How Bad is the Bank of America/Merrill Lynch Scandal?

Bank of America CEO Ken Lewis has testified that former Treasury Secretary Hank Paulson and current Fed Chairman Ben Bernanke essentially forced him to acquire Merrill Lynch despite evidence of its growing losses. Even though this was certainly done with "America's best interests" in mind, it's still a bit troubling. It's especially troubling because early this year, Merill CEO John Thain was forced out for hiding Merrill's red ink. But doesn't Lewis' testimony reveal that explanation as completely, 100 percent bogus? For me this raises three big questions about one of the biggest financial mergers of our time:

First, here are the money graphs from the article:

"Did Paulson and Bernanke abuse their authority by ordering Mr. Lewis to go through with the Merrill acquisition, or did Mr. Lewis threaten to back out in order to squeeze more money out of the federal government?" Towns asked.

Bank of America Chief Executive Ken Lewis, the sole witness at the hearing, agreed with lawmakers under questioning that there was pressure from the government to complete the deal despite growing losses at Merrill.

"But it was in the context of them thinking it was in the best interests of Bank of America and the financial system," Lewis said.

"The threat was not what gave me concern. What gave me concern was that they would make that threat to a bank in good standing," Lewis said.

Republican investigators on the committee prepared a briefing paper that accused Paulson and Bernanke of "putting a gun to the head" of Lewis and Bank of America's board.

"This transaction took place in a climate of fear and intimidation by government officials," said Republican Representative Jim Jordan of Ohio.

And here's what still has me confused:

1) Does this mean that Ken Lewis lied to his his shareholders? As I wrote in April, BofA shareholders voted to approve the merger with Merrill on December 5. Bank of America reported Merrill's loss of $15.84 billion in the fourth quarter on January 16. But Lewis had known that Merrill's asset sheet was poisonous four months earlierin September, when Paulson and Bernanke were "putting a gun to the head" to Lewis' head. Wouldn't that timeline suggest that Lewis certainly did mislead shareholders about Merrill's balance sheet months before he fired Thain for "concealing" something he already knew?

2) Was John Thain screwed? It's pretty clear that Lewis knew about the crap sandwich of assets waiting to emerge in January, but he still had the board vote on the merger in December. When Merrill's loss emerged even worse than all sides expected, Lewis forced out Merrill's chief John Thain for hoodwinking him and shareholders. But, as this testimony makes clear, Lewis wasn't hoodwinked at all. He was completely aware that Merrill was about to implode before the government forced the merger down his throat.

3) How bad is this for Ben Bernanke/the administration? A few months ago, Megan predicted that the fallout could seal the deal that Ben Bernanke will not be returning as the chairman of the Federal Reserve. Does Lewis' testimony reveal what everybody on Capitol Hill already knew and had moved on from, or will the BofA/ML scandal balloon into a meme for the administration in light of recent emails revealing that the government pursued similar strong-arm tactics to force a Chrysler-Fiat merger?