A day after the federal government laid out a sweeping plan to buy into the country's banks, a top regulator said Tuesday that Wachovia might have been saved as a stand-alone bank if the government had acted sooner.
The latest plan calls for the government to spend $125 billion to buy stakes in nine major banks in hopes they will increase lending to consumers and businesses.
“It definitely would have made a difference,” Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said of Wachovia. Speaking to a small group of reporters in Washington, she added that Washington Mutual, which went bust last month, would not have been spared that fate, even if government had moved earlier on the new plan.
A previous plan had called for the government to buy troubled mortgage assets from banks. That strategy was unveiled Sept. 19 – more than a week before Wachovia's weakening finances forced it into a quick sale.
The question – would earlier government intervention have saved Wachovia? – has been gnawing at shareholders and employees of the Charlotte bank. The bank, hobbled by its 2006 purchase of mortgage lender Golden West, is being sold to San Francisco-based Wells Fargo. Though Wells is seen as a good fit for Wachovia, culturally and geographically, the sale is still a blow to Charlotte, which is sure to lose jobs and its prestige as the home of two major banks.
The new plan, President Bush said Tuesday, is “not intended to take over the free market but to preserve it.”
It's all about cash and confidence and convincing banks to lend money more freely again. Those are all critical ingredients to getting financial markets to function more normally and reviving the economy.
The big question: Will it work?
There was a mix of hope and skepticism on that front. Unprecedented steps recently taken – including hefty interest rate reductions by the Federal Reserve and other major central banks in a coordinated assault just last week – have failed to break through the credit clog and the panicky mindset gripping investors on Wall Street and around the globe.
The Dow Jones industrials declined 77 points on Tuesday after piling up their biggest point gain ever on Monday on news of Europe's rescue plan and in anticipation of the United States' new measures.
Initially, the U.S. government will pour $125 billion into nine major banks. Another $125 billion will be made available this year to other banks – if they need it – for cash infusions.
In return, the government will get ownership stakes in the financial institutions. Banks, meanwhile, will have to accept limitations on executives' compensation.
“Government owning a stake in any private U.S. company is objectionable to most Americans – me included,” Treasury Secretary Henry Paulson said in announcing the initiative. “Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”
Treasury switched gears deciding to first use a chunk of the $700 billion from the recently enacted financial bailout package to pay for taking partial ownership stakes in banks, rather than using the money to buy rotten debts from financial institutions. The government said it still intends to buy the bad mortgages and other toxic assets, another move aimed at getting credit flowing again.
The first bank to take advantage of the program was Bank of New York Mellon, which announced it would sell $3 billion in preferred shares to the Treasury. Other banks initially participating include Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, including the soon-to-acquired Merrill Lynch, Citigroup, Wells Fargo, and State Street.
The government's cash infusions are attractive to banks because they are having trouble getting money from elsewhere. Skittish investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have rather than lending it to each other or customers.
As it relates to Wachovia, some experts on Tuesday found irony in the government's timing of its latest plan. Wachovia neared the brink of insolvency the weekend of Sept. 26, after customers got spooked by WaMu's failure and made a silent run on Wachovia's deposits.
Analysts said it was unlikely that Wachovia could have held on for another 21/2 weeks. Regulators were pressing Wachovia to sell itself, and they “have unlimited power,” said Ken Thomas, a Miami-based banking consultant. “They're the ones that insure the deposits. So they make the rules.”
But analysts also agreed that Wachovia could have been saved if the government had rolled out its intervention plan sooner. And Gary Townsend, a former analyst who has launched a Maryland-based investment firm, said Wachovia might have kept its independence if the government had not allowed the failure of Lehman Brothers, the Wall Street investment firm, four weeks ago. Its failure, Townsend said, spread through multiple parts of financial markets and led to lending gridlock among banks, which forced Wachovia into a liquidity crisis.
To be sure, the government is more interested in preserving confidence in the banking system than in preserving any individual bank. Steven Mann, a finance professor at the University of South Carolina, noted the inherent conflict in speculating that the government could have saved Wachovia. “The government wouldn't be offering this plan if there wasn't a credit crisis,” Mann said. “But if there wasn't a credit crisis, then Wachovia wouldn't be in such trouble.”
Besides, he and others noted, government action doesn't guarantee that a company will be saved. Bear Stearns failed on a Sunday in March – five days after the Federal Reserve announced a new plan to lend money to investment banks.