Last April we broke the news that Bank of America had no legal basis to threaten to the US government that it would walk away from buying Merrill Lynch, a story we followed up onsince based on internal bank documents we obtained from BofA.

And now Congress plans to grill Bank of America executives over whether BofA wrongfully used that threat to get $20 billion in taxpayer money to buy the damaged brokerage.  

Specifically, House Democrats Ed Towns and Dennis Kucinich are holding another hearing into the BofA-Merrill deal in order to probe whether BofA knew it did not have a basis for claiming a "material adverse change" [MAC] clause to cancel the merger.

BofA instead used that MAC clause as a cudgel to get $20 billion in taxpayer money, no strings attached. A MAC clause let's an acquirer walk away from a target.

BofA's former top counsel, Timothy Mayopoulous, will tell the committee that the bank knew ahead of time it had no legal basis to invoke the MAC clause in negotations with the US government, but did so anyway.

Top bank insiders gave me the deal's MAC clause, which indicates it was ironclad. The MAC says BofA could not walk away from Merrill even in the event of:

Losses at Merrill Lynch

Losses in value of Merrill's “asset marks”

Merrill's “failure…to meet earnings projections”

Changes in the price of Merrill's “common stock”

“Acts of terrorism or war”

“Losses of employees”

Among the key witnesses scheduled to testify is Brian Moynihan, BofA's president of consumer and small business banking at Bank of America and a potential replacement for CEO Ken Lewis, who stepped down under fierce criticism over his handling of one of the government's most controversial bailouts.

Merrill's John Thain was also ousted, as well as a number of board directors, after BofA accelerated $5.8 billion in bonuses to Merrill workers into December, ahead of disclosing $15 billion in losses at Merrill to bank shareholders. Merrill's bonuses are usually paid out in January.

BofA and Merrill had already received $25 billion in taxpayer funds prior to the merger--again, with few strings attached. 

At issue is the fact that BofA hid Merrill's mounting losses to shareholders who voted on the merger on Dec. 5, 2008, more than $15 billion in the fourth quarter of 2008. SEC chairwoman Mary Schapiro has since said BofA had a duty under the law to disclose those losses.

BofA also hid from shareholders the fact that it planned to invoke the MAC clause with the US government in order to get taxpayer money to buy Merrill.

And BofA did not use the MAC clause to get Merrill to lower its sale price. BofA eventually bought Merrill for $17 billion, after it got $20 billion in taxpayer money.

Former Treasury secretary Paulson at the time said that invoking the MAC would demonstrate a "colossal lack of judgment." Federal Reserve chairman Ben Bernanke said in an internal email that he thought the threat to use the MAC was a "bargaining chip." A Fed official confirmed this email to Fox Business.

And now BofA's former top counsel Mayopoulous will concur when he testifies on his knowledge of the behind the scenes negotiations. Mayopoulous was fired earlier this year, and will tell Congress he was asked to leave the premises immediately, after turning in his severance papers, corporate ID, company credit card, Blackberry and office keys.

Fox Business has obtained Mayopoulous's testimony:

“The Committee has asked what legal advice Bank of America received regarding the 'material adverse change' provisions of the merger agreement. To the best of my knowledge, from the time the merger agreement was signed until the time I left the Company, the only advice I or other lawyers gave regarding these provisions was on December 1, 2008. On that day, Joe Price, Bank of America's Chief Financial Officer, and Greg Curl, then Bank of America's head of Corporate Strategy, asked me to review with them the terms of the material adverse change provisions of the merger agreement. I do not recall why they asked for this briefing (or whether they provided me with a reason at the time). Neither of them suggested to me that they thought a material adverse change had occurred. I reviewed the provisions with Messrs. Price and Curl, and we discussed what they meant and how they should be interpreted. I advised Messrs. Price and Curl that, based on the facts of which I was aware, no material adverse change existed."

Mayopoulous has also said: "I concluded that there was no basis to conclude that a material adverse change had occurred with regard to Merrill Lynch" that would justify nixing the deal.

Recall Fed chairman Bernanke's opening statement at the June 25 hearing of the House Oversight and Government Operations Committee , which also confirms this read of the BofA-Merrill MAC clause:

"... based on our staff analysis of the legal issues, we believed that it was highly unlikely that Bank of America would be successful in terminating the contract by invoking the MAC. Rather, an attempt to invoke the MAC would likely involve extended and costly litigation with Merrill Lynch that, with significant probability, would result in Bank of America being required either to pay substantial damages or to acquire a firm whose value would have been greatly reduced or destroyed by a strong negative market reaction to the announcement."