Did Bernanke Bully BOA?

A new report by the New York Attorney General says that government officials bullied Bank of America Chief Ken Lewis into accepting a merger with Merrill Lynch--then ordered him to keep mum about losses at Merrill.

What's at stake? The integrity of the government's bailout actions, for one. Federal Reserve Chairman Ben Bernanke's reputation, for another. And of course Lewis' job.

Thursday, New York Attorney General Andrew Cuomo released documents charging that in December former Treasury Secretary Henry Paulson pressured Lewis into accepting the merger or risk a management shake-up at Bank of America. Lewis was hesitant about the merger because Merrill's projected fourth-quarter losses had jumped from $9 billion to $12 billion in just one week. They eventually topped $15 billion.

Equally as important, Lewis didn't make Paulson's threat public, nor did he tell Merrill Lynch or warn shareholders about the staggering losses. According to a letter to lawmakers and regulators, Paulson and Bernanke told him to keep mum.

"I was instructed that 'We do not want a public disclosure,'" the letter quotes Lewis as saying.

Federal Reserve officials didn't return a request for comment. Neither did a spokesperson for Paulson, who has taken up residence at Johns Hopkins University's School for Advanced International Studies. Don't be surprised if both men are soon called before Congress to testify about their actions.

It's not yet clear if any of this behavior was illegal. Paulson is out of government now, so his role going forward is limited. But the news could seriously damage Bernanke's credibility if he's seen as prodding a bank to accept a questionable merger and urging bank officials not to disclose important information about it. The Fed chief has developed a reputation as someone who's brought more transparency to the inner workings of the Fed. Recently he even appeared on the news program 60 Minutes to explain the government's response to the financial crisis.

Finally, there's the fate of Lewis to consider, and some are already using the report by Cuomo's office, first reported by The Wall Street Journal, to call for the Bank of America boss' head. The Change to Win Investment Group, which works with union-sponsored pension funds, is urging shareholders to vote out Lewis and several board members at Bank of America's annual meeting April 29.

The news "underscores why Bank of America needs a CEO and board of directors that will put the interests of shareholders ahead of their own interest in self-preservation," the group said in a statement.