Fed Chairman Ben Bernanke told a congressional panel that the regulator asked the bank to "look at top management and make changes to its board" after Bank of America proceeded with the deal and accepted another dose of government aid in January. It was the clearest signal yet that the Fed, in recent months, has had a heavier hand in the bank's operations and an unfolding board shake-up.

Documents released by the committee indicate Fed staffers in December wanted to downgrade their ratings of Bank of America's management and take some type of supervisory action.

A Fed spokesman declined to comment on any demands made of the bank. Bank of America spokesman Jim Mahoney said he couldn't discuss specific regulatory actions, but said in "the aftermath of the government stress test and in the current environment those kind of reviews are taking place across all of the major banks."

In recent weeks, Bank of America has announced the retirement of longtime chief risk officer Amy Woods Brinkley and a revamp of its board, which has included the addition of four new directors and the departure of six members. Bernanke said the Fed is not involved in Bank of America's day-to-day management, but is reviewing the bank's capital, assets, liquidity and leadership.

In Thursday's hearing of the House Oversight and Government Reform Committee, Bernanke was the only witness to testify. But Bank of America chief executive Ken Lewis, who testified this month, remained a focal point as lawmakers probed Lewis' motivation for trying to back out of the deal and the pressure he faced from the government to move forward.


Asked whether the continuing scrutiny threatened Lewis' job, Mahoney, the Bank of America spokesman, pointed to remarks by Bernanke in which the Fed chair indicated the Merrill deal had worked out in the end.

"In Washington today, Chairman Bernanke indicated that Bank of America and Merrill Lynch are on a healthy path, that the transaction protected the economy, stabilized the markets and was a good deal for taxpayers, " Mahoney said. "I would say that's a very, very strong report card for Ken Lewis."

Bank of America's shares closed flat at $12.35 Thursday, a day in which the bank said it has raised more than the $33.9 billion in capital required by the government stress test.

Amid a global financial meltdown in mid-September, Bank of America agreed to buy Merrill after less than 48 hours of negotiations. When Merrill's losses ballooned in the fourth quarter, Lewis attempted to back out in December, but Fed and Treasury officials strongly objected. 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.