Paulson says acted appropriately on BofA

WASHINGTON (Reuters) - Former U.S. Treasury Secretary Henry Paulson said that he acted appropriately in warning Bank of America Chief Executive Kenneth Lewis that top executives could be ousted if they walked away from a merger with Merrill Lynch.

While Paulson acknowledged in prepared congressional testimony that he told Lewis the U.S. Federal Reserve could oust the bank's management and board if it walked away from the deal, he said Fed Chairman Ben Bernanke never instructed him to indicate to Lewis any actions the Fed might take.

"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," said Paulson, who is due to testify before a House of Representatives panel on Thursday. A copy of the testimony was made available on Wednesday.

Lawmakers have focused on government actions during the Bank of America merger with Merrill to vent frustration at authorities' handling of the financial crisis that has cost U.S. taxpayers hundreds of billions of dollars in financial bailouts while tipping the economy into a deep recession.

Paulson's appearance follows testimony by Lewis and Bernanke before the same House Oversight and Government Reform panel.

Some lawmakers have slammed what they say was government heavy-handedness in pressuring Bank of America to go through with the deal after escalating losses at Merrill came to light.

Others are unhappy over what they believe was government pressure on Bank of America to withhold information from shareholders about Merrill's losses.

As the Obama administration and Congress debate steps to strengthen financial oversight in the wake of the crisis, many lawmakers have questioned whether the Fed should be given an expanded role given concerns about its role in the deal.

In his prepared testimony, Paulson said he told Lewis on December 21, 2008, that the government felt "very strongly" that if Bank of America sought to back out of the deal, it would show a "colossal lack of judgment."

"Under such circumstances, the Federal Reserve could exercise its authority to remove management and the board of Bank of America," he said.

Events behind the scenes of the merger burst into public view in April when New York Attorney General Andrew Cuomo said government officials pressured Lewis to go through with the deal or risk losing his job.

Bernanke told the panel last month he had never threatened to fire Bank of America's management or advised the bank to withhold information. He said the Fed had done nothing illegal or unethical.

The bank's chief executive told lawmakers he had been pressured to go through with the transaction but would not characterize the stance of Bernanke or Paulson as improper.

"They strongly advised and they spoke in strong terms but it was with good intentions," Lewis said.