The US Federal Reserve has denied pressuring Bank of America chief Kenneth Lewis to keep quiet about problems at Merrill Lynch and to press ahead with plans to buy the failing investment bank.
'No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure,' said Michelle Smith, a Fed spokeswoman. She had been asked to comment on documents released by New York state Attorney General Andrew Cuomo.
The documents showed that regulators cautioned Lewis not to disclose the extent of Merrill's troubles because of fears of a 'disaster in the financial markets'.
At the time the US financial system was under huge pressure in the fall-out from the collapse of Wall Street giant Lehman Brothers in September, which resulted in a global credit crunch.
The documents also indicated that top US Treasury and Federal Reserve officials threatened to push out bank management and board members if the takeover were not completed.
The documents released by Cuomo indicated Bank of America wanted to walk away in December from the deal announced in September to take over Merrill, which had been on the brink of collapse at the same time as Lehman Brothers.
They showed Lewis had wanted to stop the Merrill deal because of a 'staggering amount of deterioration' in the Wall Street firm's financial position that had not previously been disclosed.
The disclosures came in a letter from Cuomo to US lawmakers, the Securities and Exchange Commission and the oversight panel established by Congress for the Troubled Asset Relief Program (TARP) - the US's financial bail-out scheme.
According to the documents, Lewis sought to break the merger agreement after learning on December 14 that Merrill Lynch's losses would be far larger than initially believed.
'In six days, Merrill Lynch's projected fourth-quarter losses skyrocketed from $9 billion to $12 billion, and fourth-quarter losses ultimately exceeded $15 billion,' Cuomo said in his letter.
Lewis sought to break the deal by citing a 'material adverse event' but was talked out of this by then-treasury secretary Henry Paulson, who summoned Lewis to Washington, according to Cuomo.
Lewis said he changed his mind about ending the deal after Paulson indicated that Bank of America's 'board and management would be replaced' if the deal were terminated. The Bank of America chief then recommended to his board on December 22 that the deal be completed.
Paulson, through a spokesperson, said the discussions had 'centred on the Fed lawyers' opinion that the merger contract was binding, and the US Treasury's commitment to ensuring that no systemically important financial institution would be allowed to fail'.
After the deal had been finalized, Bank of America received a $20 billion government bail-out in January to help it absorb Merrill. Earlier it had received $25 billion in government capital to help it weather the global financial crisis.
