Ailing Banks Caught Between Regulators' Competing Visions

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, June 11, 2009

The large banks that cannot yet repay federal aid, including Bank of America and Citigroup, increasingly find themselves under pressure from competing branches of the federal government with different ideas about the government's proper role.

Ken Lewis, Bank of America's chief executive, is scheduled to appear before Congress today at a hearing called to examine his company's purchase of Merrill Lynch, a deal sealed with billions in funding from the Treasury Department and now under attack by some House Democrats and Republicans.

Citigroup, meanwhile, has been caught up in a dispute among regulators about whether the company should shake up its management.

And both companies are on the short list of seven large firms subjected to the authority of a new federal official who will decide how much the firms can pay senior employees -- the result of a law passed by Congress despite the objections of the Obama administration.

The pressures highlight the growing divide between banks that repay the government and those left behind. The Treasury has granted 10 companies permission to repay aid received at the height of the financial crisis, but another nine of the largest banks will remain in hock to taxpayers. Bank of America and Citigroup together have taken more than $90 billion from the government, and financial analysts say it is unlikely that either company can repay the government this year. These companies, already working to repair battered balance sheets, now face the added challenge of competing with rivals freed from federal restrictions and scrutiny.

Excerpts of internal Federal Reserve e-mails released yesterday shed new light on the role regulators played in pushing Bank of America to purchase Merrill Lynch, a deal that continues to embroil the company in controversy. Bank of America had agreed to the deal in September, then tried to back out in December.

Fed Chairman Ben S. Bernanke wrote at the time that the company's reversal was "a foolish move" and said "regulators will not condone it." The e-mail was provided by the Fed in response to a subpoena from the House Committee on Oversight and Government Reform, and quoted in a memo circulated by the panel's Republican staff.

Bernanke also told other Fed officials that he would warn Bank of America that senior management would be removed if the bank abandoned the deal and then needed more federal aid. Bank of America's Lewis said in a deposition that he yielded to the pressure.

Lawrence Di Rita, a Bank of America spokesman, said the company had not seen the e-mails and would reserve judgment on the contents, but he said the merger was a good deal.

"Good serious people were working day and night, weekends, to prevent a financial collapse," he said. "The results have proved to be pretty good so far. The results speak for themselves and all of the discussions about looking backward have been hashed and rehashed."

The committee's chairman, Edolphus Towns (D-N.Y.), scheduled today's hearing to explore why the government forced the deal, but Lewis will be the only witness.

Citigroup has received more federal support than any other bank, and it has therefore received the most attention.

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