BofA CEO Lewis Not Off the Hook

(Adds information on investigation and Bernanke testimony.)

Bank of America (BAC) CEO Ken Lewis may well have been pressured by regulators into completing the Merrill Lynch deal late last year, but ultimately the decision -- and the consequences -- rested with the embattled executive.

Lewis had in September agreed to acquire the troubled investment bank for a $50 billion all-stock deal, but by December Merrill's losses were spiraling out of control. In the three months since the deal was announced, Merrill lost over $15 billion on bad mortgage holdings, and its future was unclear.

But when Lewis informed regulators that he was considering using a "material adverse change," or MAC, provision to walk away from the deal, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson urged him to go forward.

Email correspondence released this week by a House committee certainly indicates unprecedented government intervention into what was purportedly a transaction between independent business. Several top officials were involved in those questionable discussions, among them Bernanke and his staff, soon-to-be Treasury Secretary Timothy Geithner, and his predecessor, Henry Paulson.

In one distasteful message, Mac Alfriend, a senior vice president at the Richmond Fed described his "very preliminary thoughts on getting a pound of flesh out of Lewis." Former Fed director Deborah Bailey also said "management should be downgraded," and that the company "will definitely [have] a price to pay."

The committee characterized such banter as "inappropriate threats," but in testimony on Thursday, Bernanke insisted the Fed didn't bully Lewis into the Merrill deal. He characterized the Fed as an interested party that would have to put more taxpayer dollars on the line to rescue the fragile financial system if BofA walked away.