“We hadn’t thought of that,” Kashkari admitted sheepishly.
It was the eureka! moment that finally seemed to break the impasse the group had reached. For the first time in days it appeared that with a few other compromises they could be near agreement on the terms of a deal. While the Democrats had backed down on the oversight component, they could console themselves with a victory of sorts on the executive compensation issue.
As his staffers continued to perform shuttle diplomacy among the various factions, trying to find some language on which they could finally settle, Paulson, looking deathly pale, retreated to Pelosi’s office.
“You want us to go get the Hill doctor?” Harry Reid asked.
“No, no, no,” Paulson said groggily. “I’ll be fine.”
Hurriedly pulling a trash can before him, he began having dry heaves.
Bob Steel and his lieutenant, David Carroll, entered the elegant Art Deco lobby of the Carlyle Hotel at 8:00 on Sunday morning, making their way to the elevators and to the suite of Dick Kovacevich, the chairman of Wells Fargo.
With the TARP legislation still publicly unresolved, Steel and Carroll had come to see Kovacevich in hopes of convincing him to buy Wachovia. For Steel it was an especially bitter pill to swallow; having left Treasury only two months earlier to become the CEO of the firm, he was now resigned to selling it. Much like AIG’s Bob Willumstad, he simply had no good options available to him. Any attempt to turn around Wachovia in this environment, with its portfolio of subprime loans falling even more every day, was going to be increasingly difficult. Steel felt a deep sense of responsibility to find a buyer quickly, to obtain some value out of the business before the winds turned against him completely.
He was also under particular time pressure from the fact that both Standard & Poor’s and Moody’s had threatened to downgrade the firm’s debt the following day. A downgrade could put even more pressure on the bank, whose stock had fallen 27 percent on Friday, further eroding confidence among customers, who had withdrawn some $5 billion that same day.
In his effort to encourage an auction, Steel had met with Pandit on Friday and Saturday, but the night before had received the bad news: Like Goldman Sachs the prior weekend, Citigroup would only buy the firm with government assistance, and even then Pandit said he was prepared to pay only $1 a share for it.
As Steel and Carroll sat down for breakfast in Kovacevich’s suite, he could only hope he was going to get a more encouraging reception.
Kovacevich, a handsome sixty-four-year-old with silver just beginning to shade his temples, had built Wells Fargo into one of the best-managed banks in the country, establishing it as the dominant franchise on the West Coast and attracting Warren Buffett’s Berkshire Hathaway as his largest single shareholder.
After a waiter poured coffee for the group, Kovacevich, who had flown from his home in San Francisco to New York expressly for this meeting, said he was very interested in making a bid for Wachovia without any government assistance and hoped to do so by the end of the day. But, he warned, in the straight-talking manner for which he was known, “This is not going to have a ‘two-handle’ in front of it.”
Steel smiled. “Listen, Dick, let’s not worry about price now,” he replied, satisfied that even while Kovacevich was rejecting a $20 offer, his interest was sufficient that Steel would likely end up with a final number in the teens. “Let’s see how this deal works, and once we know how it looks there will be a price that makes sense,” he added.
Kovacevich said that his team would continue its due diligence, and he hoped to be able to get back to him later that day.
Steel, still smiling as he left the hotel, called his adviser, Peter Weinberg, and reported, “It was a good meeting. I think.”
Sitting in his office Sunday morning Tim Geithner, habitually running his fingers through his thick hair, pondered his alternatives.
He had spoken to Citigroup the day before, when they had laid out a plan to buy Wachovia in concert with the U.S. government. The bank would assume $53 billion of Wachovia’s subordinated debt and would cover as much as $42 billion of losses on its $312 billion portfolio; anything beyond that the government would absorb. In return for that protection, Citi would pay the government $12 billion in preferred stock and warrants. Geithner had always liked the idea of merging Citigroup and Wachovia, which he viewed as an ideal solution to each party’s problems: Citigroup needed a larger deposit base and Wachovia clearly needed a larger, stronger institution. Even so, Geithner was still hopeful that Wells Fargo would pull through and be able to reach a deal without government involvement.
But now, having just gotten off a conference call with Kevin Warsh and Jeff Lacker of the Federal Reserve of Richmond, which regulates Wachovia, he had a new problem: Despite Kovacevich’s indication to Steel just that morning that he wanted to reach an independent agreement, Kovacevich had called and stated that if he had to conclude the deal before Monday, he didn’t feel comfortable moving forward without government assistance. He was too unsure of the firm’s marks and couldn’t take the risk.
There was now within the government a de facto turf battle over Wachovia, given the involvement of Richmond, with Warsh and Geithner playing deal makers. And Sheila Bair at the FDIC had yet to take part: If Wachovia really were to fail, it would be her jurisdiction.
Geithner and Warsh set up a conference call to coordinate their efforts with Bair, the fifty-four-year-old chairwoman of the FDIC and one of their least favorite people in government. They had always regarded Bair as a showboat, a media grandstander, a politician in a regulator’s position whose only concern was to protect the FDIC, not the entire system. She was not, in their view, a team player. Geithner would frequently commiserate about Bair with Paulson, who shared a similar perspective about her. At times, Paulson had a genuine respect for her. “She comes to play,” he regularly said to his staff, but added, “When she is surrounded by her people, when she’s peacocking for other people or she’s worried about the press, then she’s going to be miserable.”
Bair, who had just ended a conversation with Warren Buffett (who she was hoping could help her track down Wells Fargo’s president, John Stumpf), joined a conference call late Sunday with Geithner, Warsh, and Treasury’s David Nason. Paulson, who was barred from talking to Steel, had tried to disentangle himself from this particular matter, expending his energy instead on TARP and receiving only irregular updates on the negotiation’s progress from Nason.
When Geithner suggested Bair should help subsidize any deal for Wachovia, she resisted the proposal firmly, stating in a lengthy soliloquy that the only way she would get involved was if she were to take over the bank completely and then sell it.
When she finished, there was an awkward silence. “Right, right, right,” Geithner said, almost mocking Bair.
Geithner countered that allowing the FDIC to take over Wachovia would have the effect of wiping out shareholders and bondholders, which he was convinced would only spook the markets. He was still furious with Bair for the way she had abruptly taken over Washington Mutual, which had had a deleterious effect on investor confidence. Given Paulson’s ongoing public efforts to support the banking system, he told her, that option was a nonstarter. Then Geithner, looking for another jar of money, asked Nason if Treasury could contribute to the effort, which could eventually amount to more than $100 billion.
“We’re still trying to get TARP passed,” Nason replied briskly. “We can’t be committing money.”
At 7:00 p.m., Bob Steel, waiting in a conference room at Sullivan & Cromwell’s Midtown offices, got a disturbing call from Kovacevich, who had been inexplicably out of touch for the past two hours and who had sounded oddly detached during their previous call.