"Earlier government intervention likely wouldn't have been enough; Wachovia couldn't be helped"

"More than two years after the collapse of Wachovia Corp., a question haunts many shareholders, employees and analysts.

Could an earlier intervention by federal regulators have helped Wachovia survive the missteps of risk-taking executives and the Great Recession?

Given the Federal Reserve’s recent disclosure of some below-the-radar loans it made to Wachovia and more than 400 other recipients, the answer now seems more certain — “no.”

Wachovia’s run as an independent bank ended in October 2008 after 129 years, even though it had been given 17 short-term emergency loans worth a combined $72 billion from the Fed’s Term Auction Facility program. It took out $75 billion more after being taken over by Wells Fargo & Co., for a grand total of $147 billion in TAF loans.

The loans were not made public at the time, but the Fed disclosed details about the program, and 10 other little-known loan sources, on Dec. 1, [2012] after Congress requested more transparency in financial markets.

It may never be known publicly whether the emergency loans served as a lifeline for Wachovia, or just life support aimed at preventing a run on the bank.

Wells Fargo said in a statement, “It is not productive for us to speculate on past events.”

But analysts say that it was unlikely the bank could have survived. Even with the loans, Wachovia reported 2008 quarterly losses of $708 million, $8.9 billion and $24 billion — the largest by a U.S. bank at the time.

...The new chief executive, Robert Steel, pledged that he would keep Wachovia independent, even as analysts and shareholders fretted that he was hired just to sell the bank.

By July 2008, when Wachovia disclosed having an $8.9 billion quarterly loss, the bank had taken several drastic steps. It raised more than $8 billion in capital, cut its dividend twice and eliminated more than 11,000 jobs companywide.

As its share price continued its freefall, it borrowed billions in TAF loans, unbeknownst to the public.

...Before the financial crisis took hold, the main source of emergency funding offered by the Fed was known as the “discount window.” It was designed to function as a safety valve for banks facing liquidity strains.

The problem with the discount window is that historically it was considered the last resort for financing for struggling financial institutions.

The Fed acknowledges on its website that during the heart of the financial crisis, “many banks were reluctant to borrow at the discount window out of fear that their borrowing would become known and would be erroneously taken as a sign of financial weakness.”

...The Fed created 11 lending programs, including the TAF program, to provide liquidity to financial institutions at a time when credit markets were frozen and investors were reluctant to buy new stock issued by banks that were desperate for a capital infusion.

Although some of Wachovia’s TAF loans overlapped, no more than $17.5 million was borrowed at any time. Interest rates ranged from 2.1 percent to 4.65 percent. The loans were either 28 days or 84-85 days in length. All loans were repaid, the Fed said.

Wachovia’s borrowing ran from Dec. 20, 2007 — the first day of TAF availability — through Sept. 25, 2008. That was right before a weekend of feverish negotiations spawned the Sept. 28 announcement of a Citigroup takeover of Wachovia — brokered by the Federal Deposit Insurance Corp.

However, before that deal could close, Wells Fargo re-entered the fray with a counteroffer. Its deal was worth $12.7 billion when the purchase closed on Dec. 31, 2008 — about one-sixth the value of the $72 billion in TAF loans that Wachovia had taken out at the time.

After Wells Fargo took over Wachovia, Wachovia received an additional six loans worth a combined $75 billion — including $15 billion on the day the FDIC approved the takeover. Those interest rates started at 1.39 percent and dropped as low as 0.25 percent.

Even with Wells Fargo’s financial backing and the additional TAF money, the damage was done.

...Analysts still question why Wachovia was not allowed to participate in the more publicized, and criticized, bailout program known as TARP, or Troubled Asset Relief Program, which was introduced publicly in late summer 2008.

Through the creation of TARP, the federal government gave the U.S. Treasury the ability to spend up to $700 billion to buy mortgage-backed securities from institutions. The goal was to create liquidity and unfreeze the money markets.

At first, qualifying for TARP was considered as a sign of financial strength because the U.S. Treasury wouldn’t throw good money at financial institutions considered beyond rescue.

However, once the regulatory restrictions of having TARP financing became clearer, such as executive compensation and dividend limits, several of the stronger banks, such as BB&T and First Community Bancshares Inc., repaid the money as quickly as feasible.

...As for why regulators saved Citigroup in the financial bailout, and not Wachovia, “Wachovia had no underlying reasons to be helped out of a situation of its own making by the feds other than a cry of fairness,” said Arnold Danielson, the chairman of Danielson Associates of Bethesda, Md., a bank consulting company.

Richard Craver, JOURNAL REPORTER | Updated Dec 11, 2012

http://www.journalnow.com/business/article_f977a3b9-33c2-5ccb-bb76-fcc1bdf8b845.html?mode=jqm