Wachovia
Encyclopedia
Wachovia was a diversified financial services
company based in Charlotte, North Carolina
. Before its acquisition by Wells Fargo
in 2008, Wachovia was the fourth-largest bank holding company in the United States
based on total assets. Wachovia provided a broad range of banking, asset management, wealth management
, and corporate and investment banking
products and services. At its height, it was one of the largest providers of financial services in the United States, operating financial centers in 21 states and Washington, D.C., with locations from Connecticut to Florida and west to California. Wachovia provided global services through more than 40 offices around the world. The purchase of Wachovia by Wells Fargo and Company was completed on December 31, 2008. Wells Fargo acquired Wachovia after a government-forced sale to avoid a failure of Wachovia.
Starting in 2009, the Wachovia brand was absorbed into the Wells Fargo brand in a process that lasted three years. On October 15, 2011, the Wachovia brand was retired when the last bank branches in North Carolina
were converted to Wells Fargo.
The company was organized into four divisions: General Bank (retail, small business, and commercial customers), Wealth Management (high net worth, personal trust, and insurance business), Capital Management (asset management, retirement, and retail brokerage services), and Corporate and Investment Bank (capital markets, investment banking, and financial advisory).
It served retail brokerage clients under the name Wachovia Securities
nationwide as well as in six Latin America
n countries, and investment banking clients in selected industries nationwide. In 2009, Wachovia Securities was the first Wachovia business to be converted to the Wells Fargo brand, when the business became Wells Fargo Advisors. Calibre was an independent consultant that was hired by Wachovia for the Family Wealth Group to research managers. The group no longer uses Calibre.
The company's corporate and institutional capital markets and investment banking groups operated under the Wachovia Securities brand, while its asset management group operated under the Evergreen Investments
brand until 2010, when the Evergreen fund family merged with Wells Fargo Advantage Funds, and institutional and high net worth products merged with Wells Capital Management and its affiliates.
Wachovia's private equity
arm operated as Wachovia Capital Partners
. Additionally, the asset-based lending
group operated as Wachovia Capital Finance.
form of the Austria
n name Wachau
. When Moravian settlers arrived in Bethabara, North Carolina, in 1753, they gave this name to the land they acquired, because it resembled the Wachau valley along the Danube River
. The area formerly known as Wachovia now makes up most of Forsyth County
, and the largest city is now Winston-Salem
.
First Union Corporation
was founded as Union National Bank on June 2, 1908, a small banking desk in the lobby of a Charlotte hotel by H.M. Victor.
The bank merged with First National Bank and Trust Company of Asheville, North Carolina
in 1958 to become First Union National Bank of North Carolina. First Union Corporation was incorporated in 1967. Other predecessor companies include the Bank of North America
, the first bank proposed, chartered and incorporated in America on December 31, 1781.
Legacy Wachovia Corporation began on June 16, 1879 in Winston-Salem, North Carolina
as the Wachovia National Bank. The bank was opened by William Lemly. In 1911, the bank merged with Wachovia Loan and Trust Company
, which had been founded on June 15, 1893. Wachovia grew to become one of the largest banks in the Southeast partly on the strength of its accounts from the R.J. Reynolds Tobacco Company
, which was also headquartered in Winston-Salem. On December 12, 1986, Wachovia purchased First Atlanta. Founded as Atlanta National Bank on September 14, 1865, and later renamed to First National Bank of Atlanta, this institution was the oldest national bank in Atlanta. This purchase made Wachovia one of the few companies with dual headquarters: one in Winston-Salem and one in Atlanta. In 1998, Wachovia acquired two Virginia-based banks, Jefferson National Bank and Central Fidelity Bank. In 1997, Wachovia acquired both 1st United Bancorp and American Bankshares Inc, giving its first entry into Florida
. In 2000, Wachovia made its final purchase, which was Republic Security Bank.
announced it would merge with Winston-Salem based Wachovia Corporation. As an important part of the deal, First Union shed its name and assumed the Wachovia identity and stock ticker (NYSE:WB).
This merger was viewed with great surprise by the financial press and security analysts. While Wachovia had been viewed as an acquisition candidate after running into problems with earnings and credit quality in 2000, the suitor shocked analysts as many speculated that Wachovia would be sold to SunTrust.
The deal met with skepticism and criticism. Analysts, remembering the problems with the CoreStates acquisition, were concerned about First Union's ability to merge with another large company. Winston-Salem's citizens and politicians suffered a blow to their civic pride because Wachovia's corporate headquarters would move to Charlotte, a larger city than Winston-Salem. The city of Winston-Salem was concerned both by job losses and the loss of stature from losing a major corporate headquarters. First Union was concerned by the potential deposit attrition and customer loss in the city. First Union responded to these concerns by placing the wealth management and Carolinas-region headquarters in Winston-Salem.
On May 14, 2001, Atlanta-based SunTrust announced a rival takeover bid for Wachovia, the first hostile takeover attempt in the banking sector in many years. In its effort to make the deal appeal to investors, SunTrust argued that it would provide a smoother transition than First Union and offered a higher cash price for Wachovia stock than First Union.
Wachovia's board of directors rejected SunTrust's offer and supported the merger with First Union. SunTrust continued its hostile takeover attempt, leading to a bitter battle over the summer between SunTrust and First Union. Both banks increased their offers for Wachovia, took out newspaper ads, mailed letters to shareholders, and initiated court battles to challenge each other's takeover bids. On August 3, 2001, Wachovia shareholders approved the First Union deal, rejecting SunTrust's attempts to elect a new board of directors for Wachovia and ending SunTrust's hostile takeover attempt.
Another problem concerned each bank's credit card division. In April 2001, Wachovia agreed to sell its $8 billion credit card portfolio to Bank One. The cards, which would have still been branded as Wachovia, would have been issued through Bank One's First USA division. First Union had sold its credit card portfolio to MBNA
in August 2000. After entering into negotiations, the new Wachovia agreed to buy back its portfolio from Bank One in September 2001 and resell it to MBNA. Wachovia paid Bank One a $350 million termination fee
.
On September 4, 2001, First Union and Wachovia officially merged to form the new Wachovia Corporation, though First Union was the surviving entity. In order to prevent a repeat of the CoreStates problems, the new Wachovia took its time phasing-in the conversion of legacy Wachovia computer systems to First Union systems. The company first began converting systems in the southeast United States (where both banks had branches), before moving to the Northeast, where First Union branches only had to change their signs to reflect the new company name and logo. This process ended on August 18, 2003, almost 2 years after the merger took place.
In comparison to the CoreStates purchase, the merger of First Union and Wachovia was billed as a success by analysts. The company's deliberate pace of conversion seems to have prevented any large-scale customer attrition
. In fact, every year since the merger, Wachovia has been ranked number one in customer satisfaction among major banks by the University of Michigan
's annual American Customer Satisfaction Index
.
When Wachovia and First Union merged, Charlotte, North Carolina's One, Two, and Three First Union buildings became One, Two, and Three Wachovia Center (respectively), and the 55-story First Union Financial Center in downtown Miami
became the Wachovia Financial Center
. The merger also affected the names of the indoor professional sports arenas in Philadelphia and Wilkes-Barre, Pennsylvania
. Formerly known as the First Union Center and the First Union Spectrum (both Philadelphia) and First Union Arena (Wilkes-Barre), they were renamed the Wachovia Center
(now known as Wells Fargo Center), Wachovia Spectrum
, and Wachovia Arena at Casey Plaza
(now known as Mohegan Sun Arena at Casey Plaza), respectively.
Michael Serricchio, a broker for Prudential Securities, was called to active duty in the Air Force reserve in September 2001. At the time, he was handling about 250 accounts with assets totaling $15 million and earning $80000 a year. He was not offered his old position back after his military stint was over, instead being given a job to make cold calls for a $2,000-a-month advance on his commissions. Wachovia also shuffled all of Serricchio's clients away, leaving him with just 4. He sued Wachovia, who had purchased Prudential Securities. A jury found that Wachovia had breached the Uniformed Services Employment and Re-employment Rights Act by intentionally making Serricchio an offer that they knew that he would reject.
. This acquisition added a portfolio of over $50 billion of securities on loan to the Wachovia Global Securities Lending division.
-based SouthTrust Corporation
, a transaction valued at $14.3 billion. The merger created the largest bank in the southeast United States, the fourth largest bank in terms of holdings, and the second largest in terms of number of branches. Integration was completed by the end of 2005.
. Wachovia received $100 million out of this deal, the result of an agreement Wachovia predecessor First Union made in 2000 when it sold its credit card portfolio to MBNA. This agreement required MBNA to pay this sum if it were ever sold to a competitor. In late 2005 Wachovia announced that it would end its relationship with MBNA and start up its own credit card division so that the bank could issue its own Visa cards
Westcorp, Western Financial Bank's parent company, WFS Financial Inc. and Wachovia announced a proposed acquisition by Wachovia in September 2005. Westcorp and WFS Financial Inc. shareholders approved the acquisition on Jan. 6, 2006 and on March 1, 2006, the merger was complete. This acquisition made Wachovia the ninth largest auto finance lender in the competitive U.S. auto finance market and provided Wachovia with a small retail and commercial banking presence in Southern California
. On February 12, 2007, the former 19 Western Financial Bank branches opened under the Wachovia name. These branches became the launching point for a much larger Wachovia presence in California with the acquisition and integration of World Savings Bank in 2007.
for a little under $25.5 billion on May 7, 2006. This acquisition gave Wachovia an additional 285-branch network spanning 10 states. Wachovia greatly raised its profile in California, where Golden West held $32 billion in deposits and operated 123 branches.
Golden West, which operated branches under the name World Savings Bank, was the second largest savings and loan in the United States. The business was a small savings and loan in the San Francisco Bay area when it was purchased in 1963 for $4 million by Herbert and Marion Sandler
. Golden West specialized in option ARMs loans, marketed under the name "Pick-A-Pay." These loans gave the borrower a choice of payment plans, including the option to defer paying a part of the interest owed, which was then added onto the balance of the loan. In 2006, Golden West Financial was named the "Most Admired Company" in the mortgage
services business by Fortune magazine. By the time Wachovia announced its acquisition, Golden West had over $125 billion in assets and 11,600 employees. By October 2, 2006 Wachovia had closed the acquisition of Golden West Financial Corporation. The Sandlers agreed to remain on the board at Wachovia.
The Sandlers sold their firm at the top of the market, saying that they were growing older and wanted to devote themselves to philanthropy. A year earlier, in 2005, World Savings lending had started to slow, after more than quadrupling since 1998. Some current and former Wachovia officials say that the merger was agreed to in days and that it was impossible to conduct a thorough vetting of World Savings’ loans. They noted that the creditworthiness of World Savings borrowers edged down from 2004 to 2006, while Pick-A-Pay borrowers had credit scores well below the industry average for traditional loans. World Savings lending volume dipped again in 2006 shortly after the sale to Wachovia was initiated. In 2007, after the merger, World Savings, now known as Wachovia Mortgage began to attract more borrowers by taking a step that some regulators were starting to frown upon, and which the former World Savings management had been resisting for years: it allowed borrowers to make monthly payments based on an annual interest rate of just 1 percent. While Wachovia Mortgage continued to scrutinize borrowers’ ability to manage increased payments, the move to rock-bottom rates lured customers whose financial reliability was harder to verify. More than 70% of the Pick-A-Pay loans were made in California, Florida and Arizona, where home prices have declined severely. New York Times reporter Floyd Norris
has called World Savings a "ticking timebomb" that created "zombie homeowners".
While Wachovia Chairman and CEO G. Kennedy "Ken" Thompson had described Golden West as a "crown jewel", investors did not react positively to the deal at the time. Analysts have since said that Wachovia purchased Golden West at the peak of the US housing boom. Wachovia Mortgage's mortgage-related problems led to Wachovia suffering writedowns and losses that far exceeded the price paid in the acquisition, ending up in the fire-sale of Wachovia to Wells Fargo
.
On May 31, 2007, Wachovia announced plans to purchase A. G. Edwards for $6.8 billion to create the United States' second largest retail brokerage firm. The acquisition closed on October 1, 2007. In early March 2008 Wachovia began to phase out the AG Edwards brand in favor of a unified Wachovia Securities
.
in 2006, Wachovia began to experience heavy losses in its loan portfolios during the subprime mortgage crisis
.
In the first quarter of 2007, Wachovia reported $2.3 billion in earnings, including acquisitions and divestitures. However, in the second quarter of 2008, Wachovia reported a much larger than anticipated $8.9 billion loss.
On June 2, 2008, Wachovia chief executive officer
Ken Thompson
was forced to retire. He'd been head of Wachovia since 2000, while it was still known as First Union.
The board replaced him on an interim basis with Chairman Lanty Smith. Smith had already replaced Thompson as chairman a month earlier.
On July 9, 2008, Wachovia hired Treasury Undersecretary Bob Steel
as chief executive, in hopes that his experience would lead the company out of its difficulties.
the previous night. On the same day, several businesses and institutional depositors withdrew money from their accounts in order to drop their balances below the $100,000 insured by the Federal Deposit Insurance Corporation
(FDIC) – an event known in banking circles as a "silent run." Ultimately, Wachovia lost a total of $5 billion in deposits that day—about one percent of the bank's total deposits. The large outflow of deposits attracted the attention of the Office of the Comptroller of the Currency
, which regulates national banks. Federal regulators pressured Wachovia to put itself up for sale over the weekend. Had Wachovia failed, it would have been a severe drain on the FDIC's insurance fund due to its size (it operated one of the largest branch networks on the East Coast).
As business halted for the weekend, Wachovia was already in FDIC-brokered talks with Citigroup
and Wells Fargo
. Wells Fargo initially emerged as the frontrunner to acquire the ailing Wachovia's banking operations, but backed out due to concerns over Wachovia's commercial loans. With no deal in place as September 28 dawned, regulators were concerned that Wachovia wouldn't have enough short-term funding to open for business the next day. In order to obtain enough liquidity to do business, banks usually depend on short-term loans to each other. However, the markets had been so battered by a credit crisis related to the housing bubble that banks were skittish about making such loans. Under the circumstances, regulators feared that if customers pulled out more money, Wachovia wouldn't have enough liquidity to meet its obligations. This would have resulted in a failure dwarfing that of WaMu.
When FDIC Chairwoman Sheila Bair got word of Wachovia's situation, she initially decided to handle the situation like she'd handled WaMu a day earlier. Under this scenario, the Comptroller of the Currency would have seized Wachovia's banking assets and placed them under the receivership of the FDIC. The FDIC would have then sold the banking assets to the highest bidder. Bair felt this would best protect the small banks. However, several Federal regulators, led by New York Fed
President Tim Geithner, felt such a course would be politically unjustifiable so soon after WaMu's seizure.
After a round of mediation between Geithner and Bair, the FDIC declared that Wachovia was "systemically important
" to the health of the economy, and thus could not be allowed to fail. It was the first time the FDIC had made such a determination since the passage of a 1991 law allowing the FDIC to handle large bank failures on short notice. Bair called Steel on September 28 and told him that the FDIC would be auctioning off Wachovia's banking assets.
That night, the FDIC decided to sell Wachovia's banking operations to Citigroup in an "open bank" transfer of ownership. The transaction would have been facilitated by the FDIC, with the concurrence of the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. The FDIC's open bank assistance procedures normally require the FDIC to find the cheapest way to rescue a failing bank. However, when a bank is deemed "systemically important," the FDIC is allowed to bypass this requirement. Steel had little choice but to agree, and the decision was announced on the morning of September 29, roughly 45 minutes before the markets opened. From this point on, Citigroup became the source of liquidity allowing Wachovia to continue to operate until the acquisition was complete.
In its announcement, the FDIC stressed that Wachovia did not fail and was not placed into receivership. In addition, the FDIC said that the agency would absorb Citigroup's losses above $42 billion; Wachovia's loan portfolio was valued at $312 billion. In exchange for assuming this risk, the FDIC would receive $12 billion in preferred stock and warrants from Citigroup. The transaction would have been an all-stock transfer, with Wachovia Corporation stockholders to have received stock from Citigroup, valuing Wachovia stock at about one dollar per share for a total transaction value of about $2.16 billion. Citigroup would have also assumed Wachovia’s senior and subordinated debt. Citigroup intended to sell ten billion dollars of new stock on the open market to recapitalize its purchased banking operations.
The proposed closing date for the Wachovia purchase was by the end of the year, 2008.
Wachovia expected to continue as a publicly traded company, retaining its retail brokerage arm, Wachovia Securities and Evergreen mutual funds
. At the time, Wachovia Securities had 14,600 financial advisers and managed more than $1 trillion, third in the U.S. after Merrill Lynch
and Citigroup's Smith Barney
.
The announcement drew some criticism from Wachovia stockholders who felt the dollar-per-share price was too cheap. Some of them planned to try to defeat the deal when it came up for shareholder approval. However, institutional investor
s such as mutual fund
s and pension fund
s controlled 73 percent of Wachovia's stock; individual stockholders would have had to garner a significant amount of support from institutional shareholders to derail the sale. Also, several experts in corporate dealmaking told The Charlotte Observer
that such a strategy is very risky since federal regulators helped broker the deal. One financial expert told the Observer that if Wachovia's shareholders voted the deal down, the OCC could have simply seized Wachovia and placed it into the receivership of the FDIC, which would then sell it to Citigroup. Had this happened, Wachovia's shareholders risked being completely wiped out.
and Wachovia announced on October 3, 2008 they had agreed to merge in an all-stock transaction requiring no FDIC involvement, apparently nullifying the Citigroup deal. Wells Fargo announced it had agreed to acquire all of Wachovia for $15.1 billion in stock. Wachovia preferred the Wells Fargo deal, as it would be worth more than the Citigroup deal and kept all of its businesses intact. Also, there is far less overlap between the banks, as Wells Fargo is dominant in the West
and Midwest
compared to the redundant footprint of Wachovia and Citibank
along the East Coast
and South
. Both companies' boards unanimously approved the merger on the night of October 2.
Citigroup explored their legal options and demanded that Wachovia and Wells Fargo cease discussions, claiming that Wells Fargo engaged in "tortious interference" with an exclusivity agreement between Citigroup and Wachovia. That agreement states in part that until October 6, 2008 "Wachovia shall not, and shall not permit any of its subsidiaries or any of its or their respective officers, directors, [...] to [...] take any action to facilitate or encourage the submission of any Acquisition Proposal.".
Citigroup convinced Judge Charles E. Ramos of the New York State Supreme Court to grant a preliminary injunction temporarily blocking the Wells Fargo deal. This ruling was later overturned by Judge James M. McGuire of the New York State Court of Appeals
, partly because he believed Ramos did not have the right to rule on the case in Connecticut.
On October 9, 2008, Citigroup abandoned their attempt to purchase Wachovia's banking assets, allowing the Wachovia-Wells Fargo merger to go through. However, Citigroup pursued $60 billion in claims, $20 billion in compensatory and $40 billion in punitive damages, against Wachovia and Wells Fargo for alleged violations of the exclusivity agreement. Wells Fargo settled this dispute with Citigroup Inc. for $100 Million on November 19, 2010.
Citigroup may have been pressured by regulators to back out of the deal; Bair endorsed Wells Fargo's bid because it removed the FDIC from the picture. Geithner was furious, claiming that the FDIC's reversal would undermine the government's ability to quickly rescue failing banks. However, Geithner's colleagues at the Fed were not willing to take responsibility for selling Wachovia.
The Federal Reserve unanimously approved the merger with Wells Fargo on October 12, 2008. The merger is, however, contingent on certain conditions, that the Federal Reserve has yet to announce.
The combined company will be headquartered in San Francisco, home to Wells Fargo. However, Charlotte will be the headquarters for the combined company's East Coast banking operations, and Wachovia Securities will remain in St. Louis. Three members of the Wachovia board will join the Wells Fargo board. It will be the largest bank branch network in the United States.
In filings unsealed two days before the merger approval in a New York federal court, Citigroup argued that its own deal was better for U.S taxpayers and Wachovia shareholders. They said that they had exposed themselves to "substantial economic risk" by stating their intent to rescue Wachovia after less than 72 hours of due diligence. Citigroup had obtained an exclusive agreement in order to protect itself. Wachovia suffered a $23.9 billion loss in the third quarter.
In September 2008, the Internal Revenue Service
issued a notice providing tax breaks to companies that acquire troubled banks. According to analysts, these tax breaks were worth billions of dollars to Wells Fargo. Vice Chairman Bill Thomas of the Financial Crisis Inquiry Commission indicated that these tax breaks may have been a factor in Wells Fargo's decision to purchase Wachovia.
Wells Fargo's purchase of Wachovia closed on December 31, 2008.
A May 2007 New York Times article described Wachovia's negligence in screening or taking action against companies connected to identity theft
. These companies used stolen identities to remove funds from personal Wachovia bank accounts via unsigned checks. The article goes on to say "In all, Wachovia accepted $142 million of unsigned checks from companies that made unauthorized withdrawals from thousands of accounts, federal prosecutors say. Wachovia collected millions of dollars in fees from those companies, even as it failed to act on warnings, according to records." Furthermore, the article adds "In a lawsuit filed last year, the United States attorney in Philadelphia said Wachovia received thousands of warnings that it was processing fraudulent checks, but ignored them."
On April 25, 2008, Wachovia agreed to pay up to $144 million to end the investigation without admitting wrongdoing. The investigation found that Wachovia had failed to conduct suitable due diligence, and that it would have discovered the thefts if it had followed normal procedures. The penalty is one of the largest ever demanded by the Office of the Comptroller of the Currency
.
In April 2008 Wachovia was also investigated by United States federal prosecutors as part of a probe into drug money laundering by Mexican and Colombian money-transferring firms. The investigation of the alleged laundering also included other large U.S. banks.
Wells Fargo has since admitted that its Wachovia unit was involved in money laundering for drug traffickers. It allowed money to be transferred in and out of casas de cambio, without proper due diligence, in violation of the Bank Secrecy Act
. In March 2010 Wachovia agreed to pay a $160 million dollar fine for involvement in Mexican drug cartel
money laundering that could total up to $420 billion dollars. Said Jeffrey Sloman, the chief US prosecutor in the case, "Wachovia's blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations."
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
company based in Charlotte, North Carolina
Charlotte, North Carolina
Charlotte is the largest city in the U.S. state of North Carolina and the seat of Mecklenburg County. In 2010, Charlotte's population according to the US Census Bureau was 731,424, making it the 17th largest city in the United States based on population. The Charlotte metropolitan area had a 2009...
. Before its acquisition by Wells Fargo
Wells Fargo
Wells Fargo & Company is an American multinational diversified financial services company with operations around the world. Wells Fargo is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo is the second largest bank in deposits, home...
in 2008, Wachovia was the fourth-largest bank holding company in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
based on total assets. Wachovia provided a broad range of banking, asset management, wealth management
Wealth management
Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services...
, and corporate and investment banking
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
products and services. At its height, it was one of the largest providers of financial services in the United States, operating financial centers in 21 states and Washington, D.C., with locations from Connecticut to Florida and west to California. Wachovia provided global services through more than 40 offices around the world. The purchase of Wachovia by Wells Fargo and Company was completed on December 31, 2008. Wells Fargo acquired Wachovia after a government-forced sale to avoid a failure of Wachovia.
Starting in 2009, the Wachovia brand was absorbed into the Wells Fargo brand in a process that lasted three years. On October 15, 2011, the Wachovia brand was retired when the last bank branches in North Carolina
North Carolina
North Carolina is a state located in the southeastern United States. The state borders South Carolina and Georgia to the south, Tennessee to the west and Virginia to the north. North Carolina contains 100 counties. Its capital is Raleigh, and its largest city is Charlotte...
were converted to Wells Fargo.
Business lines
It served retail brokerage clients under the name Wachovia Securities
Wachovia Securities
Wells Fargo Advisors, is a subsidiary of Wells Fargo, located in St. Louis, Missouri. It is the second largest brokerage firm in the United States as of October 1, 2007 with $1.17 trillion retail client assets under management....
nationwide as well as in six Latin America
Latin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
n countries, and investment banking clients in selected industries nationwide. In 2009, Wachovia Securities was the first Wachovia business to be converted to the Wells Fargo brand, when the business became Wells Fargo Advisors. Calibre was an independent consultant that was hired by Wachovia for the Family Wealth Group to research managers. The group no longer uses Calibre.
The company's corporate and institutional capital markets and investment banking groups operated under the Wachovia Securities brand, while its asset management group operated under the Evergreen Investments
Evergreen Investments
Evergreen Investments was the investment management business of Wachovia. The brand was merged into Wells Fargo Advantage Funds and subsequently phased out following Wells Fargo's acquisition of Wachovia...
brand until 2010, when the Evergreen fund family merged with Wells Fargo Advantage Funds, and institutional and high net worth products merged with Wells Capital Management and its affiliates.
Wachovia's private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
arm operated as Wachovia Capital Partners
Wachovia Capital Partners
Pamlico Capital, formerly Wachovia Capital Partners and previously First Union Capital Partners, is an independent private equity firm focused on growth capital and leveraged buyout investments in middle-market companies in the business services, technology services, telecommunications and...
. Additionally, the asset-based lending
Asset-based lending
In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken. In this sense, a mortgage is an example of an asset-backed loan. More commonly however, the phrase is used to describe lending to business and large...
group operated as Wachovia Capital Finance.
Origin of corporate name
Wachovia has its origins in the LatinLatin
Latin is an Italic language originally spoken in Latium and Ancient Rome. It, along with most European languages, is a descendant of the ancient Proto-Indo-European language. Although it is considered a dead language, a number of scholars and members of the Christian clergy speak it fluently, and...
form of the Austria
Austria
Austria , officially the Republic of Austria , is a landlocked country of roughly 8.4 million people in Central Europe. It is bordered by the Czech Republic and Germany to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the...
n name Wachau
Wachau
The Wachau is an Austrian valley with a picturesque landscape formed by the Danube river. It is one of the most prominent tourist destinations of Lower Austria, located midway between the towns of Melk and Krems that also attracts "connoisseurs and epicureans". It is in length and was already...
. When Moravian settlers arrived in Bethabara, North Carolina, in 1753, they gave this name to the land they acquired, because it resembled the Wachau valley along the Danube River
Danube
The Danube is a river in the Central Europe and the Europe's second longest river after the Volga. It is classified as an international waterway....
. The area formerly known as Wachovia now makes up most of Forsyth County
Forsyth County, North Carolina
-Demographics:As of the census of 2000, there were 306,067 people, 123,851 households, and 81,741 families residing in the county. The population density was 747 people per square mile . There were 133,093 housing units at an average density of 325 per square mile...
, and the largest city is now Winston-Salem
Winston-Salem, North Carolina
Winston-Salem is a city in the U.S. state of North Carolina, with a 2010 population of 229,617. Winston-Salem is the county seat and largest city of Forsyth County and the fourth-largest city in the state. Winston-Salem is the second largest municipality in the Piedmont Triad region and is home to...
.
First Union
First Union Corporation
First Union Corporation was a banking company providing commercial and retail banking services in eleven states in the eastern U.S. First Union also provided various other financial services, including mortgage banking, credit card, investment banking , investment advisory, home equity lending,...
was founded as Union National Bank on June 2, 1908, a small banking desk in the lobby of a Charlotte hotel by H.M. Victor.
The bank merged with First National Bank and Trust Company of Asheville, North Carolina
Asheville, North Carolina
Asheville is a city in and the county seat of Buncombe County, North Carolina, United States. It is the largest city in Western North Carolina, and the 11th largest city in North Carolina. The City is home to the United States National Climatic Data Center , which is the world's largest active...
in 1958 to become First Union National Bank of North Carolina. First Union Corporation was incorporated in 1967. Other predecessor companies include the Bank of North America
Bank of North America
The Bank of North America was a private business chartered on December 31, 1781 by the Congress of the Confederation and opened on January 7, 1782, at the prodding of Superintendent of Finance Robert Morris. This was thus the nation's first de facto central bank. It was succeeded in its role as...
, the first bank proposed, chartered and incorporated in America on December 31, 1781.
Legacy Wachovia
Winston-Salem, North Carolina
Winston-Salem is a city in the U.S. state of North Carolina, with a 2010 population of 229,617. Winston-Salem is the county seat and largest city of Forsyth County and the fourth-largest city in the state. Winston-Salem is the second largest municipality in the Piedmont Triad region and is home to...
as the Wachovia National Bank. The bank was opened by William Lemly. In 1911, the bank merged with Wachovia Loan and Trust Company
Trust Company
Trust Company can refer to:*Trust company, a company acting as a trustee*Trust Company *Trust Company, predecessor to SunTrust Banks...
, which had been founded on June 15, 1893. Wachovia grew to become one of the largest banks in the Southeast partly on the strength of its accounts from the R.J. Reynolds Tobacco Company
R.J. Reynolds Tobacco Company
The R. J. Reynolds Tobacco Company , based in Winston-Salem, North Carolina and founded by R. J. Reynolds in 1875, is the second-largest tobacco company in the U.S. . RJR is an indirect wholly owned subsidiary of Reynolds American Inc...
, which was also headquartered in Winston-Salem. On December 12, 1986, Wachovia purchased First Atlanta. Founded as Atlanta National Bank on September 14, 1865, and later renamed to First National Bank of Atlanta, this institution was the oldest national bank in Atlanta. This purchase made Wachovia one of the few companies with dual headquarters: one in Winston-Salem and one in Atlanta. In 1998, Wachovia acquired two Virginia-based banks, Jefferson National Bank and Central Fidelity Bank. In 1997, Wachovia acquired both 1st United Bancorp and American Bankshares Inc, giving its first entry into Florida
Florida
Florida is a state in the southeastern United States, located on the nation's Atlantic and Gulf coasts. It is bordered to the west by the Gulf of Mexico, to the north by Alabama and Georgia and to the east by the Atlantic Ocean. With a population of 18,801,310 as measured by the 2010 census, it...
. In 2000, Wachovia made its final purchase, which was Republic Security Bank.
Merger of First Union and Wachovia
On April 16, 2001, Charlotte-based First Union CorporationFirst Union Corporation
First Union Corporation was a banking company providing commercial and retail banking services in eleven states in the eastern U.S. First Union also provided various other financial services, including mortgage banking, credit card, investment banking , investment advisory, home equity lending,...
announced it would merge with Winston-Salem based Wachovia Corporation. As an important part of the deal, First Union shed its name and assumed the Wachovia identity and stock ticker (NYSE:WB).
This merger was viewed with great surprise by the financial press and security analysts. While Wachovia had been viewed as an acquisition candidate after running into problems with earnings and credit quality in 2000, the suitor shocked analysts as many speculated that Wachovia would be sold to SunTrust.
The deal met with skepticism and criticism. Analysts, remembering the problems with the CoreStates acquisition, were concerned about First Union's ability to merge with another large company. Winston-Salem's citizens and politicians suffered a blow to their civic pride because Wachovia's corporate headquarters would move to Charlotte, a larger city than Winston-Salem. The city of Winston-Salem was concerned both by job losses and the loss of stature from losing a major corporate headquarters. First Union was concerned by the potential deposit attrition and customer loss in the city. First Union responded to these concerns by placing the wealth management and Carolinas-region headquarters in Winston-Salem.
On May 14, 2001, Atlanta-based SunTrust announced a rival takeover bid for Wachovia, the first hostile takeover attempt in the banking sector in many years. In its effort to make the deal appeal to investors, SunTrust argued that it would provide a smoother transition than First Union and offered a higher cash price for Wachovia stock than First Union.
Wachovia's board of directors rejected SunTrust's offer and supported the merger with First Union. SunTrust continued its hostile takeover attempt, leading to a bitter battle over the summer between SunTrust and First Union. Both banks increased their offers for Wachovia, took out newspaper ads, mailed letters to shareholders, and initiated court battles to challenge each other's takeover bids. On August 3, 2001, Wachovia shareholders approved the First Union deal, rejecting SunTrust's attempts to elect a new board of directors for Wachovia and ending SunTrust's hostile takeover attempt.
Another problem concerned each bank's credit card division. In April 2001, Wachovia agreed to sell its $8 billion credit card portfolio to Bank One. The cards, which would have still been branded as Wachovia, would have been issued through Bank One's First USA division. First Union had sold its credit card portfolio to MBNA
MBNA
MBNA Corporation was a bank holding company and parent company of wholly owned subsidiary MBNA America Bank, N.A., headquartered in Wilmington, Delaware, prior to being acquired by Bank of America in 2006...
in August 2000. After entering into negotiations, the new Wachovia agreed to buy back its portfolio from Bank One in September 2001 and resell it to MBNA. Wachovia paid Bank One a $350 million termination fee
Termination fee
A termination fee is a charge levied when a party wants to break the term of an agreement or long-term contract. They are stipulated in the contract or agreement itself, and provide an incentive for the party subject to them to abide by the agreement....
.
On September 4, 2001, First Union and Wachovia officially merged to form the new Wachovia Corporation, though First Union was the surviving entity. In order to prevent a repeat of the CoreStates problems, the new Wachovia took its time phasing-in the conversion of legacy Wachovia computer systems to First Union systems. The company first began converting systems in the southeast United States (where both banks had branches), before moving to the Northeast, where First Union branches only had to change their signs to reflect the new company name and logo. This process ended on August 18, 2003, almost 2 years after the merger took place.
In comparison to the CoreStates purchase, the merger of First Union and Wachovia was billed as a success by analysts. The company's deliberate pace of conversion seems to have prevented any large-scale customer attrition
Customer attrition
Customer attrition, also known as customer churn, customer turnover, or customer defection, is a business term used to describe loss of clients or customers....
. In fact, every year since the merger, Wachovia has been ranked number one in customer satisfaction among major banks by the University of Michigan
University of Michigan
The University of Michigan is a public research university located in Ann Arbor, Michigan in the United States. It is the state's oldest university and the flagship campus of the University of Michigan...
's annual American Customer Satisfaction Index
American Customer Satisfaction Index
The American Customer Satisfaction Index is an economic indicator that measures the satisfaction of consumers across the U.S. economy. It is produced by the American Customer Satisfaction Index, a private company based in Ann Arbor, Michigan....
.
When Wachovia and First Union merged, Charlotte, North Carolina's One, Two, and Three First Union buildings became One, Two, and Three Wachovia Center (respectively), and the 55-story First Union Financial Center in downtown Miami
Miami, Florida
Miami is a city located on the Atlantic coast in southeastern Florida and the county seat of Miami-Dade County, the most populous county in Florida and the eighth-most populous county in the United States with a population of 2,500,625...
became the Wachovia Financial Center
Wachovia Financial Center
Southeast Financial Center is a two-acre development in Miami, Florida, United States. It consists of a tall office skyscraper and its 15-story parking garage. It was previously known as the Southeast Financial Center , the First Union Financial Center , and the Wachovia Financial Center...
. The merger also affected the names of the indoor professional sports arenas in Philadelphia and Wilkes-Barre, Pennsylvania
Wilkes-Barre, Pennsylvania
Wilkes-Barre is a city in the U.S. state of Pennsylvania, the county seat of Luzerne County. It is at the center of the Wyoming Valley area and is one of the principal cities in the Scranton/Wilkes-Barre metropolitan area, which had a population of 563,631 as of the 2010 Census...
. Formerly known as the First Union Center and the First Union Spectrum (both Philadelphia) and First Union Arena (Wilkes-Barre), they were renamed the Wachovia Center
Wachovia Center
The Wells Fargo Center is an indoor arena located in Philadelphia, Pennsylvania....
(now known as Wells Fargo Center), Wachovia Spectrum
Wachovia Spectrum
The Spectrum, formerly known as the CoreStates Spectrum , First Union Spectrum , and Wachovia Spectrum was an indoor arena in Philadelphia, Pennsylvania...
, and Wachovia Arena at Casey Plaza
Wachovia Arena at Casey Plaza
Mohegan Sun Arena at Casey Plaza is an 8,300-seat multi-purpose arena located in Wilkes-Barre, Pennsylvania, managed by SMG.Built in 1998 due to the instrumental work of Pennsylvania Governor Robert P. Casey, Sr...
(now known as Mohegan Sun Arena at Casey Plaza), respectively.
Merger and acquisition history
The following is an illustration of the company's major mergers and acquisitions and historical predecessors (up to the Wachovia and First Union merger of 2001). The list is not comprehensive.Acquisitions
Between 2001 and 2006, Wachovia bought several other financial services companies in an attempt to become a national bank and comprehensive financial services company.Prudential Securities
Wachovia Securities and the Prudential Securities Division of Prudential Financial, Inc. combined to form Wachovia Securities LLC on July 1, 2003. Wachovia owns 62% of this entity, while Prudential Financial owns the remaining 38%. At the time, the new firm had client assets of $532.1 billion, making it the nation's third largest full service retail brokerage firm based on assets.Michael Serricchio, a broker for Prudential Securities, was called to active duty in the Air Force reserve in September 2001. At the time, he was handling about 250 accounts with assets totaling $15 million and earning $80000 a year. He was not offered his old position back after his military stint was over, instead being given a job to make cold calls for a $2,000-a-month advance on his commissions. Wachovia also shuffled all of Serricchio's clients away, leaving him with just 4. He sued Wachovia, who had purchased Prudential Securities. A jury found that Wachovia had breached the Uniformed Services Employment and Re-employment Rights Act by intentionally making Serricchio an offer that they knew that he would reject.
Metropolitan West Securities
On October 22, 2003, Wachovia announced it would acquire Metropolitan West Securities, an affiliate company of Metropolitan West FinancialMetropolitan West Financial
Metropolitan West Financial was a diversified financial services holding company with interests in a variety of firms that provide financial advice and strategic planning, capital management, asset management, investment advice, and fixed-income portfolio management.The acquisitive firm provides...
. This acquisition added a portfolio of over $50 billion of securities on loan to the Wachovia Global Securities Lending division.
SouthTrust
On November 1, 2004, Wachovia completed the acquisition of Birmingham, AlabamaBirmingham, Alabama
Birmingham is the largest city in Alabama. The city is the county seat of Jefferson County. According to the 2010 United States Census, Birmingham had a population of 212,237. The Birmingham-Hoover Metropolitan Area, in estimate by the U.S...
-based SouthTrust Corporation
SouthTrust
SouthTrust Corporation was a banking company headquartered in Birmingham, Alabama. In 2004, SouthTrust reached an agreement to merge with Wachovia in a stock-for-stock deal. At the time of the merger with Wachovia was completed, SouthTrust had $53 Billion in assets. SouthTrust was listed on the...
, a transaction valued at $14.3 billion. The merger created the largest bank in the southeast United States, the fourth largest bank in terms of holdings, and the second largest in terms of number of branches. Integration was completed by the end of 2005.
Failed MBNA purchase
In June 2005, Wachovia negotiated to purchase monoline credit card company MBNA. However, the deal fell through when Wachovia balked at MBNA's purchase price. Within a week of the deal's collapse, MBNA entered into an agreement to be purchased by Wachovia's chief rival, Bank of AmericaBank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
. Wachovia received $100 million out of this deal, the result of an agreement Wachovia predecessor First Union made in 2000 when it sold its credit card portfolio to MBNA. This agreement required MBNA to pay this sum if it were ever sold to a competitor. In late 2005 Wachovia announced that it would end its relationship with MBNA and start up its own credit card division so that the bank could issue its own Visa cards
Westcorp
Southern California
Southern California is a megaregion, or megapolitan area, in the southern area of the U.S. state of California. Large urban areas include Greater Los Angeles and Greater San Diego. The urban area stretches along the coast from Ventura through the Southland and Inland Empire to San Diego...
. On February 12, 2007, the former 19 Western Financial Bank branches opened under the Wachovia name. These branches became the launching point for a much larger Wachovia presence in California with the acquisition and integration of World Savings Bank in 2007.
Golden West Financial/World Savings Bank
Wachovia agreed to purchase Golden West FinancialGolden West Financial
Golden West Financial was the second largest savings and loan in the United States, operating branches under the name of World Savings Bank.-History:...
for a little under $25.5 billion on May 7, 2006. This acquisition gave Wachovia an additional 285-branch network spanning 10 states. Wachovia greatly raised its profile in California, where Golden West held $32 billion in deposits and operated 123 branches.
Golden West, which operated branches under the name World Savings Bank, was the second largest savings and loan in the United States. The business was a small savings and loan in the San Francisco Bay area when it was purchased in 1963 for $4 million by Herbert and Marion Sandler
Herb Sandler
Herbert Sandler is the former CO-CEO of Golden West Financial Corporation and World Savings Bank.-Career:In 1963, the Sandlers created Golden West Financial Corporation, a savings and loan holding company, to acquire Golden West Savings and Loan Association, the predecessor to World Savings Bank...
. Golden West specialized in option ARMs loans, marketed under the name "Pick-A-Pay." These loans gave the borrower a choice of payment plans, including the option to defer paying a part of the interest owed, which was then added onto the balance of the loan. In 2006, Golden West Financial was named the "Most Admired Company" in the mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
services business by Fortune magazine. By the time Wachovia announced its acquisition, Golden West had over $125 billion in assets and 11,600 employees. By October 2, 2006 Wachovia had closed the acquisition of Golden West Financial Corporation. The Sandlers agreed to remain on the board at Wachovia.
The Sandlers sold their firm at the top of the market, saying that they were growing older and wanted to devote themselves to philanthropy. A year earlier, in 2005, World Savings lending had started to slow, after more than quadrupling since 1998. Some current and former Wachovia officials say that the merger was agreed to in days and that it was impossible to conduct a thorough vetting of World Savings’ loans. They noted that the creditworthiness of World Savings borrowers edged down from 2004 to 2006, while Pick-A-Pay borrowers had credit scores well below the industry average for traditional loans. World Savings lending volume dipped again in 2006 shortly after the sale to Wachovia was initiated. In 2007, after the merger, World Savings, now known as Wachovia Mortgage began to attract more borrowers by taking a step that some regulators were starting to frown upon, and which the former World Savings management had been resisting for years: it allowed borrowers to make monthly payments based on an annual interest rate of just 1 percent. While Wachovia Mortgage continued to scrutinize borrowers’ ability to manage increased payments, the move to rock-bottom rates lured customers whose financial reliability was harder to verify. More than 70% of the Pick-A-Pay loans were made in California, Florida and Arizona, where home prices have declined severely. New York Times reporter Floyd Norris
Floyd Norris
Floyd Norris born September 6, 1947 Los Angeles) is chief financial correspondent of The New York Times and The International Herald Tribune.He writes a regular column on the stock market for the Times, plus a blog.-Biography:...
has called World Savings a "ticking timebomb" that created "zombie homeowners".
While Wachovia Chairman and CEO G. Kennedy "Ken" Thompson had described Golden West as a "crown jewel", investors did not react positively to the deal at the time. Analysts have since said that Wachovia purchased Golden West at the peak of the US housing boom. Wachovia Mortgage's mortgage-related problems led to Wachovia suffering writedowns and losses that far exceeded the price paid in the acquisition, ending up in the fire-sale of Wachovia to Wells Fargo
Wells Fargo
Wells Fargo & Company is an American multinational diversified financial services company with operations around the world. Wells Fargo is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo is the second largest bank in deposits, home...
.
A.G. Edwards
On May 31, 2007, Wachovia announced plans to purchase A. G. Edwards for $6.8 billion to create the United States' second largest retail brokerage firm. The acquisition closed on October 1, 2007. In early March 2008 Wachovia began to phase out the AG Edwards brand in favor of a unified Wachovia Securities
Wachovia Securities
Wells Fargo Advisors, is a subsidiary of Wells Fargo, located in St. Louis, Missouri. It is the second largest brokerage firm in the United States as of October 1, 2007 with $1.17 trillion retail client assets under management....
.
Historical data (2000–2008)
Wachovia, excluding subsidiaries, was the fourth largest bank at the end of 2008.2007–2009 financial crisis
Exposed to risky loans, such as adjustable rate mortgages acquired during the acquisition of Golden West FinancialGolden West Financial
Golden West Financial was the second largest savings and loan in the United States, operating branches under the name of World Savings Bank.-History:...
in 2006, Wachovia began to experience heavy losses in its loan portfolios during the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
.
In the first quarter of 2007, Wachovia reported $2.3 billion in earnings, including acquisitions and divestitures. However, in the second quarter of 2008, Wachovia reported a much larger than anticipated $8.9 billion loss.
On June 2, 2008, Wachovia chief executive officer
Chief executive officer
A chief executive officer , managing director , Executive Director for non-profit organizations, or chief executive is the highest-ranking corporate officer or administrator in charge of total management of an organization...
Ken Thompson
G. Kennedy Thompson
G. Kennedy "Ken" Thompson is an American businessman who was previously chairman, president, and CEO of Wachovia Corporation, formerly First Union Corporation, from 2000 through 2008...
was forced to retire. He'd been head of Wachovia since 2000, while it was still known as First Union.
The board replaced him on an interim basis with Chairman Lanty Smith. Smith had already replaced Thompson as chairman a month earlier.
On July 9, 2008, Wachovia hired Treasury Undersecretary Bob Steel
Robert K. Steel
Robert King "Bob" Steel is an American business leader and an expert on financial institutions and markets. In June 2010, he was named Deputy Mayor for Economic Development by New York City Mayor Michael Bloomberg...
as chief executive, in hopes that his experience would lead the company out of its difficulties.
Government intervention
After Steel took over, he insisted that Wachovia would stay independent. However, its stock price plunged 27 percent during trading on September 26 due to the seizure of Washington MutualWashington Mutual
Washington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
the previous night. On the same day, several businesses and institutional depositors withdrew money from their accounts in order to drop their balances below the $100,000 insured by the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) – an event known in banking circles as a "silent run." Ultimately, Wachovia lost a total of $5 billion in deposits that day—about one percent of the bank's total deposits. The large outflow of deposits attracted the attention of the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
, which regulates national banks. Federal regulators pressured Wachovia to put itself up for sale over the weekend. Had Wachovia failed, it would have been a severe drain on the FDIC's insurance fund due to its size (it operated one of the largest branch networks on the East Coast).
As business halted for the weekend, Wachovia was already in FDIC-brokered talks with Citigroup
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
and Wells Fargo
Wells Fargo
Wells Fargo & Company is an American multinational diversified financial services company with operations around the world. Wells Fargo is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo is the second largest bank in deposits, home...
. Wells Fargo initially emerged as the frontrunner to acquire the ailing Wachovia's banking operations, but backed out due to concerns over Wachovia's commercial loans. With no deal in place as September 28 dawned, regulators were concerned that Wachovia wouldn't have enough short-term funding to open for business the next day. In order to obtain enough liquidity to do business, banks usually depend on short-term loans to each other. However, the markets had been so battered by a credit crisis related to the housing bubble that banks were skittish about making such loans. Under the circumstances, regulators feared that if customers pulled out more money, Wachovia wouldn't have enough liquidity to meet its obligations. This would have resulted in a failure dwarfing that of WaMu.
When FDIC Chairwoman Sheila Bair got word of Wachovia's situation, she initially decided to handle the situation like she'd handled WaMu a day earlier. Under this scenario, the Comptroller of the Currency would have seized Wachovia's banking assets and placed them under the receivership of the FDIC. The FDIC would have then sold the banking assets to the highest bidder. Bair felt this would best protect the small banks. However, several Federal regulators, led by New York Fed
Federal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
President Tim Geithner, felt such a course would be politically unjustifiable so soon after WaMu's seizure.
After a round of mediation between Geithner and Bair, the FDIC declared that Wachovia was "systemically important
Too Big to Fail
Too Big to Fail is a television drama film in the United States broadcast on HBO on May 23, 2011. It is based on the non-fiction book Too Big to Fail by Andrew Ross Sorkin. The TV film was directed by Curtis Hanson...
" to the health of the economy, and thus could not be allowed to fail. It was the first time the FDIC had made such a determination since the passage of a 1991 law allowing the FDIC to handle large bank failures on short notice. Bair called Steel on September 28 and told him that the FDIC would be auctioning off Wachovia's banking assets.
That night, the FDIC decided to sell Wachovia's banking operations to Citigroup in an "open bank" transfer of ownership. The transaction would have been facilitated by the FDIC, with the concurrence of the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. The FDIC's open bank assistance procedures normally require the FDIC to find the cheapest way to rescue a failing bank. However, when a bank is deemed "systemically important," the FDIC is allowed to bypass this requirement. Steel had little choice but to agree, and the decision was announced on the morning of September 29, roughly 45 minutes before the markets opened. From this point on, Citigroup became the source of liquidity allowing Wachovia to continue to operate until the acquisition was complete.
In its announcement, the FDIC stressed that Wachovia did not fail and was not placed into receivership. In addition, the FDIC said that the agency would absorb Citigroup's losses above $42 billion; Wachovia's loan portfolio was valued at $312 billion. In exchange for assuming this risk, the FDIC would receive $12 billion in preferred stock and warrants from Citigroup. The transaction would have been an all-stock transfer, with Wachovia Corporation stockholders to have received stock from Citigroup, valuing Wachovia stock at about one dollar per share for a total transaction value of about $2.16 billion. Citigroup would have also assumed Wachovia’s senior and subordinated debt. Citigroup intended to sell ten billion dollars of new stock on the open market to recapitalize its purchased banking operations.
The proposed closing date for the Wachovia purchase was by the end of the year, 2008.
Wachovia expected to continue as a publicly traded company, retaining its retail brokerage arm, Wachovia Securities and Evergreen mutual funds
Evergreen Investments
Evergreen Investments was the investment management business of Wachovia. The brand was merged into Wells Fargo Advantage Funds and subsequently phased out following Wells Fargo's acquisition of Wachovia...
. At the time, Wachovia Securities had 14,600 financial advisers and managed more than $1 trillion, third in the U.S. after Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
and Citigroup's Smith Barney
Smith Barney
Morgan Stanley Smith Barney is a retail brokerage joint venture between Morgan Stanley and Citigroup.On January 13, 2009, Morgan Stanley and Citigroup announced that Citigroup would sell 51% of Smith Barney to Morgan Stanley, creating Morgan Stanley Smith Barney, which was formerly a division of...
.
The announcement drew some criticism from Wachovia stockholders who felt the dollar-per-share price was too cheap. Some of them planned to try to defeat the deal when it came up for shareholder approval. However, institutional investor
Institutional investor
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
s such as mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s and pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
s controlled 73 percent of Wachovia's stock; individual stockholders would have had to garner a significant amount of support from institutional shareholders to derail the sale. Also, several experts in corporate dealmaking told The Charlotte Observer
The Charlotte Observer
The Charlotte Observer, serving Charlotte, North Carolina and its metro area, is the largest newspaper, in terms of circulation, in North Carolina and South Carolina...
that such a strategy is very risky since federal regulators helped broker the deal. One financial expert told the Observer that if Wachovia's shareholders voted the deal down, the OCC could have simply seized Wachovia and placed it into the receivership of the FDIC, which would then sell it to Citigroup. Had this happened, Wachovia's shareholders risked being completely wiped out.
Acquisition by Wells Fargo
Though Citigroup was providing the liquidity that allowed Wachovia to continue to operate, Wells FargoWells Fargo
Wells Fargo & Company is an American multinational diversified financial services company with operations around the world. Wells Fargo is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo is the second largest bank in deposits, home...
and Wachovia announced on October 3, 2008 they had agreed to merge in an all-stock transaction requiring no FDIC involvement, apparently nullifying the Citigroup deal. Wells Fargo announced it had agreed to acquire all of Wachovia for $15.1 billion in stock. Wachovia preferred the Wells Fargo deal, as it would be worth more than the Citigroup deal and kept all of its businesses intact. Also, there is far less overlap between the banks, as Wells Fargo is dominant in the West
Western United States
.The Western United States, commonly referred to as the American West or simply "the West," traditionally refers to the region comprising the westernmost states of the United States. Because the U.S. expanded westward after its founding, the meaning of the West has evolved over time...
and Midwest
Midwestern United States
The Midwestern United States is one of the four U.S. geographic regions defined by the United States Census Bureau, providing an official definition of the American Midwest....
compared to the redundant footprint of Wachovia and Citibank
Citibank
Citibank, a major international bank, is the consumer banking arm of financial services giant Citigroup. Citibank was founded in 1812 as the City Bank of New York, later First National City Bank of New York...
along the East Coast
East Coast of the United States
The East Coast of the United States, also known as the Eastern Seaboard, refers to the easternmost coastal states in the United States, which touch the Atlantic Ocean and stretch up to Canada. The term includes the U.S...
and South
Southern United States
The Southern United States—commonly referred to as the American South, Dixie, or simply the South—constitutes a large distinctive area in the southeastern and south-central United States...
. Both companies' boards unanimously approved the merger on the night of October 2.
Citigroup explored their legal options and demanded that Wachovia and Wells Fargo cease discussions, claiming that Wells Fargo engaged in "tortious interference" with an exclusivity agreement between Citigroup and Wachovia. That agreement states in part that until October 6, 2008 "Wachovia shall not, and shall not permit any of its subsidiaries or any of its or their respective officers, directors, [...] to [...] take any action to facilitate or encourage the submission of any Acquisition Proposal.".
Citigroup convinced Judge Charles E. Ramos of the New York State Supreme Court to grant a preliminary injunction temporarily blocking the Wells Fargo deal. This ruling was later overturned by Judge James M. McGuire of the New York State Court of Appeals
New York Court of Appeals
The New York Court of Appeals is the highest court in the U.S. state of New York. The Court of Appeals consists of seven judges: the Chief Judge and six associate judges who are appointed by the Governor to 14-year terms...
, partly because he believed Ramos did not have the right to rule on the case in Connecticut.
On October 9, 2008, Citigroup abandoned their attempt to purchase Wachovia's banking assets, allowing the Wachovia-Wells Fargo merger to go through. However, Citigroup pursued $60 billion in claims, $20 billion in compensatory and $40 billion in punitive damages, against Wachovia and Wells Fargo for alleged violations of the exclusivity agreement. Wells Fargo settled this dispute with Citigroup Inc. for $100 Million on November 19, 2010.
Citigroup may have been pressured by regulators to back out of the deal; Bair endorsed Wells Fargo's bid because it removed the FDIC from the picture. Geithner was furious, claiming that the FDIC's reversal would undermine the government's ability to quickly rescue failing banks. However, Geithner's colleagues at the Fed were not willing to take responsibility for selling Wachovia.
The Federal Reserve unanimously approved the merger with Wells Fargo on October 12, 2008. The merger is, however, contingent on certain conditions, that the Federal Reserve has yet to announce.
The combined company will be headquartered in San Francisco, home to Wells Fargo. However, Charlotte will be the headquarters for the combined company's East Coast banking operations, and Wachovia Securities will remain in St. Louis. Three members of the Wachovia board will join the Wells Fargo board. It will be the largest bank branch network in the United States.
In filings unsealed two days before the merger approval in a New York federal court, Citigroup argued that its own deal was better for U.S taxpayers and Wachovia shareholders. They said that they had exposed themselves to "substantial economic risk" by stating their intent to rescue Wachovia after less than 72 hours of due diligence. Citigroup had obtained an exclusive agreement in order to protect itself. Wachovia suffered a $23.9 billion loss in the third quarter.
In September 2008, the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
issued a notice providing tax breaks to companies that acquire troubled banks. According to analysts, these tax breaks were worth billions of dollars to Wells Fargo. Vice Chairman Bill Thomas of the Financial Crisis Inquiry Commission indicated that these tax breaks may have been a factor in Wells Fargo's decision to purchase Wachovia.
Wells Fargo's purchase of Wachovia closed on December 31, 2008.
Controversies
Michael Serricchio, a broker for Prudential Securities, was called to active duty in the Air Force reserve, but was not offered his old position back after his military stint was over. He sued Wachovia, who had purchased Prudential. A jury found that Wachovia had breached the Uniformed Services Employment and Re-employment Rights Act by intentionally making Serricchio an offer that they knew that he would reject.A May 2007 New York Times article described Wachovia's negligence in screening or taking action against companies connected to identity theft
Identity theft
Identity theft is a form of stealing another person's identity in which someone pretends to be someone else by assuming that person's identity, typically in order to access resources or obtain credit and other benefits in that person's name...
. These companies used stolen identities to remove funds from personal Wachovia bank accounts via unsigned checks. The article goes on to say "In all, Wachovia accepted $142 million of unsigned checks from companies that made unauthorized withdrawals from thousands of accounts, federal prosecutors say. Wachovia collected millions of dollars in fees from those companies, even as it failed to act on warnings, according to records." Furthermore, the article adds "In a lawsuit filed last year, the United States attorney in Philadelphia said Wachovia received thousands of warnings that it was processing fraudulent checks, but ignored them."
On April 25, 2008, Wachovia agreed to pay up to $144 million to end the investigation without admitting wrongdoing. The investigation found that Wachovia had failed to conduct suitable due diligence, and that it would have discovered the thefts if it had followed normal procedures. The penalty is one of the largest ever demanded by the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
.
In April 2008 Wachovia was also investigated by United States federal prosecutors as part of a probe into drug money laundering by Mexican and Colombian money-transferring firms. The investigation of the alleged laundering also included other large U.S. banks.
Wells Fargo has since admitted that its Wachovia unit was involved in money laundering for drug traffickers. It allowed money to be transferred in and out of casas de cambio, without proper due diligence, in violation of the Bank Secrecy Act
Bank Secrecy Act
The Bank Secrecy Act of 1970 requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering...
. In March 2010 Wachovia agreed to pay a $160 million dollar fine for involvement in Mexican drug cartel
Mexican Drug War
The Mexican Drug War is an ongoing armed conflict taking place among rival drug cartels who fight each other for regional control, and Mexican government forces who seek to combat drug trafficking. However, the government's principal goal has been to put down the drug-related violence that was...
money laundering that could total up to $420 billion dollars. Said Jeffrey Sloman, the chief US prosecutor in the case, "Wachovia's blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations."