Before being forced last month into selling itself, Wachovia Corp. proposed a plan to stay independent with assistance from the Federal Deposit Insurance Corp. but was rebuffed, according to a securities filing today by the Charlotte bank.
At 12:30 a.m. on Monday Sept. 29, Wachovia asked for a loss-sharing agreement with the FDIC on “a designated loan portfolio” in exchange for issuing an equity stake in the bank to the government agency, according to the filing. Wachovia also would have sought to raise $10 billion in capital, the filing said.
Instead, FDIC Chairman Sheila Bair informed Wachovia chief executive Bob Steel at 4 a.m. that the agency had determined that Citigroup Inc. would buy Wachovia's banking subsidiaries and that Wachovia was to negotiate with the New York bank before an announcement was made later that morning.
Hours later, the FDIC would announce that Citi was buying most of Wachovia for $2.16 billion with FDIC assistance, although a definitive agreement still needed to be signed. Wells Fargo & Co. of San Francisco, which had earlier passed on buying Wachovia, would later return with another offer on Oct. 2, which Wachovia's board accepted. After a week of uncertainty, the Wachovia-Wells deal is moving forward, although Citi is suing Wells over the breakup of its transaction.
Today's filing is a prospectus for shareholders outlining many of the details about Wells' proposed acquisition of Wachovia, which was on the verge of insolvency when it was forced into the Citi sale. The filing did not include a date for a Wachovia shareholders meeting needed to approve the deal, but officials expect the merger to be completed by year's end. The Federal Reserve Board has already approved the purchase.
The filing provides new details about Wachovia's travails in the week leading up to its sale amid tumult in the financial markets. It describes talks with at least five major financial institutions about mergers, acquisitions and potential major investments in a two week-period. The government also began encouraging Wachovia to do a deal a week earlier than previously known.
Starting Sept. 16, following the failure of Lehman Brothers and the sale of Merrill Lynch & Co. to Bank of America Corp., Wachovia's management and board began considering multiple options, according to the filing. These included sticking to its original plan of cutting costs and shedding non-core assets as well as new options, including raising $10 billion to $15 billion in capital, selling certain core assets, seeking a large outside investor that would take a 20 percent to 40 percent voting stake in the company or finding a merger partner.
Starting that week, Wachovia received unsolicited calls from Citigroup CEO Vikram Pandit about buying Wachovia. And on Wednesday Sept. 17, Wachovia began merger-of-equal talks with an unnamed partner, likely investment bank Morgan Stanley & Co.
On Saturday Sept. 20, U.S. government officials also encouraged Wachovia to talk to another unnamed financial institution but those talks fizzled by the next day because the potential acquirer wanted a financial backstop that the U.S. government was not willing to provide. Negotiations with the potential merger of equals partner also ended on Sunday Sept. 21, according to the filing. Morgan Stanley converted into a bank holding company that day and later announced an investment by a Japanese bank.
Wachovia spokeswoman Christy Phillips-Brown declined to identify the unnamed banks in the filing. News reports have previously identified Banco Santander of Spain as an institution that looked at Wachovia.
The filing also said Steel had a brief conversation with Wells Fargo Chairman Dick Kovacevich about the possibility of a deal on Sept. 20, a week earlier than previously known. Steel and the bank's advisers at investment bank Perella Weinberg had two follow-up conversations to make arrangements for due diligence work and to encourage him to consider the purchase on an “accelerated basis,” according to the filing.
During the same period, Wachovia also made preparations to raise capital through a public stock offering as well as through private investors, the filing said. The Observer has previously reported that Wachovia talked to famed investor Warren Buffett about a possible investment, which didn't pan out.
Market conditions, however, continued to deteriorate. On Wednesday Sept. 24, Steel tried to contact Pandit but the Citi CEO was traveling. They didn't get in touch until Friday Sept. 26, when Steel promptly responded to a 4:27 a.m. email.
Later that day, Wachovia's stock would fall 27 percent, it would begin losing deposits and financial institutions began declining to conduct normal financing transactions with the bank, according to the filing. Rating agencies said they were likely to take “negative ratings action in the very near future.” Wachovia now thought it was no longer possible to raise capital and management was worried it could not conduct normal banking activities on Monday Sept. 29 without borrowing from the Federal Reserve's discount window.
By that weekend, Wachovia was in talks with Citi and Wells, with an eye on sealing a deal by Monday morning. Kovacevich backed off buying Wachovia without government assistance on Sunday Sept. 28, but Wells continued to talk to the FDIC about a government-aided deal into the early morning hours of Sunday Sept. 29, the filing said.
Wachovia also proposed its own “alternative transaction” in which it would get FDIC assistance in return for a stake in the bank.
“Wachovia urged the FDIC to accept this proposal, believing it involved significantly less risk to the FDIC fund than the transaction it understood Citigroup to be proposing,” the filing said.
The FDIC, however, decided to favor the Citi proposal, which would break up Wachovia. While Citi would buy Wachovia's banking operations, it would leave behind the asset management and brokerage businesses.
Although the parties had an agreement-in-principle, Wachovia and Citi still needed to finalize the terms. The filing said Wachovia encouraged Citi to buy all of the company but Citi refused, although it offered to pay an additional $2.16 billion in Citi stock and to buy additional assets. Wachovia remained concerned about the viability of the company that would be left behind.
In court filings, Citi has said the final agreement was essentially done on Thursday Oct. 2, but today's filing says there were a “number of substantive issues of disagreement” remaining. Meanwhile, Wells Fargo's board began discussing the possibility of making an offer, seeing that no final merger agreement had been announced, according to the filing.
After being told an offer was coming from the FDIC's Bair at about 7:15 p.m. on Oct. 2, Steel heard from Kovacevich at 9 p.m. Kovacevich e-mailed Wells' offer and said his bank would disclose the proposal publicly on the morning of Friday Oct. 3. Wachovia's board met at 11 p.m. and later approved the offer after extensive discussions, the filing said.
Around 7 a.m. on Friday, Wells and Wachovia announced their merger.
Citi spokeswoman Shannon Bell declined to comment on the content of the filing. When Citi decided to allow the Wells-Wachovia merger to go forward, CEO Pandit said his company had not sought out the transaction.
"Without our willingness to engage in this transaction, hundreds of billions of dollars of value would have been seriously threatened,” he said. “We stood by while others walked away.”Related Links
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