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CRISIS AND PANIC
Wells proposal would cost the FDIC between . billion and . billion, whereas
the Citigroup proposal would cost the FDIC nothing. Late Sunday, Wachovia submit-
ted its own proposal, under which the FDIC would provide assistance directly to the
bank so that it could survive as a stand-alone entity.
But the FDIC still hadn’t decided to support the systemic risk exception. Its
board—which included the heads of the OCC and OTS—met at : A.M. on Mon-
day, September , to decide Wachovia’s fate before the markets opened. FDIC As-
sociate Director Miguel Browne hewed closely to the analysis prepared by the
Richmond Fed: Wachovia’s failure carried the risk of knocking down too many domi-
noes in lines stretching in too many directions whose fall would hurt too many
people, including American taxpayers. He also raised concerns about potential global
implications and reduced confidence in the dollar. Bair remained reluctant to inter-
vene in private financial markets but ultimately agreed. “Well, I think this is, you
know . . . one option of a lot of not-very-good options,” she said at the meeting. “I
have acquiesced in that decision based on the input of my colleagues, and the fact the
statute gives multiple decision makers a say in this process. I’m not completely com-
fortable with it but we need to move forward with something, clearly, because this in-
stitution is in a tenuous situation.”
To win the approval of Bair and John Reich (the OTS director who served on the
FDIC board), Treasury ultimately agreed to take the unusual step of funding all gov-
ernment losses from the proposed transaction. Without this express commitment
from Treasury, the FDIC would have been the first to bear losses out of its Deposit
Insurance Fund, which then held about . billion; normally, help would have
come from Treasury only after that fund was depleted. According to the minutes of
the meeting, Bair thought it was “especially important” that Treasury agree to fund
losses, given that “it has vigorously advocated the transaction.”
After just minutes, the FDIC board voted to support government assistance.
The resolution also identified the winning bidder: Citigroup. “It was the fog of war,”
Bair told the FCIC. “The system was highly unstable. Who was going to take the
chance that Wachovia would have a depository run on Monday?”
Wachovia’s board quickly voted to accept Citigroup’s bid. Wachovia, Citigroup,
and the FDIC signed an agreement in principle and Wachovia and Citigroup exe-
cuted an exclusivity agreement that prohibited Wachovia from, among other things,
negotiating with other potential acquirers.
In the midst of the market turmoil, the Federal Open Market Committee met at
the end of September , at about the time of the announced Citigroup acquisition
of Wachovia and the invocation of the systemic risk exception. “The planned merger
of two very large institutions led to some concern among FOMC participants that
bigger and bigger firms were being created that would be ‘too big to fail,’” according a
letter from Chairman Bernanke to the FCIC. He added that he “shared this concern,
and voiced my hope that TARP would create options other than mergers for manag-
ing problems at large institutions and that subsequently, through the process of regu-
latory reform, we might develop good resolution mechanisms and decisively address
the issues of financial concentration and too big to fail.” 
