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Paulson defends his response to economic crisis

July 16, 2009|Binyamin Appelbaum | Appelbaum writes for the Washington Post.

Former Treasury Secretary Henry M. Paulson plans to tell a House committee today that he was right to pressure Bank of America Corp. to complete its acquisition of Merrill Lynch & Co. because allowing the deal to fall apart would have damaged the companies and the broader economy, according to a copy of his prepared remarks.

The strongly worded testimony makes no apologies for the government's actions, which have become the subject of considerable controversy. Paulson acknowledges, for example, that he warned Bank of America that its senior managers could be removed if the deal fell through.

He says the warning was issued because "it would be unthinkable for Bank of America to take this destructive action for which there was no legal basis and which would show a lack of judgment."

Paulson also plans to deny that the government inappropriately pressured Bank of America to withhold information from its shareholders about an agreement to provide the company with additional financial aid.

Bank of America signed the deal to buy Merrill Lynch in September, without federal support, but only completed the transaction in January after the Treasury Department agreed to invest an additional $20 billion in the company and to limit its losses on a portfolio of troubled loans.

The House Committee on Oversight and Government Reform already has heard testimony on the government's role in the merger from Kenneth D. Lewis, Bank of America's chief executive, and from Ben S. Bernanke, chairman of the Federal Reserve. The hearings have become part of the broader debate about overhauling financial regulation.

Democrats argue that regulators allowed Bank of America to squeeze additional aid from the government, and that the secrecy surrounding the episode shows the need for additional oversight of the Fed and other regulators. Republicans argue that the government forced a private company to complete a deal it no longer wanted, and that the episode highlights the need for regulators to be restrained. Members of both parties are likely to press Paulson today to support their positions.

"Much of the story remains unclear," said Rep. Edolphus Towns (D-N.Y.), chairman of the oversight committee. "I will ask Mr. Paulson the same questions that I have asked Mr. Lewis and Chairman Bernanke -- was Bank of America forced to go through with the deal, or was this just an old-fashioned shakedown?"

Paulson's testimony fits neatly with that of Lewis and Bernanke in one key respect. Lewis testified that regulators pressured him to complete the deal, and Bernanke testified that the Fed did not apply any pressure.

Paulson, who is now working on a book about his role in the financial crisis, plans to tell the committee that he communicated to Bank of America his understanding of the Fed's position, but that he was never asked directly by the Fed to do so.

"My words in speaking to Mr. Lewis were my own," Paulson's prepared testimony says. "I also want to make clear, however, that I was expressing what I am confident was the strong opinion of the Federal Reserve."

Paulson goes on to say that this understanding was based on "meetings and several phone calls."

Internal Fed e-mails obtained by the committee ahead of its earlier hearings show clearly that Paulson's understanding was correct -- senior Fed officials held internal discussions about issuing such a warning to the bank's executives.

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