$5 billion withdrawn in one day in silent run

Wachovia lost billions of dollars in deposits in recent weeks as uncertainty mounted over its financial stability and whether it would be sold to Citigroup or Wells Fargo, according to court documents filed this week.

The Charlotte bank lost $5 billion in deposits on Friday, Sept. 26, in a silent run, leading regulators to tell Wachovia that it would be shut down within days if it were not acquired, according to a motion filed by Citigroup. An expert called the lost deposits a “pretty big number,” about 1 percent of the bank's $448 billion total.

Some of the details of Wachovia's troubles have previously emerged. But documents made public Friday portray a bank that was continuing to lose deposits even after Citi agreed to buy Wachovia on Sept. 29. Although Wachovia now appears set to be sold to Wells Fargo, new filings also depict Wachovia as nearly sealing the earlier deal with Citi.

Much of the uncertainty plaguing Wachovia ended Thursday when Citi backed off, allowing the Wells-Wachovia merger to proceed, although the New York-based bank is still seeking legal damages from Wells. On Friday, Wachovia said customer reaction has been “very favorable” to the planned sale to San Francisco-based Wells, which creates a coast-to-coast banking giant.

“The proposed merger is expected to have a positive impact on our deposit base as our customers become familiar with the tremendous benefits to be offered by the combined entity,” spokeswoman Christy Phillips-Brown said.

The initial bank run started after the stunning failure of Seattle-based Washington Mutual on Thursday Sept. 25. Around 5 a.m. the next day, Wachovia chief executive Bob Steel called Citigroup CEO Vikram Pandit to talk about a possible deal, according to a Citigroup motion filed in federal court in New York. By the end of the day, Wachovia's shares would dive 27 percent, adding urgency to the situation.

During intense negotiations that weekend, Wachovia agreed to sell most of its operations to Citi under the direction of the Federal Deposit Insurance Corp. Four days later, however, Wells Fargo swooped in with a rival bid, which Wachovia accepted. That spurred a legal fight and negotiations to possibly carve up Wachovia among Citi and Wells.

The Observer previously reported that Wachovia faced a silent run on its deposits but the amount had not been detailed. The Citi filings also describe the liquidity crunch the bank faced. Wachovia's ability to borrow from other banks came under pressure because the cost of insurance products needed to cover the risk of lending to the bank escalated, the filings said.

Wachovia likely had been losing deposits even in the days before Washington Mutual's failure, said Appalachian State banking professor Harry Davis. The bank had been offering higher interest rates than its competitors – more than 4 percent – on certificates of deposits, a sign that it was trying to keep existing depositors and attract new ones, he said.

The loss of $5 billion in deposits is a “pretty big number,” Davis said. For regulators, “their concern is that Monday you would have had a continuation of the run and Wachovia would not have been able to come up with the cash they needed to meet the depositors' withdrawals.” And with a liquidity crunch, the bank would not have been able to borrow the money it needed, he added.

Although Wachovia reached an agreement in principle Sept. 29 to sell most of its operations to Citi, the two sides never finalized a merger agreement. In the following days, lawyers and executives representing both companies worked to hammer out a final document.

In the meantime, Citi provided financial support to help Wachovia. In a filing, Citi's chief risk officer Brian Leach said his bank provided “substantial liquidity” starting Sept. 29 at the request of Wachovia chief financial officer David Zwiener and other bank officials. From Monday to Thursday of that week, Leech said Citi provided Wachovia $4.9 billion in financing, an average of $1.2 billion per day, about $900 million more than the average from Citi in the previous two weeks.

According to the filings, early on the morning of Thursday Oct. 2 Citi's head of global banking, Edward Kelly, and Wachovia's Zwiener agreed the merger deal was “done.” Although lawyers still needed to work out more details, the plan was to sign the agreement at 2 p.m. on Friday Oct. 3. Following board approval at 4 p.m., the banks would have announced the accord after the markets closed.

On that Thursday, lawyers worked into the night at the offices of Citi's outside counsel, Davis Polk & Wardwell, in New York, according to Citi's motion. Around 9 p.m., however, Wells Fargo chairman Dick Kovacevich called Steel about a rival offer, which Wachovia accepted, according to documents filed by both sides.

At the time, Wachovia's deal was worth about $7 per share. Citi's deal was worth about $1 per share, although it left behind a sizable standalone asset management and brokerage firm that some analysts valued at between $4 to $6 per share.

Around 2:15 a.m. last Friday, Steel called Citigroup CEO Pandit to inform him of the new deal, according to the filings. FDIC chairman Sheila Bair was also on the call, according to an affidavit filed by Steel. Wachovia didn't give Citi a chance to make a counteroffer, according to Citi.

In the affidavit, Steel said Wachovia had negotiated “earnestly and in good faith” with Citi. The negotiations, however, “proved extremely complicated and difficult,” he added. He also cited a number of reasons why he preferred the Wells deal, which he said was unsolicited. For example, it was simpler and was more likely to get shareholder approval, he said. It also kept the company intact.

Citi executives were enraged. They had stepped up to save Wachovia when no one else would, they argued in filings. They also questioned why Wachovia thought Wells' deal was better. Kelly, the Citi executive, noted that his bank's deal paid $1 per share for part of Wachovia while leaving behind a remaining firm with a “value of many billions of dollars,” according to a filing.

After Wachovia's change of heart, Citi filed suit against Wachovia and Wells seeking $60 billion from Wells. The suit noted that Citi's market value fell $20 billion on Sept. 29, the day the original Wachovia deal was unveiled. Wachovia also sued Citi, saying its deal was valid.

As the legal battle became more vitriolic, the Federal Reserve this week brokered a legal ceasefire. Wells and Citi discussed a possible carving up of Wachovia, under supervision of the Federal Reserve. Fed governor Kevin Warsh was among the key players. The FDIC and the Office of the Comptroller of the Currency, which supervises Citi and Wachovia, played a smaller role, sources said.

The weeklong duel took a toll on Wachovia, according to a filing this week by Wachovia executive David Carroll. On Monday, $2.4 billion in deposits left the bank, he said. Wachovia also faced difficulty getting financing and faced losing key employees, he said. “So long as Wachovia's customers have uncertainty about Wachovia's status or future, there is substantial risk that the drain on deposits will continue,” Carroll said.

On Thursday, however, Citi ended the talks after disagreements over splitting branch territory and over the value of Wachovia's troubled assets. Citi was comfortable with its earlier deal, which included FDIC assistance, but didn't want to take on additional risk, a source familiar with the situation said.

Citi didn't inform Wells or Wachovia before issuing a news release Thursday evening saying that it was backing down, according to the Wall Street Journal. After a brief delay, Wells and Wachovia issued statements saying they were moving forward with their agreement. In a filing Thursday, Wachovia also said it had entered into an agreement with Wells to receive financing.

When Citi first announced its deal with Wachovia, Pandit noted that he had known Steel for two decades as a colleague and a competitor. Speaking of the two companies, “we believe we share each other's values and aspirations,” he said. Now the two banks share only a legal dispute.

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