(Adds information on investigation and Bernanke testimony.)

Bank of America

(BAC) - Get Report

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.

As such, Bernanke and his staff advised Lewis to complete the already-announced transaction for the benefit of both the company and the financial system that expected its consummation.

"Importantly, the decision to go forward with the merger rightly remained in the hands of Bank of America's board and management," Bernanke said before the House Oversight and Government Reform Committee.

Essentially, he's right.

While evidence uncovered by the committee certainly throws rotten egg all over the face of regulators, Lewis could have walked away from Merrill. Instead, he went ahead with the merger, accepting another $20 billion from the Troubled Asset Relief Program, and putting BofA in a vulnerable position.

Bank of America is still encumbered by $45 billion in debt to the government, not including dividend payments. It must boost Tier 1 capital levels by nearly $34 billion before it can consider raising funds to pay those TARP dollars back. Though

Wells Fargo

(WFC) - Get Report

also remains under TARP's shackles, other competitors like

JPMorgan Chase

(JPM) - Get Report


Goldman Sachs

(GS) - Get Report


Morgan Stanley

(MS) - Get Report


Capital One

(COF) - Get Report


US Bancorp

(USB) - Get Report

have already begun to pay back bailout cash.

The email correspondence indicates that Lewis knew there were severe risks involved, suspected that shareholder groups would be livid about the lack of disclosure, and sought a scapegoat for the Merrill decision early on.

"I think he is worried about stockholder lawsuits; knows they did not do a good job of due diligence and the issues facing the company are finally hitting home and he is worried about his own job after cutting loose lots of very good people," Mac Alfriend, a senior vice president at the Richmond Fed, says in another message.

One message, apparently from Bernanke to other Fed officials, says Lewis had asked whether he "could use as a defense that the government ordered him to proceed for systemic reasons," although there has not been any direct evidence disclosed -- at least not yet -- that the government went quite that far.

Furthermore, even if regulators had overstepped their bounds, Lewis could have made public any demands he deemed inappropriate. In fact, he was required to do so, and to walk away from the thorny acquisition, if he thought it was in the best interest of Bank of America.

The key question for BofA shareholders today is whether Lewis invoking the MAC clause and disclosing regulatory tactics would have done his company more bad than good. Given what he knew at the time -- that Merrill was in deep trouble, the markets would dive further if BofA abandoned it, and that regulators would not be happy if he came clean -- did Ken Lewis do the right thing?

"If he represents the shareholders then he should have walked away from this deal," says Dan Seiver, finance professor at San Diego State University. "You say, 'Merrill Lynch is going down the tubes and I'm going to walk away.' But I think it's a stretch to assume that any CEO would do that. He wanted to keep his job; he didn't want to fall on his sword."

The opposite argument can easily be made -- and has been, by none other than Lewis himself.

Since first stating in sealed testimony that Paulson and Bernanke threatened to replace him and BofA's board if he walked away from the deal -- implying that he had no choice -- Lewis has adopted a softer tone in public. He has since worked to emphasize concern for shareholders over concern for his own salary and reputation.

In testimony before the same House committee on June 11, Lewis asserted that abandoning the Merrill deal would have caused "systemic havoc or necessitated an AIG-style government bailout" -- neither of which would have served BofA shareholders well. He also said that Merrill will ultimately add great value to the company, noting its huge profitability in 2009. Merrill contributed over $3 billion, or 88%, of Bank of America's first-quarter profit.

"Certainly the acquisition of Merrill came with risks, and some of those risks materialized in the fourth quarter of 2008, when Merrill began recognizing significant losses," said Lewis. "The Merrill acquisition, however, also came with the promise of significant long-term rewards -- rewards that Bank of America and its shareholders are already beginning to reap."

But in December of 2008, Lewis didn't know that for certain. His options were to close the deal and keep quiet about regulators' heavy-handed tactics, or come clean about what was going on behind closed doors, and decide that BofA would not acquire Merrill after all.

Today, Merrill's "thundering herd" of brokers and executives -- its chief source of profits -- are flocking out the door for sweeter deals at competitors that aren't facing the same scrutiny, or TARP-related salary caps as BofA. Lewis knows this and knows that angry shareholders voted to strip him of his chairmanship at BofA's annual meeting in April.

He also knows that his board has undergone a massive shakeup, ejecting some of his loyal supporters in favor of outside leaders with more banking or regulatory experience. He has pledged to stay at the helm of BofA until it begins repaying TARP dollars, but he knows that may be a long road ahead, and that his days may be numbered.

"I think he made two ill-advised acquisitions that were going to build his empire and his prestige and such," says Seiver, referring to Merrill and BofA's other troubled acquisition, Countrywide Financial. "But I don't think they were going to help shareholders of Bank of America and in the end, maybe it didn't help him."

The decision to finalize the Merrill deal wasn't an easy one and wasn't lightly made. Whether it was the right choice is up for debate. It may not be determined until many years ahead, when it's clear how Merrill performs as a fully integrated component of a private, independent financial institution.

Perhaps the answer lies in how long that takes.