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MARCH TO AUGUST : SYSTEMIC RISK CONCERNS
waive all fees and prepayment penalties associated with them. On July , Wachovia
reported an . billion second-quarter loss. The new CEO, Robert Steel, most re-
cently an undersecretary of the treasury, announced a plan to improve the bank’s fi-
nancial condition: raise capital, cut the stock dividend, and lay off to of the
staff.
The rating agencies and supervisors ignored those reassurances. On the same day
as the announcement, S&P downgraded the bank, and the Fed, after years of “satis-
factory” ratings, downgraded Wachovia to , or “less than satisfactory.” The Fed
noted that projections showed losses that could wipe out the recently raised
capital: losses alone could exceed billion, an amount that could cause a fur-
ther ratings downgrade. The Fed directed Wachovia to reevaluate and update its
capital plans and its liquidity management. Despite having consistently rated Wa-
chovia as “satisfactory” right up to the summer meltdown, the Fed now declared that
many of Wachovia’s problems were “long-term in nature and result[ed] from delayed
investment decisions and a desire to have business lines operate autonomously.”
The Fed bluntly criticized the board and senior management for “an environment
with inconsistent and inadequate identification, escalation and coverage of all risk-
taking activities, including deficiencies in stress testing” and “little accountability for
errors.” Wachovia management had not completely understood the level of risk
across the company, particularly in certain nonbank investments, and management
had delayed fixing these known deficiencies. In addition, the company’s board had
not sufficiently questioned investment decisions. Nonetheless, the Fed concluded
that Wachovia’s liquidity was currently adequate and that throughout the market dis-
ruption, management had minimized exposure to overnight funding markets.
On August , the OCC downgraded Wachovia Bank and assessed its overall risk
profile as “high.” The OCC noted many of the same issues as the Fed, and added par-
ticularly strong remarks about the acquisition of Golden West, identifying that mort-
gage portfolio and associated real estate foreclosures as the heart of Wachovia’s
problem. The OCC noted that the board had “acknowledged that the Golden West
acquisition was a mistake.”
The OCC wrote that the market was focused on the company’s weakened condi-
tion and that some large fund providers had already limited their exposure to Wa-
chovia. Like the Fed, however, the OCC concluded that the bank’s liquidity was
adequate, unless events undermined market confidence. And, like the Fed, the
OCC approved of the new management and a new, more hands-on oversight role for
the board of directors.
Yet Wachovia’s problems would continue, and in the fall regulators would scram-
ble to find a buyer for the troubled bank.
Washington Mutual: “Management’s persistent lack of progress”
Washington Mutual, often called WaMu, was the largest thrift in the country, with
over billion in assets at the end of . At the time, billion of the home
loans on its balance sheet were option ARMs, two times its capital and reserves, with
