A sworn affidavit filed this weekend in federal court by Wachovia Corp. Chief Executive Robert K. Steel paints a picture of a perilous situation in which the eighth-largest U.S. bank in stock-market value was caught between competing takeover bids while facing enormous pressure from the Federal Deposit Insurance Corp. to sell itself.
The affidavit suggests that Wachovia has come close to failing at least twice in the last week. Were the Charlotte, N.C., bank to collapse, it would rank as by far the largest failure of a federally insured bank in U.S. history.
The filing also suggests that the FDIC pushed Mr. Steel toward making a deal with Wells Fargo, based in San Francisco. Upending Wachovia's initial pact with Citigroup Inc. would let the government off the hook for its agreement to absorb certain future loan losses at Wachovia.
In the 57-page filing, Mr. Steel, a former Treasury Department undersecretary and Goldman Sachs Group Inc. executive, said the Sept. 25 failure of Washington Mutual Inc. and that week's uncertainty about the bailout legislation in Washington "resulted in significant downward pressure in the market on the price of Wachovia stock."
The next day, Wachovia and Citigroup entered into a confidentiality agreement about a possible acquisition. Wachovia and Wells Fargo entered into a similar agreement the same day.
On Saturday, Sept. 27, Wells Fargo Chairman Richard Kovacevich told Mr. Steel that Wells Fargo was willing to enter into a deal without any government assistance. "A merger could be executed before the market opened Monday," Mr. Steel said he was told.
At 6 p.m. the next day, Mr. Kovacevich backed out, saying Wells Fargo couldn't follow through under the "compressed timetable to acquire Wachovia without substantial government assistance," according to the affidavit. An affidavit is a written declaration made under oath as a truthful representation of facts.
FDIC Chairman Sheila Bair then contacted Mr. Steel, advising him to "commence negotiations with Citi," since the government felt that government-assistance would be likely in any deal.
On Monday, Sept. 29 at 6:30 a.m., Mr. Steel told Wachovia's board of directors that there were two options. Either the holding company, called Wachovia Corp., could file for bankruptcy, with its banking subsidiaries going into receivership, or parts of the company could be sold to Citigroup.
Wachovia directors agreed to take Citigroup's offer, valued at about $2 billion.
In the affidavit, Mr. Steel said that subsequent negotiations with Citigroup "proved extremely complicated and difficult," though he didn't go into more detail in the affidavit.
"Wachovia was under tremendous pressure from Citi and the regulators to conclude a transaction with Citigroup with definitive agreements by the following Monday, October 6, 2008."
On Thursday, Oct. 2, Mr. Bair contacted Mr. Steel and asked if he had talked to Mr. Kovacevich recently. Mr. Steel said he hadn't, according to the affidavit. Ms. Bair said Wells Fargo would be making a counteroffer, adding that Mr. Steel should give it "serious consideration."
Mr. Steel was on a plane about to take off, so Ms. Bair called Wachovia's general counsel and went over some of the details, the affidavit states. Mr. Kovacevich called Mr. Steel at 9 p.m., once the flight had landed. Four minutes later, Mr. Kovacevich sent a signed merger agreement from Wells Fargo. Wachovia's board had a conference call at 11 p.m. that night.
"The Company's advisors and I told the board that we believed that unless a definitive merger agreement was signed with either Citigroup or Wells Fargo by the end of the day Friday, October 3, that the FDIC was prepared to place Wachovia's banking subsidiaries into receivership," Mr. Steel said in the affidavit.
