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Posted: Thursday, Oct. 16, 2008

Wachovia eyed big Buffett investment

By Rick Rothacker and Patrick Scott
Published in: A Section

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As dangers in the financial world increased in recent weeks, Wachovia chief executive Bob Steel said Wednesday that he either needed to find a big investor or a merger partner, instead of going it alone.

The Observer has learned that one of those potential partners was famed investor Warren Buffett. Wachovia executive David Carroll told managers in a conference call last month that he talked to Buffett about investing $5 billion in Wachovia in September but the deal never came to fruition, according to three people who were told about the call.

In an interview Wednesday, Steel declined to confirm the possible investment. But a person familiar with the situation said Steel and Carroll had conversations with Buffett. A representative of Buffett's company, Berkshire Hathaway, said the conglomerate doesn't have the staff to handle media questions.

The Buffett investment is another what-if scenario for Charlotte-based Wachovia, which is set to be acquired by San Francisco's Wells Fargo after breaking off an earlier deal with New York-based Citigroup. On Tuesday, Federal Deposit Insurance Corp. chairwoman Sheila Bair said things could have turned out differently for Wachovia if a capital infusion program for banks rolled out this week would have been available earlier.

An investment by Buffett would have been a significant seal-of-approval that could have buoyed confidence in a bank beset by troublesome mortgage assets. In recent weeks, Buffett has helped assuage worries about General Electric and Goldman Sachs by taking stakes in those companies. The investment guru's approach is to buy into what he perceives as undervalued companies on favorable terms.

To be sure, there's no guarantee that raising capital would have been enough to save Wachovia. Despite reaping billions from investors, Lehman Brothers and Washington Mutual collapsed and Merrill Lynch agreed to a takeover by Bank of America.

Steel replaced the ousted Ken Thompson in July as the bank suffered mounting loan losses from its 2006 purchase of Golden West Financial. Initially, he laid out a plan to keep the company independent by generating more than $5 billion in capital by cutting costs and shedding assets. But in late September, amid deteriorating conditions for the financial services industry, Steel said in a news conference Wednesday that Wachovia executives determined the plan “just wasn't going to be the right medicine, given the environment we were in.”

Wachovia talked to investment bank Morgan Stanley about an acquisition and later forged deals with Citi and then Wells Fargo. Another possibility was to receive an outside investment. As they take loan losses, banks have needed to raise more capital to absorb these hits.

Carroll talked to Buffett in September, amid the collapse of Lehman Brothers and mounting woes for the industry, according to a person briefed on Carroll's call, which was held for managers after the Citi deal was announced Sept. 29. Buffett was willing to invest $5 billion if Wachovia raised billions in additional capital from other sources, according to the person. Two other people also said Carroll discussed the possible investment on the conference call. Wachovia declined to make Carroll available for comment.

Under the possible arrangement, Buffett would have bought shares in Wachovia, but after word of the Morgan Stanley talks emerged, Wachovia's shares rose in value. That made it difficult to sell shares to Buffett at a lower price and an investment was never made.

During the week of Lehman's bankruptcy filing, Wachovia shares closed at $10.71 on Monday, Sept. 15, but had risen to $18.75 by Friday, Sept. 19. Wachovia shares closed Wednesday at $6.06, down about 4 percent.

Asked whether a $5 billion investment could have helped the company, Steel said in an interview that, in his view, Wachovia would have needed an infusion of between $15 billion to $20 billion, and not incremental infusions from various sources. “If we had raised $5 billion you'd have been all over me the next day saying that's not enough,” he said. Asked whether a Buffett investment would have given the bank a needed stamp of approval, he said at this point it was a case of “woulda, coulda, shoulda.”

Wachovia raised about $7 billion in capital in April under Thompson. But some analysts have said the bank should have gone back to investors when Steel came on board, even though raising capital by issuing new shares can anger existing investors because it dilutes their holdings.

“There was an opportunity as he came on, because there was a lot of good feeling, to raise common equity and a lot of it,” Gary Townsend, a former analyst who has launched a Maryland-based investment firm, said.

But Ken Thomas, a Miami-based banking consultant, said Steel inherited problems that were too big for anyone to solve. “It's like calling Michael Jordan in with two minutes in the game when you're down 30 points,” Thomas said.

On Wednesday, Steel said he had “mixed emotions” about the sale to Wells as he introduced the San Francisco bank's chief executive, John Stumpf, to a crowd of employees at Wachovia's headquarters complex. Later, he said at a news conference that pursuing other alternatives was a “big decision” and that it came as the world became “a more dangerous place” for financial services companies.

“I think it actually would have been pretty selfish to pursue a go it alone (strategy),” Steel, 57, said at the news conference. “We got to the point, I think, where it was creating more risk for the franchise, it would have put our customers and our clients in a more precarious situation, and would have been less thoughtful with regard to the responsibilities both to our shareholders and our employees. And so I think you crossed that bridge, which was an important one, and then you move into the issue of execution, of how you might do that.”

Asked if Wachovia's fate would have been different if the government had taken equity stakes in banks sooner, Steel also said it was a case of “woulda, coulda, shoulda,” adding he would leave that question to historians.

Steel said the shift from keeping the company independent to finding a partner arose from a combination of factors – the collapse of Lehman Brothers, the Merrill Lynch takeover, government intervention at AIG and the failure of Washington Mutual. The Observer has also reported that the bank faced a silent run on deposits and concerns about its ability to get necessary financing from other banks. With Wachovia on the verge of collapse, FDIC chair Bair instructed Wachovia to forge a deal with Citi, before it switched to the sale to Wells.

“Confidence is a very subtle thing,” Steel said in the interview. “For us to take the risk of people becoming less confident in Wachovia, we had to find other alternatives.”

In the end, Steel said a pairing with Wells was the best option the bank faced. The takeover merges dominant East Coast and West Coast franchises, and executives emphasized the cultural fit.

Ironically, if the Wells deal is completed as planned, Buffett will become an investor in Wachovia anyway. Berkshire Hathaway is Wells Fargo's largest investor.

Staff Writer Christina Rexrode contributed.

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