When the financial system was imploding in 2008, there was one shining light for Tim Geithner: a flailing Citi would buy Wachovia, giving the huge bank “a stable deposit base.”
Sheila Bair, then head of the FDIC, was not a fan of the deal, but was strong-armed into supporting it, according to an interview she gave to Joe Nocera at the New York Times.
Eventually, Wells Fargo would bid for Wachovia, and Bair would support it (much to the disdain of Geithner and the New York Fed).
The almost-Citi deal with Wachovia is just one example that Bair gives Nocera for her “exit interview,” highlighting how the FDIC was regularly sidelined by the Treasury and the Fed during the crisis, even though Bair’s agency had been the only regulator to begin calling the sub-prime meltdown prior to it happening.
Often, she’d be bullied into supporting already agreed upon terms by the Treasury and Fed, because they’d bring out the, ‘if you don’t do this, the system is going down’ argument.
According to the Bair,
They always had the view that the F.D.I.C. was not in the same league as Treasury and the Fed. As a result, we were rarely consulted. They would bring me in after they’d made their decision on what needed to be done, and without giving me any information they would say, ‘You have to do this or the system will go down.’ If I heard that once, I heard it a thousand times. ‘Citi is systemic, you have to do this.’ No analysis, no meaningful discussion. It was very frustrating.”
And in Bair’s opinion, “no bank was treated as solicitously, especially by the New York Fed,” as Citi was.
According to the New York Times,
She felt pressured by the Fed to allow Citi to buy a failing Wachovia — which she suspected was a kind of backdoor way to strengthen Citi by giving it access to Wachovia’s stable deposit base. To make the deal work, the New York Fed even agreed to absorb some of Wachovia’s losses. When the F.D.I.C. accepted the Citi offer, Geithner felt that a deal had been made.
But before Citi could close the deal, Wells Fargo, a much stronger bank, made a better offer — one that didn’t require government assistance. Bair leapt at it. Geithner was furious, complaining that Bair’s action was sending the wrong signal at the wrong time: that the federal government couldn’t be trusted to stick to its word. Bair didn’t care; she clearly got the right outcome for taxpayers and bank depositors, even if it didn’t help Citigroup.