WASHINGTON — Federal Reserve officials feared the failure of Wachovia Corp. in the fall of 2008 would intensify the financial crisis and damage the already-weak economy, Scott Alvarez, general counsel for central bank's board of governors, will tell an investigative panel Wednesday, according to his prepared testimony.
Alvarez is appearing before the Financial Crisis Inquiry Commission, a congressionally-created body tasked with probing the causes of the 2008 financial crisis.
Specifically, Alvarez is testifying on the Federal Reserve's role in brokering the sale of Wachovia as it teetered on the edge of failure.
Alvarez's testimony details the decision by U.S. regulators to pursue a government-assisted sale of Wachovia rather than have the Federal Deposit Insurance Corp. seize and liquidate the country's fourth largest bank. While liquidation was the least costly measure, regulators decided to invoke a "systemic risk exception" and pursue a government-assisted sale in order to protect the stability of the financial system, Alvarez said.
"The board believed that a full or partial default by Wachovia and its subsidiaries on their debt would intensify liquidity pressures on other U.S. banking organizations," all of which were extremely vulnerable at the time, Alvarez said in the prepared testimony. He said regulators believed that an FDIC seizure of Wachovia could also undermine already damaged business and consumer confidence, further damaging the economy.
In the end, Wells Fargo & Co. snatched Wachovia from Citigroup Inc. with an offer that required no government assistance, a well-known story that Alvarez reviews in his testimony.
He said that Citigroup sent a letter to the Fed after Wachovia accepted the Wells Fargo offer, protesting any Wells Fargo application to the Fed.
When Citigroup subsequently filed a lawsuit, Fed officials waded into the fracas out of concern that the legal fight itself could destabilize the institutions involved and the banking system as a whole, he said.
Fed officials sought to facilitate negotiations among the parties, and the result was a legal cease-fire agreement on Oct. 6 and eventually a decision by Citigroup to stop trying to halt the Wells Fargo deal, Alvarez said.