BofA sought lower price for Merrill: documents

People walk past a Bank of America branch in New York August 13, 2009.

WASHINGTON/NEW YORK (Reuters) - Bank of America Corp (BAC.N) considered invoking a contractual provision allowing it to scrap its takeover of Merrill Lynch & Co as a means to negotiate a lower price rather than to back out, internal documents obtained by Reuters on Monday show.

The largest U.S. bank wanted to use the so-called "material adverse clause" to cut the price because of Merrill's soaring losses, according to a December 17 note by a Bank of America board member, whose identity could not immediately be determined.

Four days later, Bank of America Chief Executive Kenneth Lewis spoke with then Treasury Secretary Hank Paulson and told him: "We are still of the view that there has been a (material adverse clause" at Merrill -- every day their numbers get worse" according to one document that outlines the discussion.

The documents shine new light on the last days before the closing of the controversial merger on January 1, which led to Lewis' September 30 to retire as chief executive at the end of the year.

Bank of America turned over the documents to federal regulators and a House of Representatives oversight committee after waiving attorney-client privilege earlier this month.

According to the documents, Lewis also told Paulson the Charlotte, North Carolina-based bank could close the merger if it obtained protection from the "capital hole" that Merrill had created.

It later obtained $20 billion of federal bailout money and government agreement to share losses on $118 billion of assets. The bank last month agreed to pay $425 million to get out of that agreement.

Congress and various regulators have accused Bank of America of failing to adequately disclose various details about the Merrill merger to investors. These included the $3.6 billion of bonuses it let Merrill pay, even as that company was on its way to a $15.8 billion fourth-quarter loss.

During a December 22 board meeting, Lewis told directors the Treasury Department and Federal Reserve were unified in their view that, to scrap the Merrill acquisition would result in "systemic risk to the financial services system" and have adverse consequences for Bank of America.

"The Treasury and the Fed strongly stated that if we were to ... exercise our rights under the (material adverse clause) ... that they would remove the Board and management due to the risk we would create in the system," according to a document outlining talking points for Lewis for the meeting.

Fed Chairman Ben Bernanke has already told Congress the central bank did not tell Bank of America it would take action against the bank's management or board.

Bank of America spokesman Larry Di Rita said the full breadth of the record demonstrates that the bank, "as well as inside and outside counsel were wrestling with very complex issues in a complex time with fragile financial markets, while working to make the best decisions they could for the company, shareholders and the economy."

Bank of America shares closed down 10 cents at $17.16 on Monday, which is 49 percent below where they traded when the Merrill merger was announced last September 15. The shares in the interim fell as low as $2.53 on February 20, Reuters data show.

(Additional reporting by Joe Rauch in Charlotte; editing by Gunna Dickson and Andre Grenon )