It’s now been a year since Wachovia called off an expected merger deal with Citigroup in favour of an offer from Wells Fargo. That deal hasn’t received anywhere near the attention that the acquisition of Bear Stears or the failure of Lehman Brothers received.
But now America Banker has unveiled a fascinating piece of investigative journalism by Jeff Horowitz. Six months in the making, the long article tells the twisting and turning story of the end of Wachovia. And there are lots of twists and turns.
Early on, for instance, the government urged Wachovia to negotiate a deal with Goldman Sachs. The negotiations were put to a halt, however, when the Fed decided to allow Goldman and Morgan Stanley to become bank holding companies. It really demonstrates how ad hoc and chaotic the government’s moves were last fall.
Wachovia started talking to Goldman at the urging of Kevin Warsh, a governor at the New York Fed. He urged Wachovia’s chief, Bob Steele, to talk with Goldman. Steele had been a Goldman executive before going to work for the Treasury Department and later taking the helm of Wachovia. He called Lloyd Blankfein and the two men agreed to hold talks that weekend.
The prospect of a merger with Wachovia wasn’t one that Goldman took lightly.
As John Weinberg, a former Marine who headed the investment bank from 1976 to 1990, once put it, Goldman kept commercial bankers out of the firm “because they’ll screw it up.” But being the best of the investment banks wasn’t so appealing when the field was down to two and narrowing.
“The waters were lapping around the first story of Morgan Stanley and moving up the beach toward us,” one Goldman official present for the discussions says.
By Saturday Sept. 20, Wachovia had dispatched a small team, including Carroll, Sherburne, and Wachovia adviser Peter Weinberg, to Goldman’s offices. Steel flew in to Westchester, where Blankfein was waiting for him at the airport. Only a day or two before, Federal Reserve Chairman Ben Bernanke had called Blankfein to suggest that Goldman’s management might be able to fix Citi, and asked him to discuss a merger with Pandit. But nobody had thought to run the idea past Citi before Blankfein called.
“It was a very short conversation on a subject that Vikram had no interest in,” the Goldman source says.
The groundwork had been laid a little better for the Wachovia talks – there was never any doubt that Goldman’s management would head any merged bank.
Beyond Goldman’s nebulous qualms about the retail banking business, the firm claims it had identified $60 billion in un-marked losses on Wachovia’s balance sheet. (Wachovia executives say such a number was never mentioned.) Still, Goldman was game to push on if the government provided a backstop, and the plan had the support of Paulson, a former Goldman CEO. On Sunday morning, the Treasury secretary had called Wachovia board member Joe Neubauer to tell him that a merger would be “a marriage made in heaven” in terms of addressing systemic risk, says a person Neubauer told about the call. The imminent passage of the Troubled Asset Relief Program, Paulson reportedly said, would provide legal cover for government assistance.
“There couldn’t be explicit promises, but there was a very strong commitment to cover whatever financial needs there would be,” says one former Wachovia executive. “It wasn’t just the suggestion that the two firms get together.
It was a very strong suggestion.”
Over a lunch of takeout Chinese food and pizza, the two sides agreed to make a pitch to Washington for the merger. Major elements, including price and glaring cultural differences, remained unsettled, but the plan was ready to submit to the government.
While Paulson’s support was crucial to the deal, it was undeniably awkward.
According to both sides, a principal concern was the “optics” of a bailout:
The CEO of Goldman Sachs was negotiating a merger with the former head of Goldman Sachs equities, all with the explicit support of the former CEO of Goldman Sachs. As Lloyd Blankfein’s predecessor, “the sensitivity of Paulson in all of this was pretty well understood,” someone familiar with the negotiations says.
Despite its vigorous encouragement, Treasury couldn’t make the call. The decision was handed to the Fed. Wachovia’s team was left to wait in a Goldman conference room. A few hours later, Blankfein returned.
“We’ve taken this as far as we can right now,” he said, according to sources. “You might as well go back to Charlotte.” The reason came a few hours later: The Fed had agreed to convert Goldman and Morgan to bank holding companies. The government would now provide the two firms with the stable funding that Wachovia would have offered.
And just like that, the deal with Goldman was dead.
You really should go read Horowitz’s entire article, which goes into detail about the all night negotiations with Citi and Wells that were held in the Park Avenue “M&A dorm” of the law firm Sullivan & Cromwell and how Bair and Steel broke the news to Vikram Pandit that Citi wasn’t going to get Wachovia in a 2 a.m. phone call.