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Wachovia's End

A year has passed since the teetering Wachovia Corp. called off an expected merger deal with Citigroup and opted instead to accept an offer from Wells Fargo. The broad events leading up to – and through – those decisive moments are well know to many in the industry, but the behind-the-scenes maneuvering of those fateful days remains mostly untold.

The story that follows reveals much about the interactions between executives and policymakers in those chaotic days. It is the product of a six-month investigative project undertaken by author Jeff Horwitz as part of his fellowship at Columbia University's Graduate School of Journalism.

Through interviews with attorneys, bankers and high-level government officials, Horwitz learned that regulators had rejected a Wachovia proposal to essentially "rescue" itself and that Wells Fargo initially balked at a deal with Wachovia prior to Citi's acquisition pact because Wells officials "didn't understand" Wachovia's commercial loan portfolio. He also relates the story of meetings held in the weeks before the Wells deal was struck in which Wachovia had held merger talks with Goldman Sachs at the suggestion of Treasury Secretary Henry Paulson, a former Goldman CEO. Paulson would later back away over concerns about conflicts of interest.

What emerges is a story of a group of key players making, and sometimes reversing, rapid-fire decisions at the height of last year's financial crisis to avert the total collapse of one of the nation's largest banks.

While the conclusion resolved the situation around Wachovia specifically and brought some important lessons, the questions it raised about policy around systemically important institutions are by no means settled. That debate continues to this day and will for quite some time.

On Sunday, Sept. 14, as Lehman Bros.' last suitors backed away and Merrill Lynch scrambled to find a buyer, Wachovia's top executives mulled over a comparatively trivial matter: the scheduled appearance of its chief executive, Robert Steel, on CNBC's Mad Money the following day.

Steel understood the gravity of what was happening on Wall Street. Before taking Wachovia's top job in July, he had been Henry Paulson's deputy secretary at the Treasury Department, responsible for credit-market triage after the collapse of Bear Stearns. Earlier, he'd worked with Paulson as head of global equities at Goldman Sachs.

But as dangerous as the crisis was to the remaining investment banks, the situation looked less dire from Wachovia's headquarters in Charlotte. Though the bank was staring at billions of dollars of losses on troubled mortgage loans, its $448 billion of stable deposits buffered it from the panic in the credit markets that had felled Lehman and left the surviving investment banks gasping for liquidity. Ultimately, Steel and his deputies concluded that canceling the CNBC appearance might spook investors.

Shortly after 6 p.m. on Monday the 15th, Steel strode onto Mad Money's cartoonishly cluttered set and shook host Jim Cramer's hand. Introduced as someone "who knows how bad things are, but also knows how they can get better," Steel spoke quickly and with conviction about the crisis and Wachovia's own resilience. The interview was almost over when Cramer brought up Merrill Lynch, which had just struck a deal to sell itself to Bank of America.

"Is the goal here to get it so that your bank is ready to be sold to a foreign bank, to someone else?" Cramer asked.

Steel had joined Wachovia with the intention of restoring its status one of the nation's strongest regional banks, and he had immediately bought one million shares of Wachovia's stock as a show of faith in the bank and himself. He gently shook his head.

"Jim, we have a great future as an independent company," he said, before adding that he would do whatever was in the best interest of shareholders.

There was reason for his slight hedging. The tumult following Lehman's collapse left Wachovia in need of more capital at exactly the moment when jittery investors were least inclined to provide it. While Steel projected cautious optimism, in private, he was also exploring options that included selling a stake in the bank, divesting core assets, or merging with another institution.

Three weeks later, of course, Wachovia ended up in the arms of Wells Fargo & Co., in a deal that was one of the defining events of the financial crisis.

With regulators involved every step of the way, the deal very likely saved the deposit insurance fund from what would have been the largest and costliest bank failure in history. A year later, the Wachovia rescue is also, in some ways, shaping the debate over the future of too-big-to-fail institutions. Wachovia was the first institution formally deemed to pose a systemic risk to the financial system, and its treatment, led by Federal Deposit Insurance Corp. Chairman Sheila Bair, stands in stark contrast to later interventions led by the Treasury Department and the Federal Reserve.