Former Treasury Secretary Paulson Defends Record
ROBERT SIEGEL, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel in Washington.
MADELEINE BRAND, host:
And I'm Madeleine Brand in California.
On Capitol Hill today, a blast from the recent past. The former Treasury Secretary Henry Paulson defended his handling of the financial crisis. There was a specific reason for Paulson's appearance before lawmakers. They're concerned that he and Fed Chairman Ben Bernanke improperly pressed Bank of America to take over Merrill Lynch and in doing so, ignored the interests of the bank's shareholders.
NPR's John Ydstie has our story.
JOHN YDSTIE: The subject of today's hearing, the Bank of America-Merrill Lynch merger was hatched on one of the most chaotic days of the financial crisis: Monday, September 15th, 2008. Over the previous weekend, Bank of America had refused to buy Lehman Brothers. Lehman filed for bankruptcy that day. But on the same Monday, Bank of America CEO Ken Lewis proudly announced his bank was buying Merrill Lynch. During the coming weeks, the financial markets tanked and Lewis discovered losses at Merrill Lynch were accelerating. He told the Treasury and the Fed that Bank of America wanted to back out of the deal.
Lewis and Paulson discussed the issue in a phone call on December 21st. At today's hearing, Paulson said he told Lewis that he had no legal basis for reneging on the deal and that it would show a colossal lack of judgment if he backed out.
Mr. HENRY PAULSON (Former Secretary of Treasury): And if he did so, it would -could destabilize Bank of America, Merrill Lynch and the financial system, and under those circumstances, the Federal Reserve could replace management on the board.
YDSTIE: A number of members of the committee concluded that Paulson's words did amount to a threat or at least pressure on Lewis to go through with the deal. But Paulson refused to describe it that way. Here's an exchange he had with California Republican Darrell Issa.
Mr. PAULSON: Ken Lewis didn't characterize it as a threat and I…
Representative DARRELL ISSA (Republican, California): No, actually, he didn't - he did characterize it as a threat, he managed to say that he didn't feel threatened while receiving a threat.
Mr. PAULSON: Yeah. I prefer to characterize it as me explaining the Fed supervisory authorities to him.
YDSTIE: Most lawmakers appeared satisfied they'd gotten an adequate, if nuanced, answer on the question of whether Paulson had threatened to fire Lewis. But the chairman of the House Committee on Oversight and Government Reform put a new spin on the question. Democrat Edolphus Towns of New York asked if Paulson had concerns about Lewis' judgment…
Representative EDOLPHUS TOWNS (Democrat, New York): Why don't you just fire him?
Mr. PAULSON: Well, I would say this, remember, Mr. Lewis did not do something that caused a colossal - that showed a colossal lack of judgment. Mr. Lewis was considering this and his board was considering this, and they decided to fulfill their contract.
YDSTIE: One other source of controversy surrounding the Bank of America take over of Merrill is whether Ken Lewis illegally kept information about Merrill's accelerating losses from his shareholders so that the deal could go through -and that the government was aware that was happening and did nothing. Ohio Democrat Dennis Kucinich told Paulson that committee staff had uncovered evidence showing that might be the case.
Representative DENNIS KUCINICH (Democrat, Ohio): Were you aware of concerns at the Fed and Treasury that Ken Lewis' management team failed to do due diligence in acquiring Merrill Lynch and possibly violated securities laws by withholding material information from his shareholders to get the vote for the merger with Merrill?
Mr. PAULSON: I was - I become aware from some of the emails that this committee has released and other document.
Rep. KUCINICH: Did you know at that time?
Mr. PAULSON: That there were concerns? You know, along the lines of what you expressed on due diligence, I had not heard concerns at that time about securities laws.
YDSTIE: This issue of whether there was harm to shareholders will likely be around for a while. Even if the Congress decides not to pursue it, shareholder suits will keep the question alive in the courts.
John Ydstie, NPR News, Washington.