At the peak of the financial crisis, Charlotte-based Wachovia was losing an average of $1 billion a day in deposits and had only enough cash to survive a few more days, according to newly released Federal Reserve transcripts.
The documents disclosed Friday reveal for the first time the conversations Fed officials had in regular meetings and in emergency conference calls as the financial crisis erupted in 2008. Federal Open Market Committee meeting transcripts are released annually on a five-year lag.
Wachovia’s cash woes have been previously detailed in lawsuits and Financial Crisis Inquiry Commission hearings, but the transcripts provide insights into the thinking of Fed officials as they were engineering the bank’s rescue in fall 2008.
After a weekend of frenzied negotiations, the Charlotte bank initially agreed to sell most of its assets to Citigroup, only to have Wells Fargo trump the deal with a higher bid days later. The sale to Wells Fargo stabilized Wachovia but was a blow to employees, investors and a city that took pride in its big banks.
In the transcripts, Richmond Fed President Jeffrey Lacker said Wachovia executives were eager to make a deal because of a run on deposits that intensified after mortgage lender Washington Mutual failed days earlier.
“They have liquidity to last under a calm scenario this week only until maybe Thursday or Friday,” Lacker said on a conference call on Monday, Sept. 29, 2008, hours after the Citi deal was announced.
Wachovia probably would have had to turn to the Fed as a lender of last resort had it not reached the deal with Citi, he told other Fed officials on the conference call.
To make the Citi deal work, the Fed triggered a never-before-used action that allowed government assistance, including the sharing of loan losses. Fed general counsel Scott Alvarez said the deal was necessary for a number of reasons, including the potential impact on other struggling banks.
“There was concern that because Wachovia looked so strong on a capital basis … (its failure) would send a bad signal about similarly situated institutions,” Alvarez said on the same conference call.
The transcripts of 14 meetings throughout 2008 show Fed officials struggling to get a handle on the growing crisis and to find tools to protect the crumbling financial system.
In meetings held Jan. 29-30 of that year, Boston Fed President Eric Rosengren pointed out how “stress tests” performed by large banks, including Wachovia and Bank of America, had failed to anticipate how falling housing prices would diminish capital, as mortgage losses ballooned.
“Obviously, in retrospect that doesn’t seem to have been a good forecast,” he said. The Fed later instituted its own stress tests of bank portfolios to ensure they stockpiled more capital for future downturns.
In a June 24 conference call, Lacker and Janet Yellen, the former San Francisco Fed president who is now the Fed chairwoman, criticized the Office of Thrift Supervision’s oversight of mortgage lenders IndyMac and Countrywide Financial, which was acquired by Bank of America in 2008.
Lacker said the Richmond Fed undertook its own scrutiny of Countrywide “to be able to make our own independent assessment.”
Under the 2010 Dodd-Frank financial reform law, the OTS was folded into the Comptroller of the Currency, which regulates national banks.
Fed officials themselves also failed to understand the dire circumstances facing the financial system.
In a Sept. 16 meeting, St. Louis Fed President James Bullard said “three large uncertainties looming over the economy have now been resolved,” referring to Lehman Brothers’ bankruptcy, Bank of America’s purchase of Merrill Lynch and the government’s seizure of Fannie Mae and Freddie Mac.
“Normally, the elimination of key uncertainties is a plus for the economy,” Bullard said.
Lehman’s collapse, however, would continue to roil the financial system, Bank of America would need an additional bailout to prop up Merrill, and the future of Fannie and Freddie are still being worked out.
In their meetings, Fed officials didn’t spend much time discussing bank rescues, but Richard Fisher, the president of the Dallas Fed, foreshadowed the future controversy over government bailouts of banks deemed “too big to fail.”
In the Sept. 29 conference call, Fisher said he didn’t object to the Wachovia deal, but said he was concerned that the banking industry was getting too concentrated as institutions such as JPMorgan Chase gobbled up ailing rivals.
“We’re creating larger and larger concentrations and bigger and bigger situations where we have too big to fail,” Fisher said.
Then-Fed Chairman Ben Bernanke said he shared his concerns.
“We have been very constrained throughout this entire crisis, as you know, by the existing facilities for dealing with failing institutions and mergers being one of the only tools we have,” Bernanke said.
“I think it’s very important … to develop good resolution mechanisms and to think about the issues of concentration and too big to fail.”