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How did it come to this for Wachovia?
The writing, some say, was on the wall in early 2000 as the bank felt pressure to expand
Journal Photo by David Rolfe
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Published: October 1, 2008
The end of Wachovia Corp. as a banking institution may have appeared as abrupt as a heart attack Monday.
Wachovia accepted a $2.2 billion stock offer from Citigroup Inc., along with $95 billion in assumed debt and loan losses, in a deal brokered by the federal government to keep Wachovia from total collapse. The deal requires approval by Wachovia shareholders and regulators.
However, the root of Wachovia's financial-health problems may have begun in early 2000 -- preceding the controversial sale of the bank to First Union Corp. -- according to analysts.
Linking the fall of Wachovia to challenges it faced eight years ago may be considered revisionist by some Wachovia officials, but there are similarities between today's banking environment and the one Wachovia faced before pursuing First Union as a buyer in April 2001.
In both instances, Wachovia's struggles with bad loans and poor credit decisions led to job cuts, major charge-offs, missed earnings forecasts and increasing pressure on its share price.
Analysts said yesterday that the effects of Wachovia's bad "syndicated loans" in 2000-01 are nowhere near the same level of damage caused by the toxic exotic mortgages the bank absorbed through its purchase of Golden West Financial Corp. in October 2006.
Syndicated loans are offered by a group of lenders to provide financing for a single borrower.
Still, analysts said, the losses on some syndicated loans, along with the dot.com bust and industry consolidation, probably affected Wachovia's bottom line enough to encourage L.M. "Bud" Baker Jr. to act on a merger urge with First Union he had had for months. Baker was the chairman and chief executive of Wachovia at the time of the First Union deal.
Baker said yesterday that Wachovia did have minor problems with some syndicated loans.
"But there was no pressure on the board to sell," Baker said. "Whatever talk there is that we had to sell because we were in trouble is simply untrue, absolutely wrong.
"The decision to proceed with the First Union deal was mine, and it wouldn't have happened without me."
There were other pressures on the former Wachovia, analysts said.
For years, Wachovia, then considered a well-run and conservative $74 billion bank, had heard from Wall Street that it was not going to grow its way into a top-10 bank without expanding, which meant taking more risks with some projects.
The pressures were not unlike those BB&T Corp. faced, and ultimately staved off, from 2004 until recently.
Part of Wachovia's problems in 2000 and 2001 was the "overreaching of its underwriting standards to impress analysts in an effort to play in a bigger league," said Tony Plath, a finance professor at UNC Charlotte.
Baker sold the First Union deal, announced on April 16, 2001, to a stunned work force and Winston-Salem community on the basis that Wachovia did not have all the financial tools it needed, such as a wider range of investment and capital-market products.
In return, First Union would gain Wachovia's customer-service and wealth-management expertise.
Ken Thompson, the chief executive of First Union at the time, said that "the benefits of this deal are so compelling, financially and strategically, it is something we had to do." Thompson became chief executive of the merged bank in September 2001 and chairman in February 2003.
The merger was pitched as solidifying the future of the merged bank and Charlotte as a major banking center. It also would help wipe the slate clean for First Union, which had a reputation for poorly handling the integration of financial institutions it had bought.
The deal was consummated at a time when SunTrust Banks Inc., responding to being spurned by Wachovia as a potential suitor, began a hostile takeover bid that was at times worth more than the First Union offer.
Baker denied in 2001 that he and the bank were pushed into selling, but skeptics of First Union and the deal say that Baker has never provided a compelling answer to why Wachovia pursued a buyer, particularly when other former management officials said they felt that the bank was strong enough "to stiff-arm" any hostile offer.
The deal raised questions, the skeptics said, because Wachovia shareholders got such a small premium for their stock and were asked to trade their shares for those of a company that has disappointed investors in recent years.
"So why First Union?" said Joseph Gordon of Gordon Asset Management LLC, an investment-advisory company in Durham.
"It's easy. They made Baker an offer he couldn't refuse. They didn't even need to watch Godfather reruns to do it. They simply tore up his severance package, doubled it, added a few more perks, and presto."
Baker has strongly denied, at the time of the First Union deal and yesterday, that he was influenced by personal gain.
Baker got a $1.5 million annual retirement package for life from the merged bank. He turned down a proposed $500,000 increase in his retirement compensation after accusations by some shareholders that the deal with First Union was partly motivated by a more attractive pension package.
In the end, Wachovia cut 1,300 local jobs as part of the merger, but held on to the wealth-management headquarters, the Carolinas banking unit and an information-technology division.
The merged bank moved forward with First Union's management in place, which pursued increasingly bigger and riskier deals as part of an attempt to become a one-stop financial franchise and join the big-three giants of Bank of America Corp., JP Morgan Chase & Co. and Citigroup.
Some of the new Wachovia's deals drew praise, including its February 2003 deal for Prudential Securities, its June 2004 deal for SouthTrust Corp. for $14.3 billion and its $6.8 billion deal for A.G. Edwards in June 2007.
But along with the expansions came more regulatory scrutiny.
The First Union-Wachovia deal drew inquiries from the federal Securities and Exchange Commission that mainly focused on stock purchases made by both banks between April and June 2001. Securities regulators from several states began investigating Wachovia Securities' auction-rate securities-sales practices.
And even though it posted quarter after quarter of record earnings through 2006 -- largely coming from new revenue from its purchases -- it also began a series of major job cuts aimed at cutting costs and transferring some duties to overseas vendors. A job cut of at least 10,750 was announced in July.
Then came the Golden West deal, which was pitched in May 2006 by Thompson as the "crown jewel" of the nation's savings institutions. Golden West also gave Wachovia new banking markets in five states and a much larger presence in California.
Many analysts criticized the deal, saying that it made Wachovia more vulnerable to a slowing housing market and more loan losses because the bank was heavily focused on adjustable-rate mortgages.
Thompson defended the deal, saying at the time, "You would have to have huge unemployment and a huge downdraft in home values before this product got hit in any way."
Unfortunately for Wachovia, that economic scenario surfaced so quickly that the bank posted the second-largest quarterly loss in U.S. banking history -- at $8.9 billion -- in July. It also cost Thompson his job as chairman in May and chief executive in June.
Robert Steel, a former U.S. Treasury official and former executive at Goldman Sachs, was hired as chief executive in July. Although Steel repeatedly denied that he was hired to organize the sale of Wachovia, that's what he ended up doing last weekend.
"Wachovia faced a liquidity crisis on Friday afternoon that they couldn't resolve with purchased money from the capital market, and the FDIC had to take action," Plath said. "They had to take it quickly, after all, Wachovia's deposit book is $460 billion, and the FDIC's reserve balance is $42 billion.
"So you have one very motivated seller with the FDIC looking over their shoulder trying to do a deal on Saturday and Sunday, and you only have two real buyers looking the situation over.
"When Wells (Fargo) dropped out of the bidding on Sunday evening, that left only one bank interested in the purchase, which meant Citi could pretty much name whatever price it wanted to pay for Wachovia," Plath said.
"And it did."
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
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