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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

. (Recall that FDICIA required that failing banks be dismantled at the least cost
to the FDIC unless the FDIC, the Fed, and Treasury agree that a particular company’s
collapse poses a risk to the entire financial system; it had not been tested in  years.)
Losses among those creditors created panic among the unsecured creditors of other
struggling banks, particularly Wachovia—with serious consequences. Nevertheless,
FDIC Chairman Bair stood behind the decision. “I absolutely do think that was the
right decision,” she told the FCIC. “WaMu was not a well-run institution.” She char-
acterized the resolution of WaMu as “successful.” 
The FDIC’s decision would be hotly debated. Fed General Counsel Scott Alvarez
told the FCIC that he agreed with Bair that “there should not have been intervention

in WaMu.” But Treasury officials felt differently: “We were saying that’s great, we can
all be tough, and we can be so tough that we plunge the financial system into the
Great Depression,” Treasury’s Neel Kashkari told the FCIC. “And so, I think, in my
judgment that was a mistake. . . . [A]t that time, the economy was in such a perilous
state, it was like playing with fire.” 

WACHOVIA: “AT THE FRONT END OF
THE DOMINOES AS OTHER DOMINOES FELL”
Wachovia, having bought Golden West, was the largest holder of payment-option
ARMs, the same product that had helped bring down WaMu and Countrywide. Con-
cerns about Wachovia—then the fourth-largest bank holding company—had also
been escalating for some time. On September , the Merrill analyst Ed Najarian
downgraded the company’s stock to “underperform,” pointing to weakness in its op-
tion ARM and commercial loan portfolios. On September , Wachovia executives
met Fed officials to ask for an exemption from rules that limited holding companies’
use of insured deposits to meet their liquidity needs. The Fed did not accede; staff be-
lieved that Wachovia’s cash position was strong and that the requested relief was a
“want” rather than a “need.” 
But they changed their minds after the Lehman bankruptcy, immediately launch-
ing daily conference calls to discuss liquidity with Wachovia management. Depositor
outflows increased. On September , the Fed supported the company’s request to
use insured deposits to provide liquidity to the holding company. On September , a
Saturday, Wells Fargo Chairman Richard M. Kovacevich told Robert Steel, Wa-
chovia’s CEO and recently a Treasury undersecretary, that Wells might be interested
in acquiring the besieged bank, and the two agreed to speak later in the week. The
same day, Fed Governor Kevin Warsh suggested that Steel also talk to Goldman. As a
former vice chairman of Goldman, Steel could easily approach the firm, but the ensu-
ing conversations were short; Goldman was not interested. 
Throughout the following week, it became increasingly clear that Wachovia
needed to merge with a stronger financial institution. Then, WaMu’s failure on Sep-
tember  “raised creditor concern about the health of Wachovia,” the Fed’s Alvarez
told the FCIC. “The day after the failure of WaMu, Wachovia Bank depositors acceler-
ated the withdrawal of significant amounts from their accounts,” Alvarez said. “In ad-