July 15, 2009 -- In prepared remarks for a Congressional hearing obtained today by ABC News, former Treasury Secretary Hank Paulson admits telling Bank of America CEO Ken Lewis that the Federal Reserve could remove the bank's board members if they backed out of their proposed merger with Merrill Lynch last December.

On Thursday morning, Paulson will defend his actions before the House Oversight Committee in the last of three hearings that the panel has conducted on the controversial merger.

When Bank of America considered scuttling the merger last December after discovering a $12 billion loss at Merrill, Paulson told Lewis that such a decision, citing the "material adverse change" -- or MAC -- clause, would damage the entire financial system and could result in government-imposed changes in management.

"I mentioned the possibility that the Federal Reserve could remove management and the board of Bank of America if the bank invoked the MAC clause. I believe my remarks to Mr. Lewis were appropriate," he says.

Click Here To Read Paulson's Full Prepared Testimony

"I explained to him that the government was supportive of Bank of America, but that it felt very strongly that if Bank of America exercised the MAC clause, such an action would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch, and the financial system," Paulson continues. "I intended to send a strong message."

However, Paulson emphasizes that Fed Reserve Chairman Ben Bernanke never asked him to indicate "any specific action the Federal Reserve might take." Rather, Paulson says he was simply expressing what he believed was "the strong opinion" held by the Fed -- and shared by the Treasury -- that a Bank of America pull-out was "not a legally viable option … threatened significant harm to Bank of America and to the financial system … [and] would raise serious questions about the competence and judgment of Bank of America's management and board."

The distinction is crucial because Bernanke told the House panel on June 25 that he had never personally threatened to remove Lewis or the bank's board members. In what became to some extent a question of semantics, Bernanke acknowledged that he did have concerns about the bank's management. In response, Rep. Jason Chaffetz, R-Utah, stated, "I'm just not buying that. I think that's a threat."

So did the government's actions constitute a threat? An aide to the House panel's majority staff said that Paulson's testimony "supports the theory that Lewis was engaged in a shakedown."

In the panel's first hearing on the matter, held June 11, Lewis gave the committee his impression of the government's actions. "I would say they strongly advised and they spoke in strong terms, but I thought it was with good intention," he said. Ultimately, Bank of America agreed to proceed with the deal and eventually received another $20 billion in taxpayer bailout money.

Whatever took place, Bernanke, Lewis, and Paulson all appear to agree on one thing: the merger was the right move.

"It's protected our economy and it was a good deal for taxpayers," Bernanke told the committee last month. "I have nothing to regret about the whole transaction."

In his prepared testimony, Paulson echoes those views. "Bank of America's completion of the merger, and the subsequent assistance from the government, not only protected our country's financial system, but also was in the best interest of the shareholders, customers, employees, and creditors of Bank of America and Merrill Lynch," he says.

Another question is when do the ends justify the means?

"What we can take away from Mr. Paulson's testimony is that his threat of removing management and the board of Bank of America was a strong message that he believed was consistent with the beliefs of the Treasury and the Fed," said Kurt Bardella, spokesperson for Republicans on the House committee. "The question that remains now is do committee Democrats believe that Secretary Paulson's use of threats and intimidation were inappropriate or justified?"

The committee's ranking member Darrell Issa, R-Ohio, has accused the Fed of orchestrating a "shotgun wedding" and engaging in a "cover-up" to hide its involvement in the merger talks from other government agencies.

Overall, Paulson says that while the government's responses "were not perfect," but he adds, "I am confident that our responses were substantially correct and that they saved this nation from great peril."

"Without the actions taken in 2008, that suffering would have been far more profound and disturbing," he says, noting, "The most dire of consequences were averted."