The deal closed Jan. 1, and on Jan. 16 the bank announced it was getting an extra $20 billion capital injection, plus insurance against losses on $118 billion in toxic assets.
Under questioning from lawmakers, Bernanke acknowledged that he had "concerns and questions" about Bank of America's management after it tried to cancel the transaction. And documents released by the committee showed Fed staffers wanted to take "some type of action" against the bank's management, according to one e-mail.
In a Dec. 20 e-mail exchange, Fed official Deborah Bailey said of Bank of America: "Personally, I think management should be downgraded, no more acquisitions, raise some 'real capital,' frequent meetings with the Board, etc. It will definitely (have) a price to pay."
Bailey also notes the bank paid a premium to buy Merrill even though the brokerage firm was on the verge of collapse. "How do you pay a premium and now ask for help? This will not go over well at all," she wrote.
In the exchange, Federal Reserve Bank of Richmond official Mac Alfriend suggested the Fed do "what we did with Wachovia," apparently referring to the Charlotte bank now owned by San Francisco-based Wells Fargo. He then ticked off requirements that included retaining "an independent consultant acceptable to the Reserve Bank to conduct a review of the effectiveness of Wachovia's corporate governance and risk management ... and to prepare a written report of findings and recommendations."
Such an agreement has not been publicly disclosed and the e-mail did not say when the action was taken or whether the review was ever conducted. Wachovia and the Fed declined to comment. Sources contacted by the Observer indicated the bank may not have faced such an action in recent memory.
In May of 2008, then-Wachovia CEO Ken Thompson said the bank and its board planned to hire a third-party consultant to review its financial controls and risk management practices after a series of miscues, but the bank didn't indicate any government involvement. The bank's board ousted Thompson weeks later, and in October his successor, Bob Steel, agreed to sell the bank to Wells Fargo.
The hundreds of pages of e-mails and documents released Thursday made clear that Fed officials and staffers were irritated with Bank of America as the regulators first dissuaded the bank from abandoning the Merrill deal and then arranged a rescue package.
In handwritten notes from a Jan. 9 meeting where regulators were hashing out aid for Bank of America, the writer noted then-Treasury Secretary Henry Paulson's worries about the stability of the financial system. The author of the notes also appeared to attribute a crude remark about Bank of America to Paulson: "BofA is the turd in the punchbowl." That's because there "should be an industrywide solution" for the struggling financial system, but that would "take weeks to put together," the notes continued.
In an e-mail on Jan. 16, Boston Fed president Eric Rosengren compared Bank of America's situation to that of the Royal Bank of Scotland, where the British government took a majority ownership stake, ousted management and replaced directors. "Such a strategy obviously has pitfalls, but I would not want to discard this option prematurely," he wrote.
Bank of America appeared to have resented some of the regulators' demands. In a Dec. 31 e-mail, Bernanke told other Fed board members that Lewis expressed "concern about the local supervision" of the bank, which had told the bank a management downgrade was possible because Bank of America had not cut its dividend fast enough to conserve capital.
"I said that he should keep us informed and that the (Federal Reserve) Board and (the Richmond Fed) would work together on this," Bernanke wrote.
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