With its financial condition increasingly fragile, Wachovia lost control of its own destiny a little less than two weeks ago, falling into the arms of two vying suitors under the direction of federal regulators, according to court filings and interviews.
Typically, mergers are the stuff of clandestine meetings between chief executives driving hard bargains on issues such as price and who gets to run the show. In this case, regulators pushed a faltering Wachovia into a deal with Citigroup, then nudged it toward Wells Fargo, according to the filings.
Now the Federal Reserve Board in Washington, which wants to steady a wobbling financial system, is working to end an increasingly nasty legal spat, sources familiar with the situation said Monday. One of the possible solutions is to carve up the company among the two suitors, and Wachovia isn't even central to the talks, sources said. “It's a Wells-Citi issue,” one source said.
That means shareholders, employees and even executives have found themselves on the outside looking in at times as Wachovia's future is decided. Coming under duress, the competing offers value Wachovia at between $2.16 billion for part of the company and $15 billion for all of it. That's much lower than the $50 billion franchise value estimated by Miami-based banking consultant Ken Thomas, who considered the value of the bank's 3,300 bank branches in prime growth markets nationwide.
Instead of getting the best deal for Wachovia, however, the Fed “wants a quick resolution,” Thomas said. “With everything going on, they don't need this.”
The banks have declined to comment on the substance of negotiations. The Fed did not return a call seeking comment.
Court documents in recent days depict Wachovia's financial health as so dire that the company neared collapse twice, although the banks may be hyping the language to suit their legal purposes. Still, the bank's precarious position led to a deal last Monday with Citi, followed by a new one on Friday with Wells Fargo.
Initially, a bidding war seemed a good sign for a downtrodden financial system, but now it only appears to be fueling the market's uncertainty.
According to an affidavit filed by Wachovia chief executive Bob Steel over the weekend, Wachovia's troubles spiked Thursday, Sept. 25, with the failure of Washington Mutual and the House's initial rejection of a government bailout plan. That put “significant downward financial pressure” on Wachovia's shares, Steel said. As its stock plunged 27 percent that Friday, the bank also began experiencing a “silent run” on its deposits that would build over the weekend. Later in the day, Wachovia had entered confidentiality agreements with Citi and Wells Fargo and launched intense negotiations.
Over that weekend, Steel talked with Wells Chairman Dick Kovacevich, who indicated his bank was interested in buying all of Wachovia in a deal that would not need government assistance. As both Citi and Wells continued to dig into their target's books, Wachovia's outside lawyers prepared a merger agreement with Wells, according to the affidavit. Citi representatives indicated they were only interested in a transaction that included government assistance, Steel said.
But around 6 p.m. that Sunday, Kovacevich reversed course. He told Steel he couldn't do a deal in such a compressed time frame without government help, according to the affidavit. Steel then received a call from Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., who said the situation posed a major risk to the banking system and that the FDIC was poised to broker its own transaction. Bair directed Steel to do a deal with Citi.
At a Wachovia board meeting at 6:30 a.m. Monday, Sept. 29, Steel and the bank's advisers told directors that the bank had two choices: File for bankruptcy or negotiate with Citi and the FDIC, which would provide assistance in the transaction. The board went with Citi.
Wachovia general counsel Jane Sherburne, a former Citi executive, signed an agreement-in-principle that outlined the basics of the transaction. Citi, code-named “Crimson” in the document, would buy most of Wachovia's assets but leave behind the brokerage and asset management businesses. Citi would absorb the first $42 billion in losses on a $312 billion loan book, while the FDIC would assume the remaining losses. The deal still needed a definitive agreement signed by the Wachovia board and approved by shareholders.
In addition, Sherburne signed an “exclusivity agreement” that barred Wachovia from talking to other suitors before Monday. Wachovia couldn't modify the documents, Steel's affidavit said.
Wachovia reached the Citi agreement with the understanding that, if it didn't, the FDIC would seize its assets later in the day, according to a lawsuit filed over the weekend in federal court in New York. In a suit it filed Monday, Citi said the Charlotte bank was on the “verge of collapse” because of bad loans and a “liquidity crisis,” meaning it might not be able to obtain necessary financing from other banks.
“Had Citigroup not stepped up in this way, Wachovia would have failed the following day and the debt issued by its holding company would have collapsed, with potentially devastating implications for the stability and security of the financial markets,” Citi said in its suit.
The FDIC announced the deal that Monday morning, but a final merger agreement still needed to be negotiated. As the week progressed, talks proved “extremely complicated and difficult,” Steel said in his affidavit. One of the difficulties was splitting apart Wachovia's “fully integrated” operations. Wachovia suggested a transaction that would buy all of the company, but Citi refused, Steel said.
With negotiations continuing, Steel received an unexpected call from Bair, the FDIC chairwoman, at 7:15 p.m. on Thursday, telling him to be on the lookout for an offer from Wells, the affidavit states. He was preparing to board a flight from New York to North Carolina so he told her to call the bank's general counsel, Sherburne. When he landed, he talked with Bair again before receiving a 9 p.m. call from Wells Fargo Chairman Kovacevich. A few minutes later, Kovacevich e-mailed Steel a signed merger agreement.
Wachovia faced a second precipice. In a conference call at 11 p.m., Steel and the bank's advisers told the Wachovia board that the company faced being put into FDIC receivership unless it completed a deal with either Citi or Wells Fargo by the end of the day Friday, according to the affidavit. After extensive discussion, the board approved the Wells deal. Early that morning, Steel, Sherburne and Bair called Citi CEO Vikram Pandit to tell him of the deal with Wells.
Rob Bliss, a business and accountancy professor at Wake Forest University, said Wachovia's travails show how even a banking giant can quickly fall into trouble. That's because banks typically have large rolling debts that they pay off by issuing new debt. With the market losing confidence, banks stopped lending to other banks and Wachovia was caught in the bind, he said. “If they don't have any money, then they're gone,” he said.
The fight, however, had just begun. Executives at Citi were outraged by Wachovia's defection, and lawsuits started flying over the weekend. In its suit, Wachovia argued that the exclusivity agreement was invalid and that its deal with Wells should go through. On Monday, Citi sued Wells for interfering in its deal, seeking a whopping $60billion in damages.
By Monday afternoon, the three banks agreed to a standstill in the litigation while negotiations continued with the Fed. One source said “frenetic activity” had been building among lawyers and senior managers and the idea was to “ratchet down the pressure.” The $60 billion figure also showed how serious Citi was in its pursuit of its original deal, the source said.
Another source said the Fed was concerned about the Citi's harsh characterization of Wachovia's condition in its suit. “People have never seen a bank attack another U.S. bank that way,” the source said.
The truce continues until noon on Wednesday – unless a resolution is reached earlier or the deadline is extended.