WASHINGTON - Former Treasury Secretary Henry Paulson says he was justified last year in suggesting that Bank of America Corp.'s chief executive could lose his job if the bank backed out on plans to buy troubled Merrill Lynch.
His admission, included in written testimony for a House hearing Thursday, comes as Congress debates the government's role in managing financial firms that accept billions of dollars in aid.
Bank of America Corp., which went through with the merger, ultimately accepted $45 billion in federal aid, including $20 billion to absorb the financial hit it took from acquiring Merrill Lynch & Co.
Rep. Darrell Issa of California, the top Republican on the House Oversight and Government Reform Committee, said Paulson's testimony makes clear that the government became too involved and misused its power.
"It is a threat to the foundations of our free society when government officials, acting in the midst of a crisis, use dire predictions of imminent disaster to justify their encroachment on our individual liberty and the rule of law," said Issa.
In prepared testimony, Paulson said he told Bank of America CEO Kenneth Lewis last year that reneging on his promise to purchase Merrill would show a "colossal lack of judgment."
Paulson said that "under such circumstances," the Federal Reserve would be justified in removing management at the bank.
"By referring to the Federal Reserve's supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America's regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment," Paulson said.
Paulson said he believed his remarks to Lewis were "appropriate."
Federal Reserve Chairman Ben Bernanke has denied threatening to oust Lewis and said he never told anyone else to, either. But another Fed official suggested otherwise in an e-mail obtained by House investigators.
Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said in a December 2008 e-mail that Bernanke had planned to make "even more clear" that if Bank of America backed out on the deal, "management is gone."
Paulson said Bernanke never asked him to relay the message. But, he added, he believed he was expressing the Fed's opinion that dropping the deal "would raise serious questions about the competence and judgment of Bank of America's management and board."