On Crisis Stage, FDIC Plays Tough

It’s nice to know that the FDIC is now driving banking mergers. Here we see that the FDIC and the Treasury continue to pick and choose who wins and who loses. The gradual destruction of free markets continues.

jg – November 3, 2008
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NOVEMBER 3, 2008

On Crisis Stage, FDIC Plays the Tough

Wells Filing on Wachovia Deal Shows Agency Acting Quickly, Decisively

By DAN FITZPATRICK
Wall St. Journal

In a further sign of the U.S. government's get-tough approach with banks, the Federal Deposit Insurance Corp. threatened to seize Wachovia Corp. last month if it didn't find a buyer, passed on an initial government-assisted takeover by Wells Fargo & Co. and rejected an 11th-hour option that would have allowed the Charlotte, N.C., bank to remain independent, according to a Wells Fargo securities filing Friday.

Before Wachovia's sale, the FDIC gave an ultimatum: sell or be seized. Here, employees at a meeting after the sale.

The FDIC also was a central player in Wells Fargo's surprise re-emergence as the winning bidder on Oct. 3, edging out Citigroup Inc.

The details offer fresh evidence of a government strategy of trying to rid the banking industry of its weakest performers.

This approach, employed in recent takeovers of Wachovia, Seattle thrift Washington Mutual Inc. and Cleveland-based National City Corp., has drawn some criticism as the Treasury moves to shore up certain banks. In agreeing to acquire National City last month, Pittsburgh-based PNC Financial Services Group Inc. used a federal pledge of $7.7 billion in new capital and potentially billions more in tax savings, prompting Ohio politicians to ask why National City was not offered the same sort of U.S. assistance.

"It is still unclear what factors, terms and conditions Treasury and the various regulators are using to make capital investment decisions," Ohio Sen. George Voinovich said in an Oct. 30 letter to Treasury Secretary Henry Paulson. Without a clearer explanation, the senator added, "people start questioning whether Treasury officials are picking winners and losers."

Wachovia's problems emerged before the Treasury rescue plan was available. In mid-September, management and the board considered an array of alternatives: selling core assets, raising $10-15 billion of new capital, offering an investor 20%-40% of Wachovia's voting shares or combining with another company. But after negotiations with two different merger partners didn't work out and a potential deal with the new investor fell through, Wachovia went into the weekend of Sept. 27-28 with concerns about a deposit runoff and its ability to fund its banking activities on Monday, the 29th. If Wachovia couldn't find a partner by the 29th, management told its board, the FDIC would place the company's bank subsidiaries into receivership.

The bank's two remaining options were Citigroup Inc. and Wells Fargo. Citigroup Chief Executive Officer Vikram Pandit had already placed four unsolicited calls to Wachovia in recent weeks to explore a possible transaction, and Wells Fargo Chairman Richard Kovacevich had first discussed the topic with Wachovia CEO Robert Steel on Sept. 20, according to the securities filing.

As the weekend began, Mr. Kovacevich was willing to consider a purchase of Wachovia without any government assistance but backed away from that idea around 7 p.m. on Sunday, Sept. 28, saying the timetable was too tight. FDIC Chair Sheila Bair, feeling that Wachovia's problems posed "systemic risk" to the banking system, told Wachovia she would try to push through a FDIC-assisted transaction over the next several hours.

Sheila Bair

At 12:30 a.m., on Monday the 29th, Wachovia's final effort at keeping its stand-alone status was a proposal that the FDIC provide loss-sharing protection on certain loans, take an equity stake and allow the bank to raise $10 billion in new capital. Wachovia argued its proposal involved less risk to the FDIC than a transaction with Citigroup.

Wells Fargo also came back to the table that morning, discussing a loss-sharing agreement with the FDIC that would limit Wells Fargo's exposure.

The FDIC at 4 a.m. rejected both options in favor of a government-assisted sale of Wachovia's banking subsidiaries to Citigroup, with the FDIC providing the New York bank with protection on a certain Wachovia loan portfolio. If Wachovia's board hadn't accepted the agreement during a 6:30 a.m. meeting that day, the FDIC would have placed Wachovia's banking subsidiaries in receivership and Wachovia Corp. would likely have filed for bankruptcy, according to the filing.

When Wells Fargo re-emerged later that week with a new offer for Wachovia, it was Ms. Bair of the FDIC who first notified Wachovia's Mr. Steel that such a proposal would be forthcoming, and she "encouraged" him to give it serious consideration. Ms. Bair also discussed the matter with Wachovia's general counsel and relayed a message back to Wells Fargo's Mr. Kovacevich that Wachovia needed to see a board-approved merger agreement.

At that point Citigroup and Wachovia had not yet agreed on their final acquisition document, and there were "substantive issues of disagreement" between the two companies, according to the filing.

When Wachovia's board met at 11 p.m. on Oct. 2 to consider the new offer from Wells Fargo, they were told again that FDIC would place the company's banking subsidiaries into receivership over the coming weekend if a merger proposal was not signed by Oct. 3. After board approval, Ms. Bair of the FDIC joined Mr. Steel and Wachovia's general counsel in breaking the news to Citigroup's Mr. Pandit.

Mr. Pandit asked Ms. Bair to consider "the effect of this development on systemic issues unrelated to Wachovia" but the appeal fell flat. Citigroup declined comment for this article but said in an Oct. 9 release that Wachovia approached Citigroup, instead of the other way around, and that "we stood by while others walked away."
Wells Fargo and Wachovia announced their agreement at 7 a.m. on Oct. 3. It now is scheduled to close by the end of the year.

Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com