As CEO of Wells Fargo, Dick Kovacevich had eyed Charlotte from a distance but never thought a merger with Wachovia would happen.
For one, the Charlotte bank would want to keep its headquarters in the city. In a straight acquisition, Wachovia would command too high a price.
Of course, the financial crisis upended those calculations. By then, Kovacevich had stepped down as CEO but remained chairman of the board as the San Francisco bank absorbed the stumbling Wachovia.
Four years later, Kovacevich looks back on the merger as a success.
“I said at the time of the deal that I believed that this would turn out to be the best merger in banking history from both a strategic and a financial standpoint. I believe even more so that that is the case today,” he told the Observer in an interview in his Charlotte hotel room.
“We’re gaining market share and wallet share in frankly every geography throughout old Wachovia. ... The cultures have melded well. I cannot stay enough about what a great deal it was.”
Kovacevich was in town this week for the Wells Fargo Championship, which is continuing through the weekend at Quail Hollow Club. The retired executive gave a speech to bank clients on Tuesday, and teed off Wednesday in the Pro-Am tournament alongside past champion Rickie Fowler.
He spoke to the Observer about his bank’s acquisition of Charlotte-based Wachovia, government regulation and the economy.
Questions and answers have been edited for length and clarity.
Q: What was the mindset of you and your team as you were preparing to bid on Wachovia?
There were a lot of things going on at one time. It was chaotic. I’m sure there were people with stomach acid. I felt relatively confident, very confident I would say, that we had done the analysis correctly. There was obviously risk, but there were also great rewards.
The most relevant uncertainty was what the future was going to be like economically. What I did was I gave the people the scenario that they should use to base the decision. I took responsibility for that. The world was not going to come to an end, it was going to be difficult but we’d get through it. We used conservative assumptions but not so conservative there wasn’t still some risk there.
I felt comfortable that these were risks well worth taking.
Q: Was the long-term vision for the company to have a coast-to-coast presence?
No. If it happened it was fine, if not, we had plenty of room for growth in the West. We looked at Regions, we looked at other companies in the East, especially the Southeast. But again, we were always outbid. I can’t think of anyone we were that serious with.
Q: Moving to the present, everybody’s been talking about the Brown-Vitter bill that would require the biggest banks to have a 15 percent capital ratio. Is it a reasonable proposal?
I don’t think it is a reasonable proposal. I do agree that it must be clear that no financial institution is too big to fail. I think there’s a way of doing that that ensures there is no taxpayer at risk. We should make very clear that if the bank fails, it fails and shouldn’t be rescued.
I think everyone is focused on equity as the means to protect the taxpayer. I think that’s a mistake. I think equity’s important but it’s not the sole way to protect it. If you have so much equity required, the cost of capital is such that the industry will have to do one of two things. It will have to shrink in order to get that equity base. Or even scarier, you’ll have to take more risk because you have so much equity there, to get a reasonable return, the only way to do that is by taking even more risk.
The way you should do it is a combination of equity and debt. These bondholders will, in the case of a failure, be at risk of a haircut or at risk of losing everything, as they would in a normal bankruptcy. It makes a lot more sense.
Q: What’s your latest feeling on government involvement in mortgages, and the government-sponsored mortgage giants Fannie Mae and Freddie Mac?
Fannie and Freddie must go. It probably takes five years to get rid of them totally. We’ve got to go to a private market, no more hybrids. But you still have the FHA around to do whatever the government wants to do for some sort of subsidizing.
The problem is the hybrid. It’s either got to be pure government, on balance sheet, do whatever you want, and pure private. We know it works. I don’t understand what the angst is. It’s simple.
Q: Wells is very big in the mortgage market and has been able to use the Fannie/Freddie model. Would they be able to make as many loans if Fannie and Freddie were discontinued?
I think the Wells Fargo position is somewhat different from mine. I’m just a free market guy.
If someone wants to subsidize, we’ll take advantage of it. It’s the American way, right? I just don’t think it’s good policy.
Q: Does the government do too much to subsidize or promote homeownership?
Yeah. Well, I believe they do. But that’s a political decision. I’m saying I don’t care, do whatever you want to do, just make sure that you pay for it and make it clear that you’re paying for it.
Q: What’s your view on the economy?
We’re in a funk, and the reason we’re in a funk is there are bad policies coming out of Washington, D.C., that are not conducive to faster economic growth.
Having said that, I think a couple years ago when we were growing at 2 percent there was still a fairly serious risk that we could fall back into recession. I think that is not a huge risk today. The underpinnings of our 2 percent growth are more solid. Housing certainly has bottomed out, automobile has bottomed out.
There’s a total lack of confidence in what Washington is going to do or not going to do that will impact the economy. People are just sitting on the sidelines because they don’t know what’s going to happen.
Dunn: 704-358-5235 Twitter: @andrew_dunn
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