Jury is still out over rescue of Wachovia
By Suzanne Kapner
Published: September 28 2010 18:34
It was a deal that almost did not happen. And yet, the tale of how Wells Fargo snapped up failing Wachovia from under Citigroup’s nose at the height of the financial crisis is likely to be regarded as one of the savviest negotiating moves of all time.
For Wells Fargo, which had grown from a small California lender into a regional powerhouse through dozens of acquisitions, it was the deal of a lifetime. The move would transform Wells Fargo from the fourth-largest US retail bank into the second largest, trailing only Bank of America – according to SNL Financial, the deal allowed the bank to double its branch network and nearly triple deposits.
But it was also a huge gamble on the US economy, which is now seeing considerable deleveraging by consumers, low interest rates and new regulations eat into bank profits.
In rushing to Wachovia’s rescue as it teetered on the verge of collapse, Wells Fargo was also making a bet that it could correctly estimate future losses on hard-to-value residential and commercial real estate loans that were going bad at a record pace. Scott Siefers, a Sandler O’Neill analyst, says: “The concern was that Wachovia would turn out to be a bottomless pit of losses”.
These all appeared risks worth taking in September 2008, when, at the height of the financial crisis, the US government was desperately trying to prevent another bank failure just weeks after Lehman Brothers filed for bankruptcy protection.
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