Paulson Ordered the Code Red

Ken Lewis proved he was the best man to lead Bank of America (BAC) after acquiescing to regulators' pressure to go forward with the Merrill Lynch deal, Former Treasury Secretary Henry Paulson told lawmakers on Thursday.

Paulson faced harsh questioning from members of the House Committee on Oversight and Government Reform, who said he acted inappropriately by bullying the CEO into the deal. Paulson says he did threaten to remove management if it walked away from the deal, confirming what Lewis and Federal Reserve Chairman Ben Bernanke had earlier said.

"I was attempting to send a very strong message to Ken Lewis in terms of how strongly the Treasury and the Fed felt about these matters," Paulson said in response to a question about regulators' heavy-handed tactics.

Paulson and Bernanke have defended their moves by saying the deal was necessary not only for the health of the incredibly fragile financial market last winter, but for BofA and Merrill as well. They also said that a legal analysis by government experts found that it would not have been legally defensible for Lewis to invoke a material adverse change, or MAC, clause to abandon the acquisition.

Paulson Parries Politicians

"[E]xercise of the MAC clause was not a legally reasonable option and, accordingly, that the merger contract was binding," Paulson said in a prepared statement. "Moreover, all public officials involved, including Mr. Bernanke and me, believed that the failure to consummate the merger would likely create immediate financial market instability, would threaten the viability of both firms, and would call into serious question the judgment of Bank of America's leadership."