But yesterday the Obama administration was pulled more deeply into the scandal as well, after newly unveiled BoA documents suggested that both incoming Treasury Secretary Tim Geithner and incoming senior economic adviser Larry Summers had endorsed the merger as well. From The Washington Post:

Bank of America chief executive Kenneth D. Lewis told the company’s board that Federal Reserve Chairman Ben Bernanke told him “that Geithner and, in addition, Larry Summers, were both on board with the transaction,” according to Dec. 22 talking points prepared for a conference call.

Both the White House and the Treasury Department have denied that Geithner and Summers were influential in pushing the merger, even if they knew about it, the Post reported. But their involvement at any level might explain why the Obama administration’s Securities Exchange Commission was so light in penalizing BoA for a failure to tell its shareholders about $3.6 billion in bonuses Merrill was poised to pay its employees around the time of the merger. The $33 million SEC fine — which effectively charged company shareholders for the alleged crimes of company executives — was thrown out by a federal judge last month.  According to U.S. District Judge Jed Rakoff, “The notion that Bank of America shareholders, having been lied to blatantly in connection with the multibillion-dollar purchase of a huge, nearly bankrupt company, need to lose another $33 million of their money . . . is absurd.” Rakoff has ordered a trial to be held in February.

The saga hasn’t been lost on some lawmakers. The House Oversight and Government Reform Committee has undertaken an extensive investigation into the details of the dubious merger — including those surrounding the decision to hide Merrill’s bonus payments from BoA shareholders. The committee will hold its fourth hearing on the episode this Thursday. Witnesses will include SEC Chairman Mary Schapiro, former SEC Chairman Christopher Cox, and Sheila Bair, head of the Federal Deposit Insurance Corporation.

Lewis and BoA have been in hot water over their government-backed deal to acquire the failing Merrill Lynch in December. At the time of the deal, Merrill was set to pay $5.8 billion in employee bonuses — bonuses that BoA executives didn’t reveal to their shareholders, who approved the buyout.

The saga didn’t escape Democratic leaders on the House Oversight and Government Reform Committee, whose ongoing investigation of the deal has gained public prominence with several Capitol Hill hearings. Rep. Edolphus Towns (D-N.Y.), who chairs the panel, issued a statement Wednesday warning Lewis’s that the probe will continue despite the changing of the guard.

Our investigation has uncovered troubling facts about Bank of America’s acquisition of Merrill Lynch, and Mr. Lewis was at the center of this controversy. We hope that Bank of America’s new leadership will quickly repay American taxpayers and help us finally resolve unanswered questioned about this merger.

Bank of America purchased Merrill Lynch in December, even after then-BoA CEO Ken Lewis voiced reservations that the buyout would be a bad move for BoA shareholders due to the bad financial shape of Merrill.

Lewis later told New York’s attorney general that federal officials, notably Bernanke and Paulson, had pressured him to go through with the sale. To sweeten the pot, the White House eventually put up $20 billion of Wall Street bailout dollars to catalyze the deal.

Appearing before Towns’ panel last week, Bernanke defended his role in the saga. Paulson will have his chance  July 16.

The saga made headlines this spring when former BoA CEO Ken Lewis told New York’s attorney general that he was reluctant to go through with the deal because Merrill was in such tough shape financially, but federal officials, including Bernanke, had pressured him to keep quiet about Merrill’s troubles so the deal could proceed.

Today Bernanke conceded that (1) Lewis had expressed interest in backing out of the acquisition, and (2) he urged Lewis to complete the contract, citing the fragility of the economy at the time. But in his strongest defense yet of the Fed’s handling of that deal, Bernanke also said the Fed put no inappropriate pressure on BoA to finalize the deal.

Here’s the money quote from his prepared testimony:

Importantly, the decision to go forward with the merger rightly remained in the hands of Bank of America’s board and management, and they were obligated to make the choice they believed was in the best interest of their shareholders and company. I did not tell Bank of America’s management that the Federal Reserve would take action against the board or management if they decided [not] to proceed with the [acquisition]. Moreover, I did not instruct anyone to indicate to Bank of America that the Federal Reserve would take any particular action under those circumstances.

Rep. Edolphus Towns (D-N.Y.), who chairs the oversight panel, had subpoened the Fed earlier in the month to obtain documents related to the BoA-Merrill deal. His opening statement at today’s hearing set the appropriate tone.

“This was,” Towns said, “a most unusual transaction.”

It seems only one of those requests was honored.

On Tuesday, Towns and Kucinich — along with Rep. Darrell Issa (Calif.), the senior Republican on the oversight panel — announced that they’ve subpoenaed the Fed for its share of the information.

It’s just the latest in a string of controversies surrounding the merger. In April, reports emerged that Lewis claimed he was pressured by Fed Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson to keep silent about Merrill’s decline at the end of 2008 — as well as $4 billion in bonuses Merrill intended to pay its employees — lest the news spook BofA shareholders and kill the acquisition deal. That deal, originally billed as a private transaction, eventually required $20 billion in federal funds to complete.

The House lawmakers want to know to what extent Lewis’ claims are true.

Yesterday, the Wall Street Journal reported that BofA chief executive Ken Lewis told New York’s attorney general in February that Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson told Lewis to keep mum about Merrill’s steep losses at the end of 2008, as well as $4 billion in bonuses Merrill intended to pay employees, lest the news spook BofA shareholders and kill the acquisition deal.

Geithner, of course, was neck deep in crafting the bailout strategies under the Bush administration, and now Towns, who heads the House Oversight and Government Reform Committee, has joined forces with Rep. Dennis Kucinich (D-Ohio), who chairs the Domestic Policy subpanel, to ask what role Geithner played in the controversial BofA-Merrill deal.

From the lawmakers’ April 23 letter to Geithner:

If Mr. Lewis’s statement, as reported by the Journal, of discussions that occurred between Mr. Paulson, Mr. Bernanke and himself is accurate, then federal officials were potentially involved in knowingly denying BOA investors material information.

The lawmakers are asking Geithner for “all documents prepared for internal use related to discussions with Bank of America and/or Treasury about compensation packages, bonuses, annual losses at Merrill Lynch, and federal guarantees against losses on Merrill Lynch assets, for the period August I, 2008 through January 19,2009,” as well as “discussions relating to public disclosure of information about compensation packages, bonuses, and annual losses at Merrill Lynch.”

A similar version of the letter went to Bernanke. And unlike the first inquiry over executive compensation limits — which Geithner still hasn’t responded to, even eight days after the requested deadline –  Towns and Kucinich are threatening to subpoena the officials for the information if they don’t get it otherwise.

The implications of Mr. Lewis’ testimony, if accurate, are extremely serious. Under these circumstances failure to comply with the Subcommittee’s request raises the prospect that we will be forced to consider compulsory means to achieve compliance with our request. However, we would prefer your voluntary compliance.

Guess the Obama honeymoon is officially over.

“In a crisis, transparency, accountability and a coherent plan with clear goals are essential to maintain the confidence of the public and capital markets,” he told the panel.

Funny, then, that Geithner is ignoring a congressional inquiry into Treasury’s plan to circumvent congressionally imposed restrictions on bailout recipients by creating a middleman through which to channel bailout funds. That strategy — first reported April 4  by The Washington Post — would allow the bailed out firms to claim that they haven’t received help directly from the government because the money would be funneled through these “special purpose vehicles” — a technicality allowing firms to ignore certain behavioral conditions, including executive pay limits.

The plan drew fire from Rep. Edolphus Towns (D-N.Y.), chairman of the House Oversight and Government Reform Committee, who fired off a series of questions to Geithner about why the Treasury thinks it has the authority to ignore Washington’s legislative branch.

Towns requested answers by last Thursday, but Towns spokeswoman Jenny Rosenberg said today that Treasury has yet to respond.

How’s that for maintaining the confidence of the public?

As The Washington Post reported earlier this month, Treasury’s strategy is to create virtual middlemen through which the bailout funds will pass, thereby side-stepping certain behavioral restrictions on the banks, like limits on executive pay.

The plan caught the eye of House Oversight and Government Reform Chairman Edolphus Towns (D-N.Y.), who last week sent a letter to Geithner requesting responses to six questions, most challenging the administration’s authority to ignore Congress as it pertains to regulating bailout spending.

Geithner was asked to respond by 4 p.m. today. No word yet if that’s happened, but you’ll know when we do.

1. Is it your position that the executive compensation limits and federal ownership requirements imposed by Congress on bailout funding do not apply to the ultimate recipients of that funding if it is passed through special entities or special-purpose vehicles? If so, please explain the basis for this position.

2. Has the Treasury Department conducted or obtained from another federal agency or other entity an analysis of the limits on the executive compensation restrictions and other conditions Congress placed on the use of bail out funds? If so, please describe and provide copies of any such analysis.

3. Has the Treasury Department considered establishing or established any special entities or special-purpose vehicles through which it has funneled or plans to funnel bailout funds to banks or other companies? If so, please identify and describe in detail all such special entities or special-purpose vehicles.

4. American International Group, Inc. (AIG) has now received more than $180 billion in bailout funding, of which at least $40 billion was apparently funneled directly to the largest counterparties to AIG transactions. It is still unclear as to why these payments were made at 100 cents on the dollar, far more than these counterparties would likely have received had AIG filed for bankruptcy. Was AIG a “special entity” or “special-purpose vehicle” that permitted these payments to be made without imposition of the executive pay restrictions and federal ownership requirements required by law?

5. Has the Treasury Department received from the Department of Justice any advice or opinion to the effect that the executive pay limits and other conditions Congress placed on the use of bailout funds do not apply to payments funneled through special entities or special-purpose vehicles? If so, please provide copies of all records of such advice or opinions.

6. Has the Treasury Department advised or directed the Federal Reserve that the executive pay limits and other conditions Congress placed on the use of bailout funds do not apply to payments made to special entities or special-purpose vehicles? If so, please explain and provide copies of all records of such advice or direction.

Towns asks Geithner to respond by 4 p.m. April 16. Don’t hold your breath.

The Treasury’s strategy, first reported by The Washington Post over the weekend, is a clever one: Bailout money shuffled to banks through these “special purpose vehicles” won’t technically have come from the government — at least not directly — and therefore conditions like executive pay limits won’t apply to the eventual recipients. (Those familiar with the Enron scandal will remember the dubious role of special purpose vehicles.)

But it’s a strategy that might also be illegal, and Rep. Edolphus Towns (D-N.Y.), who just happens to chair the House Oversight and Government Reform Committee, is looking into the matter. In a letter sent Monday to Treasury Secretary Tim Geithner, according to The Post, Towns didn’t mince words about his displeasure with the end-around Congress:

“It would be unconscionable and irresponsible for the Treasury Department to permit excessive pay practices to continue at companies that have been rescued by the taxpayers,” Towns wrote in the letter. “I will strongly oppose any attempt to weaken or bypass these restrictions, or to violate the spirit, if not the intent, of these laws.”

The sharp tone of the letter marks a rare instance of a powerful Democrat calling the young Obama administration — still very much in its honeymoon phase, in the eyes of most Democrats — onto the carpet.

No response this morning from Towns’ office*, but this is an episode worth watching.

*Update: Towns’ spokeswoman Jenny Rosenberg said that the Treasury has yet to respond to the letter.