Too Big to Fail [269]
He had spoken to Citigroup the day before, when they had laid out a plan to buy Wachovia in concert with the U.S. government. The bank would assume $53 billion of Wachovia’s subordinated debt and would cover as much as $42 billion of losses on its $312 billion portfolio; anything beyond that the government would absorb. In return for that protection, Citi would pay the government $12 billion in preferred stock and warrants. Geithner had always liked the idea of merging Citigroup and Wachovia, which he viewed as an ideal solution to each party’s problems: Citigroup needed a larger deposit base and Wachovia clearly needed a larger, stronger institution. Even so, Geithner was still hopeful that Wells Fargo would pull through and be able to reach a deal without government involvement.
But now, having just gotten off a conference call with Kevin Warsh and Jeff Lacker of the Federal Reserve of Richmond, which regulates Wachovia, he had a new problem: Despite Kovacevich’s indication to Steel just that morning that he wanted to reach an independent agreement, Kovacevich had called and stated that if he had to conclude the deal before Monday, he didn’t feel comfortable moving forward without government assistance. He was too unsure of the firm’s marks and couldn’t take the risk.
There was now within the government a de facto turf battle over Wachovia, given the involvement of Richmond, with Warsh and Geithner playing deal makers. And Sheila Bair at the FDIC had yet to take part: If Wachovia really were to fail, it would be her jurisdiction.
Geithner and Warsh set up a conference call to coordinate their efforts with Bair, the fifty-four-year-old chairwoman of the FDIC and one of their least favorite people in government. They had always regarded Bair as a showboat, a media grandstander, a politician in a regulator’s position whose only concern was to protect the FDIC, not the entire system. She was not, in their view, a team player. Geithner would frequently commiserate about Bair with Paulson, who shared a similar perspective about her. At times, Paulson had a genuine respect for her. “She comes to play,” he regularly said to his staff, but added, “When she is surrounded by her people, when she’s peacocking for other people or she’s worried about the press, then she’s going be miserable.”
Bair, who had just ended a conversation with Warren Buffett (who she was hoping could help her track down Wells Fargo’s president, John Stumpf), joined a conference call late Sunday with Geithner, Warsh, and Treasury’s David Nason. Paulson, who was barred from talking to Steel, had tried to disentangle himself from this particular matter, expending his energy instead on TARP and receiving only irregular updates on the negotiation progress from Nason.
When Geithner suggested Bair should help subsidize any deal for Wachovia, she resisted the proposal firmly, stating in a lengthy soliloquy that the only way she would get involved was if she were to take over the bank completely, and then sell it.
When she finished, there was an awkward silence. “Right, right, right,” Geithner said, almost mocking Bair.
Geithner countered that allowing the FDIC to take over Wachovia would have the effect of wiping out shareholders and bondholders, which he was convinced would only spook the markets. He was still furious with Bair for the way she had abruptly taken over Washington Mutual, which had had a deleterious effect on investor confidence. Given Paulson’s ongoing public efforts to support the banking system, he told her, that option was a nonstarter. Then Geithner, looking for another jar of money, asked Nason if Treasury could contribute to the effort, which could eventually amount to more than $100 billion.
“We’re still trying to get TARP passed,” Nason replied briskly. “We can’t be committing money.”
At 7:00 p.m., Bob Steel, waiting in a conference room at Sullivan & Cromwell’s Midtown offices, got a disturbing call from Kovacevich,