Before being forced to sell itself in late September, Wachovia proposed a plan to stay independent with assistance from the Federal Deposit Insurance Corp. but was rebuffed, according to a securities filing Friday.
At 12:30 a.m. on Monday Sept. 29, the Charlotte-based bank asked the FDIC to share losses on certain loans in exchange for issuing an equity stake in the bank to the government agency, according to the filing. Wachovia also would have sought to raise $10 billion in capital in a public offering, the filing said.
Instead, FDIC Chairman Sheila Bair informed Wachovia chief executive Bob Steel at 4 a.m. that the agency had determined that Citigroup Inc. would buy Wachovia's banking subsidiaries and that Wachovia was to negotiate with the New York bank before an announcement was made later that morning.
The document filed Friday provides new details about Wachovia's travails in the weeks leading up to its sale and yet another what-if scenario that possibly could have allowed the company to continue operating on its own. The filing describes talks with five financial institutions about potential mergers, acquisitions and substantial investments in a two-week period. The government began encouraging Wachovia to look at transactions on Sept. 20, a week earlier than previously known.
A little more than a week later, on Sept. 29, the FDIC would announce that Citi was buying most of Wachovia for $2.16 billion with FDIC assistance, although a definitive agreement still needed to be signed. Wells Fargo of San Francisco, which had earlier passed on buying Wachovia, would later return with another offer on Oct. 2, which Wachovia's board accepted. The Wachovia-Wells deal is now moving forward, although Citi is suing Wells for damages.
The filing issued Friday by Wachovia and Wells Fargo provides information on the proposed transaction for Wachovia shareholders who need to approve the deal. The filing did not include a date for a shareholder vote, but officials expect the merger to be completed by Dec. 31. The Federal Reserve Board has already approved the purchase, now valued at about $14.7 billion. The prospective merger has stabilized the company but likely means thousands of job cuts in Charlotte.
Wachovia emerged as one of the nation's most vulnerable banks this spring as losses mounted from its 2006 acquisition of mortgage specialist Golden West Financial Corp. and as the company suffered a series of other missteps. The board in June “terminated” CEO Ken Thompson, according to the filing, and in July brought on Steel, who soon outlined a plan to cut costs and sell off non-core assets.
But starting Sept. 16 – following the failure of Lehman Brothers and the sale of Merrill Lynch to Bank of America – Wachovia's management and board began considering additional options, according to the filing. These new possibilities were raising $10 billion to $15 billion in capital, selling certain core assets, seeking a large outside investor that would take a 20 percent to 40 percent voting stake in the company or finding a merger partner.
While management and the board preferred staying independent, Wachovia hired investment banks Perella Weinberg and Goldman Sachs as well as two law firms to help explore merger and acquisition possibilities.
That same week, Wachovia received unsolicited calls from Citigroup CEO Vikram Pandit about buying Wachovia. And on Wednesday Sept. 17, Wachovia began “merger-of-equals” talks with an unnamed partner, likely investment bank Morgan Stanley & Co.
On Saturday Sept. 20, U.S. government officials also encouraged Wachovia to talk to another unnamed financial institution but those talks fizzled by the next day because the potential acquirer wanted a financial backstop that the U.S. government was not willing to provide. Negotiations with the potential merger of equals partner also ended on Sunday Sept. 21, according to the filing. Morgan Stanley converted into a bank holding company that day and later announced an investment by a Japanese bank.
Wachovia spokeswoman Christy Phillips-Brown declined to identify the unnamed banks in the filing. News reports have previously listed Banco Santander of Spain as an institution that looked at Wachovia. Banco Santander spokesman Peter Greiff declined to comment.
The filing also said Steel had a brief conversation with Wells Fargo Chairman Dick Kovacevich on Sept. 20, a week earlier than previously known. Steel and advisers from Perella Weinberg had two follow-up conversations, making arrangements to allow Wells to look at the bank's books and to encourage Kovacevich to consider a purchase on an “accelerated basis,” according to the filing.
During the same period, Wachovia also made preparations to raise capital through a public stock offering as well as through private investors, the filing said. The Observer has previously reported that Wachovia talked to famed investor Warren Buffett about a possible $5 billion investment, which didn't pan out.
Market conditions, however, continued to deteriorate. On Wednesday Sept. 24, Steel tried to contact Pandit but Citi's CEO was traveling. They didn't get in touch until Friday Sept. 26, when Steel promptly responded to a 4:27 a.m. e-mail.
Later that day, Wachovia's stock would fall 27 percent and it would begin losing deposits. Financial institutions began declining to conduct normal financing transactions with the bank, according to the filing. Rating agencies said they were likely to take “negative ratings action in the very near future.”
Wachovia now determined it was no longer possible to raise capital, and management was worried the bank could not conduct normal banking activities on Monday Sept. 29 without borrowing from the Federal Reserve's discount window.
By the weekend, Wachovia was in talks with Citi and Wells, with an eye on sealing a deal by Monday morning. Kovacevich backed off buying Wachovia without government assistance on Sunday Sept. 28., but Wells continued to talk to the FDIC about a government-aided deal into the early morning hours of Monday Sept. 29, the filing said.
Early that morning, Wachovia also proposed its own “alternative transaction” in which it would get FDIC assistance in return for a stake in the bank. “Wachovia urged the FDIC to accept this proposal, believing it involved significantly less risk to the FDIC fund than the transaction it understood Citigroup to be proposing,” the filing said.
The FDIC, however, decided to favor the Citi proposal, which would break up Wachovia. While Citi would buy Wachovia's banking operations, it would leave behind the asset management and brokerage businesses. FDIC spokesman David Barr said the agency doesn't comment on open banks.
At 6:30 a.m., Wachovia held a board meeting by phone to discuss the over-night events. Wachovia's legal counsel said the bank faced two options: back the agreement with Citi or allow the bank to fall into FDIC receivership and likely file for bankruptcy protection. The board went with the Citi deal.
On Thursday Oct. 2, as Wachovia and Citi continued to haggle over details of their final merger agreement, Wells Fargo and its advisers began discussing the possibility of making a renewed offer for Wachovia and later signaled their intentions to regulators, according to the filing. Around 7 a.m. on Friday Oct. 3, Wells and Wachovia announced their merger.
Citi spokeswoman Shannon Bell declined to comment on the filing. When Citi decided Oct. 9 not to block the Wells-Wachovia merger, CEO Pandit said his company had not sought out the transaction with Wachovia.
During the weeks described by the filing, Congress debated various versions of financial industry bailout packages, which at times buoyed and deflated Wachovia's fortunes. On Oct. 3, President Bush signed a bill that created a program to buy troubled assets from banks. That plan has since morphed into an effort to inject $250billion directly into financial institutions.
Asked whether this plan could have helped stay independent, the FDIC's Bair last month said: “It definitely would have made a difference.”