Ten years ago, as Charlotte’s Wachovia teetered on collapse, commercial banking executive Carlos Evans hardly slept over what he calls “the adoption agency weekend.”
That was the fateful time in September 2008 when government officials decided whether Wells Fargo or Citigroup would buy Wachovia to save it in time to open Monday morning.
“For Charlotte, it was just a very difficult time,” the now-retired Evans said.
Wells Fargo ultimately emerged as Wachovia's savior, prevailing in the tug of war for the iconic North Carolina bank. Wells was the rare U.S. bank that emerged from the crisis with its reputation intact, if not enhanced.
A decade later, Wells has fully integrated Wachovia, remained highly profitable and expanded employment in Charlotte. But in an ironic twist, the San Francisco-based bank is now the institution in regulatory crosshairs after a series of missteps, including $1 billion in fines announced Friday for improper mortgage and auto insurance practices.
Over the course of 2018, the 10-year anniversary of major milestones in Wachovia’s demise will play out: mortgage losses that began skyrocketing in the spring, the ouster of CEO Ken Thompson, the hiring of his replacement Bob Steel, the scramble for a merger partner and Wells Fargo’s winning deal over Citigroup.
The memories will put knots in the stomachs of employees and investors who lived through those days.
During the 2008 crisis, regulators feverishly worked to engineer mergers and capital infusions to rescue failing companies, spurring criticism of bailouts but potentially preventing a much-worse economic calamity.
At the time of Wachovia’s sale, some in Charlotte wondered if regulators could have found a way to save it as a standalone company. Those questions persist today, particularly amid Wells Fargo's recent struggles, although former Federal Deposit Insurance Corp. Chair Sheila Bair told the Observer any standalone rescue of Wachovia would have been problematic.
Bair was a key player in the government's handling of the Wachovia crisis. Despite improvements in the banking system, Wells Fargo’s travails are a reminder that regulators need to remain watchful to avoid future crises, she said.
“You have to stay vigilant," she said, "and not assume just because a bank has a good reputation and is well managed today that couldn’t unravel."
'It was a challenge'
Wachovia began showing major signs of distress in April 2008 when it reported a surprising first-quarter loss, largely from loans acquired in its purchase of Golden West Financial, a West Coast mortgage lender. Wachovia had also taken hits over risky products in its corporate and investment bank.
At the annual shareholders meeting later in April, Thompson, the CEO, faced angry investors.
Wachovia's stock had been around $60 before the Golden West deal but now was down by more than half. It would tumble much lower in the months ahead.
By June, Thompson had been pushed out, and in July the board named Steel as the new CEO. The Goldman Sachs alumni and former Treasury official pledged to keep the bank independent.
The crisis intensified when investment bank Lehman Brothers went bankrupt on Sept. 15, 2008, the same day Charlotte-based Bank of America announced plans to buy Merrill Lynch. Steel soon began seeking his own merger partner, including Goldman Sachs and Morgan Stanley.
After Washington Mutual failed on Sept. 25, Wachovia’s stock crashed, and nervous commercial depositors started pulling money. Steel began pursuing potential deals with Citi and Wells.
"The failure of these negotiations could have resulted in Wachovia filing for bankruptcy," Steel said later in testimony to a commission that investigated the financial crisis.
On Monday morning, Sept. 29, Citigroup announced a government-assisted deal to buy most of Wachovia after Wells Fargo decided not to pursue an unassisted purchase. Citigroup’s deal was expected to bring job cuts, while also leaving a chunk of the remaining company in limbo.
But Wells Fargo upended Citi's plans days later when it swooped in with a new offer to buy the whole company for $7 per share without government help.
Wells Fargo's current CEO, Tim Sloan, was a high-ranking executive at the San Francisco bank at the time, heavily involved in the examination of Wachovia's books.
“We had to make a very strategic and monumental decision in a very short time with limited information. It was a challenge,” Sloan told the Observer in an interview in March. "I remember how disappointed we were when initially it appeared that Citibank was going to be the purchaser of Wachovia and how elevated we were at the end of week that we were going to purchase Wachovia.”
Could Wachovia have survived?
While Wachovia was married off to Wells Fargo during the crisis, other banks, including Bank of America, received bailouts to help stabilize the financial system.
Some at Wachovia still wonder if the bank could have survived on its own.
Former Bank of America CEO Hugh McColl Jr. even once publicly mused about how New York-based banks were saved, while Charlotte's Wachovia had to find a partner.
"There were plenty of banks that had far greater problems," said Evans, the Wachovia banker who later stayed on with Wells, adding: "My preference would have been for Wachovia to survive on its own."
He noted that Wachovia survived the tumultuous period before its merger closed with Wells Fargo at year's end, although having a purchase agreement with the San Francisco bank certainly boosted confidence in the company's stability.
During that fateful weekend in September 2008, Wachovia made a proposal to the FDIC to remain as a standalone entity. But Bair, the former FDIC chair, says it would have been difficult for the regulator to provide any taxpayer assistance when it had private-sector companies pursuing acquisitions.
"If the FDIC did a one-off bailout of Wachovia and put taxpayer money at risk and told Wells Fargo, 'No we’re just going to bail out this bank on its own,' I think they probably would have put me in jail," she said. "To have the FDIC take billions of exposure when you had a then quite healthy private buyer ready, how could I have ever defended that?"
In another twist, Congress didn't approve the TARP bailout program until shortly after Wachovia had reached its deal with Wells on Oct. 3, 2008.
"TARP funding was only theoretically there for solvent institutions," Bair said. "I think that would have been a big question mark about Wachovia, given that high risk mortgage they had especially on the West Coast."
Rodgin Cohen, a Sullivan & Cromwell lawyer in New York who advised Wachovia during its travails, said the bank's fate reflected the "randomness" of events during those hectic days.
"Had Wachovia been three or four weeks later, maybe even two weeks later, they may have had a government assistance program," he said.
In the end, Wachovia shareholders in North Carolina and across the country suffered a major blow when the company was sold. They received one-fifth of a Wells share for each of their Wachovia shares — that's the equivalent of about $10 today, compared with Wachovia's earlier peak near $60.
Mark Beck, a Charlotte-area Wachovia shareholder, was a vocal opponent of Wachovia's sale in 2008, launching a website called wachoviavoteno.com that initially opposed the Citi deal. Shareholders were "collateral damage" to management's "recklessness," he said.
"They took this company with fantastically valuable assets in a moment when it faltered because of one aspect of it," he said, "and they just ripped it away and gave it to another group at more than a fire sale price."
'The beating it deserves'
While Wells Fargo rescued Wachovia from potential collapse in 2008, it is now facing its own problems, including 2016 revelations of employees opening unauthorized accounts in customers' names to meet sales goals.
The Federal Reserve has put a cap on its growth from the sales scandal, and on Friday the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau announced its latest round of penalties.
Evans, the former Wachovia executive who remained at Wells before retiring in 2014, said the San Francisco bank is getting "the beating it deserves" over the sales scandal. But he adds the Wells deal was far better for the company than the Citi one.
"It's some massive multiple better for Charlotte," he said. "Wells has more employees in Charlotte today than Wachovia did prior to the deal. If it had been Citi I think it might be half of that."
Sloan, the Wells CEO, defended the company.
"Wells Fargo just celebrated our 166th birthday," he said. "For every one of those days that make up those 166 years it hasn't been smooth or perfect. We’ve had so many successes, but we’ve also had some challenges.
"There’s no questions we’re going through a challenging period of our history right now," he said. "We’ve made some mistakes. We’ve talked about what those mistakes were. We've taken responsibility for those. We’re fixing anything that needs to be fixed. And fundamentally are transforming the company."
Bair said she believes regulators made the right actions with the information they had at the time.
"Looking back, the industry bears accountability for this," she said. "Not that we regulators and the government didn’t contribute or the regulators weren’t as tough as they should have been. But at the end of the day these were privately run institutions for profit that engaged in these activities.
"The lesson was regulators need to be vigilant."