Washington 'bullied' Bank of America into saving Merrill Lynch from collapse

The strong-arm tactics used by the US government to bully Bank of America into rescuing Merrill Lynch emerged today - highlighting the shift of power from Wall Street to Washington as the financial crisis deepened.

BoA agreed to buy Merrill for $50 billion (£34.7 billion) last September amid fears it could follow Lehman Brothers down the plughole.

At the time it looked like a good piece of business for BoA and its chief executive Ken Lewis, but by late November Merrill's losses were spiralling out of control.

By mid-December Lewis flew to Washington to tell government officials BoA wanted to abandon the deal on legal grounds, arguing the "material adverse effect" clause in the merger document could be triggered by the deteriorating situation.

"I need you to know how bad the picture looks," Lewis told then-US Treasury Secretary Hank Paulson and Federal Reserve chairman Ben Bernanke, according to the Wall Street Journal.

Paulson and Bernanke urged Lewis not to walk away, warning that abandoning the deal would be a death sentence for Merrill.

Two days later Bernanke said BoA had no legal justification for ditching the deal, while a Fed official warned that if it fell through and the bank needed further government aid in future, regulators would consider ousting management.

Lewis was also warned that ditching the deal would spook the markets, spark lawsuits against BoA, and damage its reputation for years.

The deal went ahead, but last month BoA unveiled fourth-quarter losses of $15.31 billion at Merrill and $1.79 billion of its own. The bank also got $20 billion in cash from the government and a $118 billion guarantee to underwrite Merrill's toxic assets.

Key dates in the now ill-fated deal were:

15 September: BoA agrees to buy Merrill for $50 billion.

30 November: Merrill losses have spiralled to $13.34 billion.

5 December: Shareholders approve deal despite "mixed emotions" at BoA.

17 December: Lewis tells officials he wants to abandon the deal.

19 December: Bernanke says the deal must go ahead.

16 January: BoA announces massive losses at Merrill and a $138 billion lifeline from the US government.