Page 396 - untitled
P. 396
CRISIS AND PANIC
dition, wholesale funds providers withdrew liquidity support from Wachovia. It ap-
peared likely that Wachovia would soon become unable to fund its operations.” Steel
said, “As the day progressed, some liquidity pressure intensified as financial institu-
tions began declining to conduct normal financing transactions with Wachovia.”
David Wilson, the Office of the Comptroller of the Currency’s lead examiner at
Wachovia, agreed. “The whole world changed” for Wachovia after WaMu’s failure, he
said. The FDIC’s Bair had a slightly different view. WaMu’s failure “was practically a
nonevent,” she told the FCIC. “It was below the fold if it was even on the front
page . . . barely a blip given everything else that was going on.”
The run on Wachovia Bank, the country’s fourth-largest commercial bank, was a
“silent run” by uninsured depositors and unsecured creditors sitting in front of their
computers, rather than by depositors standing in lines outside bank doors. By noon
on Friday, September , creditors were refusing to roll over the bank’s short-term
funding, including commercial paper and brokered certificates of deposit. The
FDIC’s John Corston testified that Wachovia lost . billion of deposits and . bil-
lion of commercial paper and repos that day.
By the end of the day on Friday, Wachovia told the Fed that worried creditors had
asked it to repay roughly half of its long-term debt— billion to billion. Wa-
chovia “did not have to pay all these funds from a contractual basis (they had not ma-
tured), but would have difficulty [borrowing from these lenders] going forward given
the reluctance to repay early,” Richard Westerkamp, the Richmond Fed’s lead exam-
iner at Wachovia, told the FCIC.
In one day, the value of Wachovia’s -year bonds fell from cents to cents on
the dollar, and the cost of buying protection on million of Wachovia debt jumped
from , to almost ,, annually. Wachovia’s stock fell , wiping out
billion in market value. Comptroller of the Currency John Dugan, whose agency
regulated Wachovia’s commercial bank subsidiary, sent FDIC Chairman Bair a short
and alarming email stating that Wachovia’s liquidity was unstable. “Wachovia was at
the front end of the dominoes as other dominoes fell,” Steel told the FCIC.
Government officials were not prepared to let Wachovia open for business on
Monday, September , without a deal in place. “Markets were already under con-
siderable strain after the events involving Lehman Brothers, AIG, and WaMu,” the
Fed’s Alvarez told the FCIC. “There were fears that the failure of Wachovia would
lead investors to doubt the financial strength of other organizations in similar situa-
tions, making it harder for those institutions to raise capital.”
Wells Fargo had already expressed interest in buying Wachovia; by Friday, Citi-
group had as well. Wachovia entered into confidentiality agreements with both com-
panies on Friday and the two suitors immediately began their due diligence
investigations.
The key question was whether the FDIC would provide assistance in an acquisi-
tion. Though Citigroup never considered making a bid that did not presuppose such
assistance, Wells Fargo was initially interested in purchasing all of Wachovia without
it. FDIC assistance would require the first-ever application of the systemic risk ex-
ception under FDICIA. Over the weekend, federal officials hurriedly considered the
