WASHINGTON
In an appearance before the Financial Crisis Inquiry Commission on Thursday, Federal Reserve Chairman Ben Bernanke said that in September 2008, Wachovia Corp. told regulators that the bank wasn't going to be able to open up in a "day or two" in the face of a serious deposit run.
Bernanke's remarks came after a commission member wondered why an acquisition appeared to be the only solution considered for an ailing Wachovia, the Charlotte bank now owned by Wells Fargo & Co. The Fed's discount window -- a funding source of last resort for banks -- is considered a tool to stem bank runs, noted commission member Peter Wallison.
"They thought that the liquidity drains were such that they could not meet them even with the discount window," Bernanke said. The Federal Reserve Bank of Richmond later confirmed this diagnosis, he added.
The questioning came on a second day of hearings about how the government handled banks "too big to fail" such as Wachovia and Lehman Brothers Holdings Inc. at the peak of the financial crisis. The commission is charged with examining the causes of the meltdown and issuing a report on its findings by Dec. 15.
Over the weekend of Sept. 27-28, 2008, regulators arranged a government-assisted sale of most of Wachovia to Citigroup. Days later, Wells Fargo prevailed with an offer to buy Wachovia without government aid.
Under questioning, Bernanke said that the run on Wachovia's deposits was initiated by the earlier failure of Seattle-based mortgage lender Washington Mutual Inc.
However, Sheila Bair, the chairman of the Federal Deposit Insurance Corp., later disputed that characterization in defending her agency's handling of WaMu's closure.
"I think there was a culmination of events that led to Wachovia's liquidity problems," Bair testified. "And if there was a connection between WaMu and Wachovia, it was not how the resolution of WaMu was handled. It was the fact that WaMu had failed for reasons related to a very large (adjustable-rate mortgage) portfolio on the West Coast, which Wachovia also had because of its Golden West acquisition."
The Office of Thrift Supervision shuttered WaMu on the evening of Thursday, Sept. 25, 2008, and the FDIC sold most of its operations to JPMorgan Chase & Co. The timing was unusual and spooked the markets: Regulators almost always shut down troubled financial institutions on Fridays, but Bair said that "circumstances" forced them to close WaMu a day earlier than planned.
The next day, Wachovia was pummeled: Investors sent the stock plunging 27 percent. By the end of the day, Wachovia was in talks with Citi and Wells Fargo.
In testimony Wednesday, an FDIC official, John Corston, said that Wachovia lost $5.7 billion in deposits on that Friday, Sept. 26. But he also said that a deposit drain had begun weeks earlier. In the week after Lehman's bankruptcy filing on Sept. 15, Wachovia lost $8.3 billion in deposits, he said.
"Wachovia was losing uninsured deposits. They were losing transaction accounts. They were losing derivatives counterparties," Bair said. "It was a near-panic situation from a whole series of events: Lehman, AIG, the uncertainty of the TARP legislation."
Under questioning from Wallison, Bair said that Wachovia was technically solvent at the time, but it was an "open question" as to whether it could stay that way.
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