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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

systemic risks if the FDIC did not intervene and if creditors and uninsured deposi-
tors suffered losses.
The signs for the bank were discouraging. Given the recent withdrawals, the
FDIC and OCC predicted in an internal analysis that Wachovia could face up to 
billion of additional cash outflows the following week—including, most prominently,
 billion of further deposit outflows, as well as  billion from corporate deposit
accounts and  billion from retail brokerage customers. Yet Wachovia had only 
billion in cash and cash equivalents. While the FDIC and OCC estimated that the
company could use its collateral to raise another  billion through the Fed’s dis-
count window, the repo market, and the Federal Home Loan Banks, even those ef-
forts would bring the amount on hand to only  billion to cover the potential
 billion outflow. 
During the weekend, the Fed argued that Wachovia should be saved, with FDIC
assistance if necessary. Its analysis focused on the firm’s counterparties and other
“interdependencies” with large market participants, and stated that asset sales by
mutual funds could cause short-term funding markets to “virtually shut down.” 
According to supporting analysis by the Richmond Fed, mutual funds held  bil-
lion of Wachovia debt, which Richmond Fed staff concluded represented “signifi-
cant systemic consequences”; and investment banks, “already weak and exposed to
low levels of confidence,” owned  billion of Wachovia’s  billion debt and de-
posits. These firms were in danger of becoming “even more reliant on Federal Re-
serve support programs, such as PDCF, to support operations in the event of a
Wachovia[-led] disruption.” 
In addition, Fed staff argued that a Wachovia failure would cause banks to “be-
come even less willing to lend to businesses and households. . . . [T]hese effects
would contribute to weaker economic performance, higher unemployment, and re-
duced wealth.” Secretary Paulson had recused himself from the decision because of

his ties to Steel, but other members of Treasury had “vigorously advocated” saving

Wachovia. White House Chief of Staff Josh Bolten called Bair on Sunday to express
support for the systemic risk exception. 
At about : P.M. on Sunday, September , Wells’s Kovacevich told Steel that he
wanted more time to review Wachovia’s assets, particularly its commercial real estate
holdings, and could not make a bid before Monday if there were to be no FDIC assis-
tance. So Wells and Citigroup came to the table with proposals predicated on such as-
sistance. Wells offered to cover the first  billion of losses on a pool of  billion
worth of assets as well as  of subsequent losses, if they grew large enough, cap-
ping the FDIC’s losses at  billion. Citigroup wanted the FDIC to cover losses on a
different, and larger, pool of  billion worth of assets, but proposed to cover the
first  billion of losses and an additional  billion a year for three years, while giv-
ing the FDIC  billion in Wachovia preferred stock and stock warrants (rights to
buy stock at a predetermined price) as compensation; the FDIC would cover any ad-
ditional losses above  billion. 
FDIC staff expected Wachovia’s losses to be between  billion and  billion.
On the basis of that analysis and the particulars of the offers, they estimated that the