After Wells Fargo agreed to buy Wachovia in 2008, former Federal Reserve Board chairman Ben Bernanke spent several hours assuring the North Carolina congressional delegation that the deal “did not mean the end of the bank’s role as a major employer in Charlotte.”
Instead, avoiding Charlotte-based Wachovia’s collapse “should help preserve local banking jobs as well as avoid much more serious economic consequences for the country,” the former Fed chairman told lawmakers, according to his new memoir.
With his book released Monday, Bernanke becomes the last major U.S. regulator to publish his account of the 2008 financial crisis and the effort by federal officials to stabilize the tottering banking system.
In “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” the Fed chairman from 2006 to 2014 recounts key moments involving Wachovia and hometown rival Bank of America. He also describes growing up in Dillon, S.C., and his family’s Charlotte roots.
In one of the most dramatic moments of the crisis, New York-based Citigroup agreed to buy a failing Wachovia with government assistance in September 2008. But days later, San Francisco-based Wells Fargo swooped in with a higher offer that didn’t need any government aid.
That bid was well received by Sheila Bair, chairman of the Federal Deposit Insurance Corp., who would potentially be on the hook for some of Citigroup’s losses in the deal. But Fed officials were worried about the consequences of leaving Citi at the altar.
“Future negotiations could be jeopardized if the government refused to honor the agreement with Citi that it had helped to arrange,” Bernanke says in the book. “And we worried that the demise of the existing deal would fan market fears about Citi, which had already trumpeted the acquisition as strengthening its franchise.”
After Citigroup learned of the new deal, the New York bank’s then-CEO Vikram Pandit called Bernanke to “vent bitterly,” he writes. If the deal fell through, Citigroup could be in danger because “markets had come to believe Citi needed Wachovia’s deposits to survive,” Pandit told Bernanke.
Robert Rubin, the former Treasury secretary who had become a senior counselor at Citi, also called. “He thought that Citi might be able to improve its offer and get back in the game,” writes Bernanke.
The Fed had the power to reject the Wachovia-Wells Fargo deal. But it had to rule on specific provisions, such as whether the deal would hurt competition in certain markets, Bernanke writes. Ultimately, whether Wachovia had violated its deal with Citi was a matter for the courts, not the Federal Reserve, and the Fed gave its consent, Bernanke writes.
Since then, Wells Fargo has earned praise for a smooth merger with Wachovia and now has more employees in Charlotte than it had at the time of the deal. Citigroup received a second bailout from the federal government and is still struggling to recover from the crisis.
What went wrong
As for how Wachovia got into trouble in the first place, Bernanke says Ken Thompson, Wachovia’s former CEO, made the same mistake as his peers, “aggressively pushing his bank into risky real estate banking.” He cites the bank’s 2006 acquisition of mortgage lender Golden West Financial and its expansion in commercial real estate and construction lending.
“Wachovia’s merger with Golden West, and Bank of America’s acquisition of Countrywide were strikingly similar,” Bernanke writes, referring to the subprime mortgage lender that produced tens of billions of losses for Bank of America.
Bernanke also says, in his view, the FDIC’s handling of the Washington Mutual failure in September 2008 “did hasten the fall of the next financial domino – Wachovia.” By imposing losses on WaMu’s senior debt holders, the regulator created more uncertainty about how the government would handle ailing banks, Bernanke writes, although he acknowledges that Bair has strongly defending her handling of WaMu.
Once Wachovia’s struggles became clear, Bair favored a sale of the entire company, Bernanke writes. Merging Wachovia into another bank wasn’t ideal because it would create an even bigger institution, he says, but it was the best solution “given the circumstances and our rapidly shrinking solutions.”
Bernanke’s book also covers former Bank of America CEO Ken Lewis’ attempt to scuttle the Charlotte bank’s planned purchase of Merrill Lynch in December 2008, amid rising losses at the New York-based investment bank. The case for backing out of the deal “seemed exceptionally weak,” he writes.
While the decision legally was up to Bank of America, Bernanke and former Treasury Secretary Henry Paulson “did make clear that (abandoning the deal) was a terrible idea for Bank of America and the financial system,” he writes.
Bank of America went ahead with the purchase, and soon after that, the government provided the bank with a second injection of capital to help stabilize the company. “I suspected that securing government help was probably one of Lewis’ objectives” when he threatened to cancel the Merrill deal, Bernanke writes.
As for new regulations imposed on banks after the crisis, Bernanke defends the Obama administration’s decision not to push for a new Glass-Steagall type wall between investment banking and traditional banking. Such a barrier wouldn’t have prevented some of the biggest problems that flared up during the crisis, he says.
“Wachovia and Washington Mutual, by and large, got into trouble the same way banks have gotten into trouble for generations – by making bad loans,” Bernanke writes.
Bair, Paulson and former Treasury Secretary and New York Fed president Tim Geithner have also published memoirs on the crisis.