a result of these accelerated losses. And --

REP. LYNCH: You didn't disclose that to your shareholders, though.

MR. LEWIS: But the acceleration really took place about a week after. That's when you saw massive acceleration -- not necessarily those days, but as a result of the forecast increasing. And so there was -- this was not some wild bluff. We thought we had the real possibility of a MAC.

REP. LYNCH: Okay. Mr. Chairman, I yield back.

REP. KANJORSKI (?): Chair recognizes Mr. McHenry.

REP. MCHENRY: Thank you, Mr. Chairman.

Were there specific details that the Federal Reserve and Treasury told you not to disclose to your shareholders?

MR. LEWIS: No, sir. Neither Secretary Paulson nor the chairman of the Federal Reserve, Mr. Bernanke, ever told me not to disclose something that we publicly -- that we felt should be publicly disclosed.


Mr. Kucinich referenced some e-mails, and I just wanted to get on the record: Have you seen the -- had you seen those e-mails before today?


REP. MCHENRY: Okay. I just want to make sure we got that on the record, Mr. Chairman, with all due respect to you.

And Mr. Lewis, as I asked earlier, you've been involved in a number of mergers and acquisitions. Your institution's been involved in dozens upon dozens over the -- your career with the bank. To your knowledge, have there been material adverse change clauses included in previous deals of this sort?

MR. LEWIS: Virtually every acquisition would include some form of material adverse change clause, and it is not totally uncommon to have them invoked.

REP. MCHENRY: Has your institution invoked this clause before?

MR. LEWIS: Yes, sir, we invoked it on a deal that was with Sally Mae.

REP. MCHENRY: All right. And looking at the list of Federal Reserve regulators who are second-guessing your decision, or your raising the issue of the material adverse change clause, it's probably fair to say that you've done more of these deals than they have in their careers as bureaucrats. Is that safe to say?

MR. LEWIS: I'm sorry?

REP. MCHENRY: Is it safe to say you've done more deals that include MAC clauses than the bureaucrats that were second-guessing your decision?

MR. LEWIS: I don't know their backgrounds.

REP. MCHENRY: Okay. Well, I understand you're still a regulated institution, so no need to hit on the Federal Reserve and their staff there.

But there have been reports -- to go to another subject matter, there have been reports about efforts of various banks to raise capital in the wake of stress test results. What's the status of your capital-raising efforts?

MR. LEWIS: We were asked -- we were required to raise $33.9 billion, and I'm pleased to say that we have raised that amount. And we will raise more than that. That should be completed sometime toward the end of this month.

REP. MCHENRY: Okay. My constituents are concerned about access to credit. We've got a mortgage foreclosure issue that's widespread across this country. Can you tell me about Bank of America's actions as it relates to foreclosure mitigation and helping those folks that are facing the loss of their homes?

MR. LEWIS: One of -- one of the issues with the loan modification issue was that initially the banks were just not staffed up, to handle that kind of volume and the different-type things that were being asked.

Since then, we now have 7,200 associates that just focus on loan modifications. And since July of 2008, so less than a year, we actually already have modified 311,000 loans.

REP. MCHENRY: There's been a discussion about access to credit and whether or not institutions are lending. With the downturn in the economy certainly institutions have a more difficult time, in a down economy, to find creditworthy individuals and make loans.

Can you discuss the loans that you've made over the last two- three quarters?

MR. LEWIS: Well, it's -- the -- it's a great question. And it's also the key to us getting this country back on track, because if the financial system doesn't make loans, then we've got an issue.

First, I would say, I'm very proud that Bank of America is the largest lender in the United States. I'm very proud of that. Secondly I can assure you that we're making every good loan that we can make. Simply put, banks take deposits and make loans. That's how we make money. So it's in our enlightened self-interest to do that. If we don't, we don't optimize our profits.

But I will say, to your point, that in a recession that's this deep and this prolonged, you do get an issue with demand. People start cutting back. They spend less. And countries, excuse me, companies expand less. And so I can't assure you that these loan increases are going to continue because of loan demand. What I can assure you is, we're going to make every good loan there is to be made.

REP. MCHENRY: Thank you, Mr. Chairman.

MR. : The gentleman's time has expired.

The chair recognizes Mr. Quigley.


Good morning still. There's been discussion of a new stress test, as it relates to our financial institutions. I guess the question comes, was the current test good enough? Do we need a new one? And would either kind of stress test helped us to understand or prevent these issues, when all these issues took place with your acquisition?

MR. LEWIS: I do think the stress test was a good one.

And I think the fact that they probably used higher standards in terms of things getting worse than, hopefully, they will, was helpful, too, because those things can happen. And so I would -- I think it's -- I know it's caused us to look at our -- to look forward with a greater sense of pessimism, or greater sense of things could be worse than they -- than we actually think they are, and so you should have higher buffers of capital. And that will show up in our internal objectives going forward. So I do think it was -- it was a very good thing.

I don't see any evidence, particularly as we talk about there being some signs that the economy may be improving somewhat, to put another stress test on top of that. If you think about the last two years, the industry had gone through a significant stress test in actuality, and then we were getting a stress test on top of that. So I think that's enough.

REP. QUIGLEY: But you know what the stress test was that we just went through.

MR. LEWIS: Right.

REP. QUIGLEY: If Merrill had gone through that stress test, and you had gotten the results prior to the board's vote, would it have affected what your board did?

MR. LEWIS: I don't know if -- the stress test, of course, came after the fact of all of this happening. What we didn't project, and what nobody that I know projected, was the severity of the credit crunch, or the credit crisis that occurred during that fourth quarter. It wasn't that we hadn't identified the instruments. We just didn't see the depth of the decline that happened during that quarter, and most people didn't.

So to answer your question, if in fact we had been able to predict that, no, we would not have done the deal, because the hole would have been too big.

REP. QUIGLEY: So you don't think that this stress test would have indicated the problems that Merrill was going to face, because you couldn't have predicted the fourth-quarter collapse?

MR. LEWIS: No, sir, I don't know of anybody that would have predicted that. And actually, you can see some evidence of that in the fact that virtually every major bank had an operating loss in the fourth quarter. And even the financial analysts were not predicting those losses, you know, prospectively.

REP. QUIGLEY: Sure. Switching ground just here for a second, questions.

You also acquired, with that acquisition, a significant ownership in BlackRock?

MR. LEWIS: Yes, sir, 49.9 percent.

REP. QUIGLEY: Okay. I'm aware -- they do have contracts with the Federal Reserve and the Department of Treasury, BlackRock?

MR. LEWIS: Yes, they do. Well, I think they do. I -- we don't manage them. But --

REP. QUIGLEY: I'm sorry?

MR. LEWIS: We don't manage the company, but I have heard they do have contracts, yes.

REP. QUIGLEY: So you may not know, then: Were any of these contracts given to Black Rock in furtherance of financial support to Bank of America from the government?

MR. LEWIS: No. There's a big distinction in the management of the two companies, and we, in fact, make it a point not to be part of the management team.

REP. QUIGLEY: But you could see the potential for a conflict of interest in -- you have to have some control over them.

MR. LEWIS: We actually don't. But I do see the cosmetics of the potential conflicts.

REP. QUIGLEY: And cosmetics are becoming important.

MR. LEWIS: They certainly are, yes, sir. And I --

REP. QUIGLEY: So how do you avoid even the appearance of conflicts of -- or impropriety in that vein?

MR. LEWIS: Well, you make it very clear in terms of how the company's managed that you have nothing to do with their management. And it's -- it is pretty clear in the bylaws of the company that we do not manage the company.

REP. QUIGLEY: Very good. Thank you.

REP. TOWNS: All right. We now go to one of our senior members in Congress in terms of service, not age, Marcy Kaptur from Ohio.

REP. MARCY KAPTUR (D-OH): (Laughs.) Thank you, Mr. Chairman. You're a very diplomatic man.

Mr. Lewis, thank you for appearing this morning. As you can tell, there are serious questions being raised about how much you actually knew about Merrill Lynch's condition -- and, indeed, the condition of Bank of America -- that you then did or didn't share with your shareholders.

And I'd like to cast a wider lens on a pattern of behavior of Bank of America that -- and perhaps other institutions in our country -- that some have dubbed "crony capitalism" that has led our nation to the precipice that it now faces.

On August 20th, 2007, the Federal Reserve replied to a Bank of America request to waive banking regulation that limited the amount that federally insured banks can lend to related brokerage companies to 10 percent of banks' capital. Until that point, banking regulation was that banks with federally insured deposits should not be put at risk by brokerage activities.

Four months after that waiver was provided to Bank of America, Bank of America bought Countrywide, which had proven to be the worst subprime lender in our nation. And I'd like to place in the record a report by the Center for Public Integrity that documents that.

And the question that I have is, who headed Bank of America at the time that the request was made of the Fed to waiver that, to allow Bank of America to enter into bad brokerage activity?

MR. LEWIS: I was the chairman of -- and CEO of the company.

REP. KAPTUR: You were chairman and -- so you made the request?

MR. LEWIS: I didn't -- I really -- I don't know of this particular request.

REP. KAPTUR: But you are aware that Bank of America then bought Countrywide four months later.

MR. LEWIS: Yes, ma'am, I am very aware of that.

REP. KAPTUR: Okay. What kind of due diligence was done on their portfolio?

MR. LEWIS: We did a -- we did a great deal of due diligence on their portfolio.

And I'm proud to tell you we bought them; we changed all of their lending practices. We're now -- they're now a prime lender. They are the ones that are doing these loan modifications. They're not doing the Alt-A's and subprimes. Bank of America had gotten out of subprimes in 2001. We were not doing it at all. And so we've turned that company around to a very reputable mortgage lender doing the right things.

REP. KAPTUR: But you had to absorb all their losses?

MR. LEWIS: No, ma'am. We -- in the transaction, there's an accounting thing called purchase accounting, when you mark the assets down before you buy them.

REP. KAPTUR: That sort of leads me to my next question. It has been stated that the Bank of America in 2008 conspired with Merrill Lynch in a sweetheart deal to give out exorbitant bonuses to Merrill executives totalling over $4 billion -- that's with a "b" -- in December 2008, soon after Bank of America got major infusions from taxpayer TARP money. But in 2008 on its federal taxes, Bank of America, though it earned $4.4 billion that year, apparently paid just $120 million in taxes, and deferred $5 billion in taxes for 2008.

Some people are saying that Bank of America acquiesced to the Merrill bonuses because otherwise all of Bank of America's 2008 earnings would have been consumed with bonuses for Merrill. How do you respond to that?

MR. LEWIS: Well, the transaction with Merrill took place on January the 1st of this year. And until that time, they had a separate board and a separate compensation committee.

We had entered into agreement which allowed us to cap the bonuses and to have influence on the bonuses, but that the final decisions would be made by their compensation committee and their board because it's still a separate public company.

So there was not a -- there was not a connectivity fully until after they became a (subsidiary of ?) Bank of America.

REP. KAPTUR: But it certainly looks like a -- I don't want to use the word "hedge," but it certainly looks like financial people inside your company were anticipating what might occur, and those -- the deferral of taxes in 2008 seems most curious.

MR. LEWIS: Well, I'm not a tax attorney and I don't know exactly what the hedging was, but it was not -- it was not -- I don't see the connection to Merrill, because Merrill was -- was, you know, the next year.

REP. KAPTUR: Well, I would sure appreciate, Mr. Lewis, if you could provide for the record what net effective tax your company paid in 2008, because to me it looks like you paid one-fiftieth of what you should, and I'd like to compare what tax rate was paid and the amount that was paid, versus what the average middle-class family in our country paid. I think the record will show you paid actually substantially less.

MR. LEWIS: I'd be happy --

REP. KAPTUR: I have a request, Mr. Chairman, if I could, for information for the record. Mr. Lewis, is it possible that in the spring of 2008 -- I have information that Bank of America bought a portfolio of subprime loans from the Federal Deposit Insurance Corporation that had been previously originated by Superior Bank of Illinois. Subsequently, Bank of America sold those same loans, valued at hundreds of billions of dollars, to investors who as of last year have now suffered major realized losses. Has Bank of America estimated the amount of those losses attributable to the acquisition of the Superior FDIC portfolio sold to Bank of America? And can you provide that to the record?

MR. LEWIS: Yes, ma'am, I'd be happy to do that.

REP. TOWNS: Thank you very much.

MR. LEWIS: Thank you.

REP. KAPTUR: Thank you, Mr. Chairman.

REP. TOWNS: I now yield to Congressman Welch from Vermont.

REP. PETER WELCH (D-VT): Thank you, Mr. Chairman, and thank you, Mr. Lewis, for being here.

A couple of questions. My understanding is that the original transaction started out as a private deal between Bank of America and Merrill Lynch. Correct?


REP. WELCH: And you did the due diligence financial review to make you come to the conclusion that it was in the best interest of the shareholders of Bank of America to proceed. Correct?

MR. LEWIS: That's correct.

REP. WELCH: And then some time after you made this decision, you became aware of the $12 billion additional hole in the balance sheet. Is that correct?

MR. LEWIS: Yes, sir.

REP. WELCH: And that was on December 14th of 2008?

MR. LEWIS: That's when we saw the accelerating losses.

REP. WELCH: Well, that's when the -- "accelerating" as in $12 billion additional?

MR. LEWIS: Correct.


Now the -- your shareholders had already voted to approve the merger based on information that you had provided up to that point. Is that correct?


REP. WELCH: But the $12 billion figure that you became aware of on December 14th was of such magnitude that it made you believe that in your capacity as the CEO, you would have to consider invoking the MAC clause. Is that correct?

MR. LEWIS: Yes, sir.

REP. WELCH: And is it fair to say that the MAC clause would be considered in effect the nuclear option?

MR. LEWIS: I don't -- I don't know --

REP. WELCH: Well, here's what I mean.

If you invoke the MAC clause to get out of a deal that you entered into, then there's obviously reputational consequences and litigation, correct?

MR. LEWIS: There is -- yes, sir, that is a possibility.

REP. WELCH: And if you lose the litigation, there are financial consequences to your shareholders, correct?

MR. LEWIS: Yes, sir.

REP. WELCH: So you wouldn't even consider invoking the MAC clause unless there was something of enormous magnitude and consequence to the company and the shareholders, correct?

MR. LEWIS: That's correct.

REP. WELCH: Now, in order to invoke the MAC clause and avoid the consequences of perhaps losing, would it be prudent, in the ordinary course, to get financial advice from your financial advisers as to the impact of this $12 billion hole on the business plan that justified the original decision to enter into the agreement?

MR. LEWIS: Well, we had finance people looking at all of that, and so we were looking at that issue.

REP. WELCH: Well, obviously -- this is my question: If you found out about a $12 billion additional hole, whatever model you had about payback and value to the shareholders now was called into question, right?

MR. LEWIS: It -- I tried to mention this before, but it extended the amount of time that you would get your payback, yes.

REP. WELCH: It affected shareholder value, correct?

MR. LEWIS: Correct.

REP. WELCH: All right. Basically, two questions: One, did you get a financial analysis that you reviewed before you made a decision to discuss with the Treasury officials the invocation of the MAC --

MR. LEWIS: There was financial analysis that we saw -- that I saw, yes.

REP. WELCH: Okay. These were made available to you?

MR. LEWIS: They were -- yes.

REP. WELCH: And what was the conclusion of those financial analysis?

MR. LEWIS: The conclusion was that you pushed out the -- your payback, or your accretion, because you have -- you had these preferred shares now that you were having to pay back.

REP. WELCH: Well, that's obvious. I mean, the bottom line is, was there a conclusion about what the viability of this transaction was?

MR. LEWIS: Well, we still felt very strongly that the -- all of strategic issues were -- that were being addressed prior to Merrill Lynch were being addressed by the acquisition --

REP. WELCH: Have you made these financial studies available to the committee for its review?

MR. LEWIS: I don't know. I don't know what this committee has.

REP. WELCH: All right. So what you're saying is that you did review financial statements from your advisers -- those being whom, by the way?

MR. LEWIS: Our financial advisers are us.

REP. WELCH: So they're all internal.

MR. LEWIS: Right.

REP. WELCH: And on the basis of that, you decided that despite the knowledge of the $12 billion dollar hole, it was prudent to proceed, correct?

MR. LEWIS: Yes, sir.

REP. WELCH: All right. So whatever threat or whatever word it is we're going to use for Mr. Bernanke and Mr. Paulson's interactions, you had come to an independent conclusion on the basis of financial review by your people that it still made sense for your taxpayer -- for your shareholders to proceed, correct?

MR. LEWIS: No. As I recall, they were done in the context of the -- receiving the money.

REP. WELCH: Let's be clear. You're saying two things now. One, you did an independent financial analysis that said it'll stretch out the payback time, but it still was prudent to proceed. But on the other hand, you had Bernanke and Paulson breathing down your neck, so that was a factor. Are you saying those two things?

MR. LEWIS: No, I -- I don't think I am. I'm trying to say that we --

REP. WELCH: Okay, I'm going to interrupt. I don't understand that, because I think you have said those two things. Another thing that is very important I think to shareholders -- $12 billion is of consequence to you, correct?

MR. LEWIS: Yes, it is.

REP. WELCH: Did you tell your shareholders that you had come upon this information that the deal they voted on is not the deal that was going through because it had a $12 billion hole that was accelerating? Did you tell them that?

MR. LEWIS: The 12 billion (dollars) was what we discovered later.

REP. WELCH: And do you think after-the-fact information is not of interest to investors?

MR. LEWIS: What I do know is that when our lawyers tell us we have a disclosable event, we disclose it.

REP. WELCH: Okay, if you are having one --

REP. TOWNS: Will the gentleman -- I must get to the other gentleman.

REP. WELCH: Can I ask just one final question? If there is an event that you consider so significant that it may allow you to invoke the material adverse consequence contract clause, do you not think that same event is of interest to shareholders and requires you, in your duty, fiduciary duty, to disclose it?

MR. LEWIS: I'd leave that decision to our security lawyers and our outside counsel.

REP. WELCH: You're not CEO?

MR. LEWIS: I am not a securities lawyer.

REP. WELCH: You're not the ultimate one --

REP. TOWNS: I have to interrupt the gentleman.

REP. WELCH: Okay. Thank you.

REP. TOWNS: We have votes, and we have other members who have not had an opportunity.

The gentleman from Virginia, Mr. Connolly. Delighted.

REP. GERALD CONNOLLY (D-VA): I thank the chairman.

Again, Mr. Lewis, thank you for being here this morning. Several questions. One is, when did you decide that the financial losses being incurred by Merrill Lynch should be disclosed to your shareholders?

MR. LEWIS: Again, I don't decide on disclosures. We have securities lawyers, and many times they talk to external counsel to determine that. I'm not --

REP. CONNOLLY: Well, presumably, you -- I mean, I worked for a company. Presumably, you, as the CEO, are in on those conversations?

MR. LEWIS: No, they come to me, and they are done.

REP. CONNOLLY: Right. So when did that happen? When was the decision made, and how was it made, to disclose or not to disclose to the shareholders of your company?

MR. LEWIS: We disclosed the losses at Merrill Lynch consistent with disclosing the agreement we had with the government and consistent with us announcing our earnings on June 6th -- or January the 16th.


MR. LEWIS: Mm-hmm.

REP. CONNOLLY: Why such a long delay?

MR. LEWIS: Again, I'm not a securities lawyer. That is when -- that is when we announced according to schedules given us -- given to us by our lawyers.

REP. CONNOLLY: Were you ever encouraged or pressured by anyone at the U.S. Treasury or by the Federal Reserve not to disclose until January?

MR. LEWIS: No, we were -- we were working on a goal of getting everything done at once.

REP. CONNOLLY: I'm sorry, I cannot hear you.

MR. LEWIS: We were working on a goal of getting everything done at once so that we didn't have an announcement of something that would cause more damage to the economy. But nobody ever told us that we should not disclose a disclosable event.

REP. CONNOLLY: So, for example, nobody at the Federal Reserve and no one at the United States Treasury urged you to manage the timing of the disclosure so that Merrill's earnings and the receipt of TARP money were all disclosed in January?

MR. LEWIS: The target was to do that so that we didn't damage the economy any more.

REP. CONNOLLY: So there were discussions about that with the U.S. Treasury and with the Federal Reserve?

MR. LEWIS: It was about announcing everything at once.

REP. CONNOLLY: I understand, but the timing is interesting. "Let's announce it in January, not in December."

MR. LEWIS: We did --

REP. CONNOLLY: Was there something critical that had happened on Wall Street that made it better in January than December?

MR. LEWIS: There was -- there was not an agreement in -- in December.

REP. CONNOLLY: I'm sorry?

MR. LEWIS: There was not an agreement in December.

REP. CONNOLLY: There was no an agreement among whom?

MR. LEWIS: Among us, us being the Federal Reserve and the Treasury.

REP. CONNOLLY: So there were discussions, but not an agreement in December?

MR. LEWIS: There were discussions, but not an agreement. Yes.

REP. CONNOLLY: Did those discussions involve the secretary of Treasury himself and the chairman of the Federal Reserve at the time?

MR. LEWIS: Yes. Yes, they did.

REP. CONNOLLY: And yourself?

MR. LEWIS: Yes, they did.

REP. CONNOLLY: And the agreement was, let's hold off until January because we're not in agreement yet about what to disclose and when to disclose it?

MR. LEWIS: We did not -- we did not have an agreement, and we had not agreed on all the details or the amounts.

REP. CONNOLLY: Was it -- were the reports that you elected to accept TARP funds true?

MR. LEWIS: I'm sorry, I couldn't hear you.

REP. CONNOLLY: There was a report that you did not want to accept TARP funding. Is that correct?

MR. LEWIS: It is true that we did not think we needed the TARP funds at the time we were asked to take them.

REP. CONNOLLY: And was there any connection between your reluctance in accepting them and the exhortation from Secretary Paulson at that time to accept them and the issue of don't disclose the $12 billion worth of losses you've just discovered?

MR. LEWIS: No, I -- absolutely not. It never came up, no.

REP. CONNOLLY: Why did you accept TARP funds if you didn't think you needed them?

MR. LEWIS: Because after hearing the various regulators, I felt like, given what they were saying about the potential of further deterioration in the economy, that we should have a healthy fear of the unknown.

REP. CONNOLLY: How much in TARP funds did you accept? It's not --

MR. LEWIS: Fifteen billion (dollars).

REP. CONNOLLY: That's a lot of -- that's a lot of money for insurance against the unknown, especially if your initial reaction was "we don't need them."

MR. LEWIS: Yes, but if you then see that credit meltdown of epic proportions that happened in the fourth quarter, it may not have been such a big insurance policy after all.

REP. CONNOLLY: My time is almost up. One final question.

Greg Curl replaced Amy Brinkley as BOA's chief risk officer. Given the fact that Mr. Curl failed to notice $12 billion of Merrill Lynch's losses, is it wise to have Mr. Curl be your chief risk officer? And did you approve of that decision?

MR. LEWIS: Mr. Curl didn't miss the -- miss the instruments which caused the loss. What -- what happened is we did not anticipate the meltdown of such -- of such significant proportions in the fourth quarter. So we -- he had identified everything properly. No one thought things would get as bad as it -- as it did in the fourth quarter.

And -- and I made that decision.

REP. CONNOLLY: You made the decision that Mr. Curl should go ahead to become the CRO.

MR. LEWIS: To become the COO -- I'm sorry, the CRO.

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

REP. TOWNS: Let me thank you, too.

Let me announce that we have two votes on the floor and that we will recess for -- until 12:30, and we will return at 12:30 and of course continue the questions. So the committee's in recess until 12:30. (Sounds gavel.)


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