Market Epicurean


The Month I Could Never Forget: A Not-So Happy Anniversary – PART EIGHT

Pipe

What a 20-Block Walk Can Mean to the Fate of a Gigantic Bank

I arrived in New York City on the evening of Thursday, September 25, 2008, in time to take in the failure of banking giant, Washington Mutual.  I also arrived without luggage (the one time in over 250 trips to New York City in twenty years that luggage was lost).  If lost luggage, a week representing the collapse of capital markets, and the failure of one of the largest banks on the west coast were all not enough, USC also lost to Oregon State late that night in on an ESPN Thursday Night Football game that would end up being our only loss of the season.  Yes, things were really bad.

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Friday, September 26 was another substantial day in the financial crisis.  Senator John McCain announced he was “suspending his campaign” to focus on the financial crisis, a political stunt that won over absolutely no one.  I spent the day in various meetings and found myself leaving a meeting at 36th Street and Madison Avenue at approximately 2:00 pm.  My blackberry went off as I walked into a little restaurant to grab a late lunch.  “Citigroup closer to acquiring Wachovia” was the headline at that time.  A beverage and meal later, I began a walk down Madison Avenue where I was meeting people at 54thStreet.  By the time that walk was done, I had received three more alerts on the blackberry – one suggesting that a large bank in Spain was looking at Wachovia, and one suggesting that Wells Fargo may jump in the fray.  If you will recall, just a week earlier, rumors were flying that Wachovia may buy Morgan Stanley.  I actually have this literal progression sorted out in vivid memory:

9/17 – Wachovia to buy Morgan Stanley

9/19 – Goldman Sachs to buy Wachovia

9/24 – Wachovia passing on buying Morgan Stanley and passing on selling to Goldman Sachs

9/26 – 2pm – Citi making offer to buy Wachovia

9/26 – 3pm – Banco Santander considering a bid for Wachovia

9/26 – 4pm – Wells Fargo making offer to buy Wachovia

It was an exciting week in Charlotte, NC!  (Home of Wachovia Bank, then the 4th largest bank holding company in the U.S.)

As it would play out, Citi formerly offered to buy Wachovia for basically $1 per share, but with the FDIC absorbing any losses in a $312 billion mortgage pool Wachovia owned after $42 billion of losses.  The FDIC and Fed announced that this deal was entering final stages.  The deal was not going to include the Wachovia brokerage business (itself a conglomerate of Prudential, First Union, Everyn, and AG Edwards).  The Wells Fargo offer came during a period Wachovia and Citi were exclusively negotiating and involved no government backstop at all.  The deal was essentially for $7 a share.

(Remember that when I say “basically $1 per share” and “essentially $7 a share,” it is because these types of deals are actually done at an “equivalent” ratio in stock of the acquiring company.  So one can compute what the economic value to the seller was at the point of the offer, but the ending economic value fluctuates as the stock value of the buyer fluctuates; the ratio stays the same, but the numbers are not so black and white).

James Gorman, CEO of Morgan Stanley (still today) told us at a closed-door meeting in 2009 that the capital hole in Wachovia’s balance sheet was $25 billion.  Well, the cost of their purchase of Golden West Financial in 2006 was, you guessed it, $25 billion.  Golden West was a famed subprime mortgage provider known for their use of negative amortization loans.  Wachovia Bank had $671 billion of deposits, but the capital hole in their balance sheet from somewhat inexplicable mortgage acquisitions, combined with a run on their bank the day after WaMu went down, had left Wachovia beaten and left for dead.  Wells Fargo had the balance sheet to make the purchase without government support, and Wachovia’s board jumped on the deal.

That final weekend of September would encompass some real drama for millions of Americans.  Across midtown Manhattan, there was a palpable sense of dread, fear, and uncertainty.  The world was now two weeks past the death of Lehman Brothers, and Congress was to vote on Monday on the idea of a “TARP” relief package to re-instill confidence in America’s financial system.  If fatigue was setting in on what had become of American capital markets and her premier financial institutions, the weekend would prove to be little aid in addressing such fatigue.

Wachovia became the latest institutional casualty in this financial crisis, and I banked another memory – of a 20-block walk so eventful, I hardly remember the meetings before and after it.

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