Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren't normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill -- which eventually totaled $15.84 billion for the fourth quarter -- could have given BofA's shareholders an opportunity to stop the deal and let Merrill collapse instead.
"Isn't that something that any shareholder at Bank of America...would want to know?" Mr. Lewis was asked by a representative of New York's attorney general, Andrew Cuomo, according to the transcript.
"It wasn't up to me," Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would "impose a big risk to the financial system" of the U.S. as a whole.
Mr. Lewis's testimony suggests how aggressively federal regulators have been willing to behave in their fight to fix the U.S. financial system. The testimony for the first time spreads some of the blame to Messrs. Paulson and Bernanke for Mr. Lewis's decision to keep problems at Merrill under wraps.
"Everybody -- Lewis, Paulson, Bernanke -- eventually agreed that any public discussion of the situation at Merrill would have adverse consequences for the system," according to an individual close to BofA.
A person in government familiar with Mr. Bernanke's conversations with Mr. Lewis said Wednesday that the Fed chairman didn't offer Mr. Lewis advice on the question of disclosure. Instead, Mr. Bernanke suggested Mr. Lewis consult his own counsel.
Mr. Paulson repeatedly told Mr. Lewis that "the U.S. government was committed to ensuring that no systemically important financial institution would fail," according to his spokeswoman.
Mr. Lewis couldn't be reached for comment. A BofA spokesman said, "We had no legal obligation to disclose ongoing negotiations with the government and disclosure of ongoing negotiations likely would have severely disrupted the global financial markets and damaged the bank."
In the transcript reviewed by the Journal, Mr. Lewis didn't say he was explicitly instructed to keep silent about the losses piling up at Merrill. But his testimony indicates that he believed the government wanted him to remain silent. 'Good Part of the Hit'
Mr. Cuomo's investigator asked: "Wasn't Mr. Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses?"
Mr. Lewis said, "Over the short term, yes." But he also said he believed Mr. Paulson's motive was preventing widespread disaster in the U.S. financial system.
According to a person familiar with the matter, Mr. Paulson in March told Cuomo investigators that Mr. Lewis may have misinterpreted some remarks about the Treasury's disclosure obligations as referring to BofA's obligations.
The transcript, which stems from an investigation into bonus payments at BofA conducted by the New York attorney general's office, illuminates the difficult dilemmas that regulators and executives alike have had to wrestle with in recent months. By keeping mum, the CEO of one of the biggest U.S. banks appeared to set aside a basic tenet of American-style finance -- that, above all, companies must disclose material information to shareholders and potential investors
"Regulators are supposed to tell you to obey the law, not to disobey the law," said Jonathan R. Macey, deputy dean of Yale Law School. "If you're the CEO, your first obligation is not to your regulator, it's to your institution and shareholders."
At the same time, regulators were struggling to prevent a systemic panic. In the transcript, Mr. Lewis is quoted saying that the regulators' goal was to put everything in place for the deal to be done, "so that you didn't set off alarms in a tragic economy."
Mr. Lewis's statements highlight a lack of public disclosure that has accompanied the financial crisis since its inception. The crisis has roots in the fact that Wall Street banks didn't adequately disclose the true prices of the toxic mortgage-related assets they held. The government has also been criticized for offering limited disclosure of the details or rationale of some of its bailout strategies, from the forced sale of Bear Stearns Cos., to the $173 billion injection into American International Group Inc. From the Archive
* In Merrill Deal, U.S. Played Hardball 02/05/09
The testimony -- which the New York attorney general plans to release to federal regulators and overseers of bailout money and banks Thursday -- stemmed from an investigation that started when the New York attorney general began examining the circumstances surrounding $3.6 billion of bonus payments to Merrill employees just before the takeover was completed. New York prosecutors are expected to provide the testimony to several regulatory bodies, says a person familiar with the matter.
The new details of Mr. Lewis's interactions with regulators over the Merrill merger coincide with the bank chief's battle to retain control of his company as it continues to struggle. The size of the Merrill losses stunned investors in January, and earlier this week Mr. Lewis gave a dim outlook for the economy, setting aside another $13.4 billion to brace for more credit losses, despite earning a first-quarter profit. Jobs at Stake
The Wall Street Journal previously reported, in a page-one story on Feb. 5, that Mr. Lewis agreed to proceed with the Merrill merger only after Messrs. Paulson and Bernanke said that he and his board would lose their jobs if Bank of America backed out of the deal. Mr. Lewis's testimony with the New York attorney general's office corroborates that account. [Rocky Start]
Mr. Cuomo's office says it has been unable to gather a full picture of the Fed's role in the December discussions because the Fed has invoked a regulatory privilege, allowing it to keep some documents confidential.
Mr. Lewis has previously said that he first considered backing out of the Merrill deal on Dec. 13, when he said his chief financial officer told him projected after-tax losses were "about $12 billion."
Shareholders of the Charlotte, N.C., bank voted to approve the purchase on Dec. 5, and the deal was completed on Jan. 1.
Bank of America agreed to accept $20 billion in new capital from the government and announced the injection, in conjunction with the Merrill losses, with its regularly scheduled earnings release on Jan. 20.
Mr. Lewis has since been vilified by lawmakers and shareholders for his handling of the purchase. Several investors, including TIAA-CREF, a major pension-fund manager, have said they intend to vote against his re-election as chairman. Some argued that Mr. Lewis should have informed shareholders of the potential losses at Merrill before the Jan. 1 closing of the deal.
During his testimony, Mr. Lewis described a conversation with Mr. Paulson in which the Treasury secretary made it clear that Mr. Lewis's own job was at stake. Mr. Lewis still was considering invoking his legal right to terminate the Merrill deal. Mr. Paulson was out on a bike ride when Mr. Lewis phoned to discuss the matter, according to the transcript.
"I can't recall if he said, 'We would remove the board and management if you called it [off]' or if he said 'we would do it if you intended to.' I don't remember which one it was," Mr. Lewis said. "I said, 'Hank, let's de-escalate this for a while. Let me talk to our board.' " —Dan Fitzpatrick and Dennis K. Berman contributed to this article.