Tuesday, August 4, 2009

Geithner versus Bair

Friday's blow up by Treasury Secretary Geithner may have been directed to a large degree at FDIC Chairman Sheila Bair. She is against the Federal Reserve gaining more power, and Geithner and Bair have history. WSJ is running the below excerpt today from WSJ economics editor David Wessel's new book, In Fed We Trust. Note Geithner's forceful attempt to push Wachovia into the hands of Citi, which would have been a gift similar to the gifts of Bear Stearns and Washington Mutual delivered to JPMorgan Chase. It should be noted that former Goldman CEO, Robert Rubin, played an important roles at Citi, including for a short-term Chairman--which would explain the desire to help out Citi. Geithner really wanted to give Citi, Wachovia compared to the multi-billion bid from Wells Fargo. Keep in mind while you read the excerpt that the initial deal with Citi was for $1 per share of Wachovia stock, Wachovia ultimately accepted an offer to merge with Wells Fargo for $7 per share.

The Fed contemplated but ultimately rejected making an “unusual and exigent” loan. Wachovia was a bank, and the law provided a road map for coping with the collapse of a big bank. The only rub was that it meant dealing with [FDIC Chairman] Sheila Bair. They decided to do it anyhow.
Bair wanted to do to Wachovia what she’d done to WaMu — take it over, sell the pieces, and wipe out stockholders and bondholders. After all, any losses that the FDIC had to swallow to rescue Wachovia would have to be assessed across the entire banking system in higher premiums on FDIC deposit insurance.

“I don’t think that the small banks should have to pay for the sins of the big banks,” she said.
[Then New York Fed President] Geithner blew up. Wachovia has to open on Monday, he argued. It must be sold this weekend, the buyer needs government assistance, and the debt holders need to be protected. “It has to be this way,” he said. “We just went to Congress for $700 billion. The policy of the U.S. government is that there will be no more WaMu’s.”

Don Kohn, the calm, straight shooter who was the Fed’s vice chairman, mediated. Eventually, Bair acquiesced; and the Fed, the Treasury, and the FDIC declared Wachovia to be “systemically important,” the first such declaration since Congress legislated the notion in 1991. Wachovia was, after all, the fourth-largest bank in the country, and if that didn’t make it systemically important, then what did? The officials agreed to provide “open bank assistance” — subsidizing the takeover of a bank before it formally failed — for the first time since 1992. Bair called Wachovia’s [CEO Bob] Steel to tell him that the FDIC would be auctioning off his company that night.

[But the auction process wasn't a smooth one. Citigroup and Wells Fargo were both suitors. Bair initially chose Citigroup, and a deal was announced. But one day later, Wells Fargo came back with a counteroffer. The new proposal got the FDIC off the hook, and Bair endorsed it. A new deal between Wells Fargo and Wachovia was unveiled, just four days after the Citigroup-Wachovia announcement.]

Geithner was ballistic over the about-face. This was bad for Citigroup, a big and troubled bank that was hugely important to the system. Though his detractors saw protecting Citi as his main concern, Geithner argued that the switch to Wells Fargo would destroy the government’s credibility in cutting Sunday-night deals to sell failing institutions. “You cannot run a government in a financial crisis like this,” said Geithner. “You can’t let people rebid every time the world changes.”

Bair, though, stuck with Wells Fargo, and other Fed officials were reluctant — having turned Wachovia over to her — to try to take it back. Citi executives were understandably livid. [Citigroup CEO Vikram] Pandit called Geithner, who got Warsh on the phone; a couple of Pandit’s top lieutenants joined the call. Not only had they lost Wachovia, but they also now looked like bank executives who couldn’t negotiate an airtight merger agreement.

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