US role in bank takeover examined

Ken Lewis has been under pressure since the takeover of Merrill Lynch

US lawmakers have accused the US Treasury of "putting a gun to the head" of Bank of America boss Ken Lewis over the bank's takeover of Merrill Lynch.

The allegation, also levelled at the Federal Reserve, was made as Mr Lewis testified in front of Congressmen.

Mr Lewis said he had not been put under undue pressure and the takeover was in the best interests of shareholders.

Bank of America bought Merrill last year, a move that reduced its cash reserves when it needed them most.

'Good intentions'

The House Oversight and Government Reform Committee is investigating claims that the then Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke put pressure on Mr Lewis to close the deal, despite Merrill's financial difficulties.

Why did a private business deal, with no mention of government assistance, end up costing the taxpayers $20bn in January? Edolphus Towns, Democratic Committee Chairman

"This transaction took place in a climate of fear and intimidation by government officials," said Republican Representative Jim Jordon.

Mr Lewis did not agree that he had been pressured into the deal.

"I would say they strongly advised and they spoke in strong terms but I thought it was with good intentions," he said.

The committee said it would call both Mr Paulsen and Mr Bernanke to hear their side of the story.

Mr Lewis has been under intense pressure over the purchase of Merrill - which was approved before shareholders learned of huge losses at the investment bank, and before billions of dollars' worth of bonuses were paid to Merrill employees.

Shareholders even voted in April to oust Mr Lewis as the firm's chairman, following months of criticism over his running of the company.

Bail-out

Bank of America agreed to buy Merrill for $29bn (£17.5bn) last September.

As the crisis in the financial sector intensified, the bank subsequently needed $25bn in capital injections from the Troubled Assets Relief Programme, known as Tarp, the bail-out fund designed to rescue banks reeling from the financial crisis.

At the start of this year, it then required a further $20bn.

"Why did a private business deal, announced in September and approved by shareholders in December, with no mention of government assistance, end up costing the taxpayers $20bn in January?" said Democratic Committee Chairman Edolphus Towns.

The bank was told by the US government earlier this month that it needed to raise $33.9bn - more than any other US bank - in order to weather the crisis.

It subsequently raised $13.5bn through selling new shares as it looked to strengthen its financial position during the economic downturn.