Source: https://www.scribd.com/document/110876535/McKinley-v-FDIC-Wachovia-Package-of-Regulatory-Documents-and-Board-Materials-Lawsuit-1
Timestamp: 2017-02-21 19:44:17
Document Index: 175888173

Matched Legal Cases: ['§ 1823', '§ 1823', '§ 1823', '§ 1823', '§\n1821', '§ 1821', '§\n1823', '§ 1823', '§\n1823']

McKinley v FDIC Wachovia Package of Regulatory Documents and Board Materials (Lawsuit #1) | Wachovia
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The assessment considers the company's risk profile, the effectiveness of corporate governance, risk management practices, internal controls, and financial strength and assigns a supervisory rating for the consolidated organization. The supervisory rating is based on the results of our continuous monitoring effol1s, regular discussions with management, horizontal reviews, and targeted examinations conducted during 2006. The findings of the targeted examinations were communicated to senior management through letters issued after the conclusion of each examination. In addition, we worked closely with the lead bank's primary supervisor and developed an understanding of the newly acquired thrift, GoldenWest Financial (GoldenWest), by meeting with thrift management and the Office of Thrift Supervision (OTS). With the company's significant retail brokerage activity and insurance businesses, we held regular meetings with the functional regulators and management in these businesses. SUPERVISORY RATING Wachovia continues to be assigned a composite supervisory rating of"2" reflecting its overall satisfactory condition. The same rating was accorded to each ofthe component ratings: risk management, financial condition, and the potential impact of the parent and non-bank subsidiaries on the depository institutions. Wachovia's overall rating is represented as follows: R-Risk F - Financial Condition I - Impact on Bank C - Composite (D) - Depository Management Subsidiaries Institutions 2 2 2 2 (2) Each of the component ratings, as well as the subcomponent ratings for Risk Management and Financial Condition, are discussed on the following pages. CONFIDENTIAL FCIC-134580 Messrs. Thompson and Neubauer 2 April 4, 2007 OVERALL ASSESSMENT The consolidated corporation continues to be operated in a sound manner. Board and senior management governance and oversight are satisfactory and continue to evolve with the growth and changing business profile ofthe company. The company has an effective enterprise risk management program that works closely with the business lines to establish both risk tolerances and strategies. The audit department remains in satisfactory condition. Internal controls are generally effective, although continued management attention is warranted towards IT/Operational risk internal controls. The assessment of operational internal controls remains fair or "3" as the efficacy of the four key remediation projects has not been validated by internal audit. During 2006 management continued to make sound progress on a number of critical initiatives to improve the risk management and control environment of the firm. This included improving the infrastructure of the corporate investment bank (Crn) and increasing the staffing in the market risk management function. The company has devoted appropriate resources to the proximity risk issue and has developed a comprehensive plan for the Oxmoor data center. It is our expectation that funding for the build out of the Oxmoor data center will be approved by senior management in 2007. Also, we are satisfied with the performance ofthe compliance risk management function as the department is well positioned to monitor the risk associated with new acquisitions and business expansion. Notwithstanding the noted improvements, the institution continues to face significant challenges going forward with the management of critical infrastructure projects. Despite the success of certain initiatives, other high profile projects have been delayed, redesigned, cancelled, andlor suffered cost overruns. Project execution challenges are further amplified by current and expected expansion plans. Wachovia altered its business mix with the acquisition of Go lden West, significantly increasing the company's retail exposure and heightening merger integration risk. The company has stated it will maintain Golden West's people-dependent business model and expand the option adjustable rate mortgage (option ARM) product distribution across the legacy Wachovia franchise. To date, the merger has been executed with little disruption to normal business activities, but the significant systems and account conversions will occur in the fomth quarter of2007. In addition to this domestic expansion, the company continues to grow internationally with the recent opening of a subsidiary bank in Ireland and fUlther expansion into Asian markets. Wachovia is shifting from a large regional banking company with a commercial lending focus to a global financial services company with a greater retail risk concentration. The key supervisory issues noted below all revolve around supervising the heightened level of project execution risk and the need for management to be proactive in managing the infrastructure improvement projects. While the current management team appears well equipped to manage this high execution risk, the underlying issues require management's continued attention. KEY SUPERVISORY ISSUES Elevated Project Execution Risk and Monitoring Project Management: Our supervisory focus is on the issue of execution risk. We are patticularly concerned with inconsistent project management practices, the multitude of key projects, the recognized scarcity of experienced project management resources, and possible funding limitations given potential earnings pressures. Many of the projects have a direct impact on the strength of the company's risk management infrastructure and controls. These include the Oxmoor data center build out, the Basel II1RDS project, and crn infrastructure improvements. We expect that the company will be proactive in managing current and future projects to limit execution risk by prioritizing investments appropriately. CONFIDENTIAL FCIC-134581 Messrs. Thompson and Neubauer 3 April 4, 2007 Inconsistent project management performance was noted earlier in this letter, and management will need to he particularly vigilant to ensure that that the risk management infrastructure keeps pace with expansion plans and business needs. This concern is recognized by senior management and many projects receive significant attention. The company has an inventory of over 30 "must do" initiatives, which are defined as projects that cannot be deferred, are critical to a line of business or the enterprise, present significant reputational or financial risk, and/or may have an associated external commitment. The inconsistency issue is further complicated and amplified by the limited number of qualified senior project managers and the company's desire to control costs. As with many organizations, there is a recognized scarcity ofIT/Project management resources and this limitation will challenge the company's ability to execute effectively. Similar to many of its peers, Wachovia's margins will be pressured in 2007 with the flat yield curve environment. This challenge, coupled with the expectation for a return to more normal credit provisioning expenses, present earnings challenges for the company and the potential inclination to limit funding for certain projects. Accordingly, management needs to remain attentive to these infrastructure projects and provide appropriate funding. With limited resources and numerous initiatives, the company will need to be proactive in identifying and addressing project management issues. In 2006, the Investment Review Board (IRB) began monitoring key projects and serves as a positive control process to insure oversight of end-to-end investment management decisions. While this process has led to greater accountability, management also recognizes the need to have an investment review process that insures future expenditures align with strategic needs. In pmiicular, the company will need to carefully distribute project management resources given the continued growth of the franchise and potential funding constraints. The Golden West Integration: The integration of GoldenWest will present new challenges to the organization. The GoldenWest business model is highly dependent on judgmental processes that have allowed the company to offer its products to the full spectrum of borrowers yet limit credit losses. Wachovia management recognizes the importance of knowledge transfer to the continued success of the Golden West model, and this process will be emphasized during the integration given the potential that key managers of legacy Golden West could leave the company. Based on that "flight risk", talent rctention effOlis are also important. RISK MATRIX Wachovia's overall inherent risk profile remains moderate. Comments regarding our assessment of risk management have been integrated into the following discussion of the supervisory rating. Inherent Risk Management Overall Moderate Satisfactory Credit Moderate SatisfactOlY Market Moderate Liquidity Limited Satisfactory Operational Considerable Satisfactory Legal/Compliance Considerable Satisfactory_ CONFIDENTIAL FCIC-134582 Messrs. Thompson and Neubauer 4 April 4, 2007 RISK MANAGEMENT Wachovia's risk management program remains satisfactory based on the fIrm's effective corporate-wide processes for identifying, measuring, monitoring and controlling risk. Risk Management Satisfactory (2) Board and Senior Management Oversight Satisfactory (2) Policies, Procedures and Limits Satisfactory (2) Risk Monitoring and Management Information Systems Satisfactory (2) Internal Controls Satisfactory (2) Board and Senior Management Oversight Board and senior management oversight is satisfactory. The rating continues to reflect active Board oversight with strong interaction evidenced in the company's business activities, risk management, and compliance practices. In 2006, there were some changes to the senior management team with CFO Wurtz and CIO Enos replacing seasoned leaders in the company. The management team effectively transitioned these key players into new roles with minimal impact to the corporation. CEO Thompson and his executive management team continue to provide capable, experienced leadership while also demonstrating a solid understanding of the risks facing the company. The Board committee structure effectively completed its oversight duties as evidenced by the work ofthe Risk Committee and Audit Committee. Senior level discussions were noted around emerging risks and industry issues in key senior management committees including the Senior Risk Committee, the Operating Committee, the Credit Risk Policy Committee, and ALCO. The business line leadership governance structure ensures ownership and accountability for risks and appropriately rewards risk mitigation practices. Enterprise-wide risk management is suffIciently aligned with key business lines. Appropriate attention continues to be centered on key risks including long standing IT/Operational risk weaknesses, strategic investment decisions, strengthening BSA compliance across all parts of the company, and reviewing new/complex product offerings. Policies, Procedures and Limits Policies and procedures across the fInancial institution are considered satisfactory. The company has established a conservative limit structure for credit, trading exposures, interest rate risk, and liquidity. In some areas, however, the updating of corporate policies has not kept pace with the business activity of the company. Throughout 2006, there were a signifIcant number of relationships and some industry exceptions to the current credit capital guideline structure. Management is aware of the issues surrounding the credit capital limit exceptions and is reviewing the guidelines, which are dated given the growth in the company's capital base. While this process has been somewhat protracted, the reassessment is appropriate as the large number of exceptions makes it difficult to determine if the company is exceeding its risk tolerance. Risk Monitoring and Management Information Systems The institution's risk monitoring and management information systems (MIS) are satisfactory. Wachovia continues to demonstrate effective risk management oversight given the risk profile ofthe company. During 2006, our compliance monitoring and testing examination noted a satisfactory monitoring program while recommending consistent usage of the issues tracking database and the formalization of the issues escalation procedures. Firm-wide stress scenario analysis is still evolving. Risk reporting for interest rate, market, and liquidity risk include stress scenarios but specifIc credit event stress tests are only completed on an ad-hoc basis. While the current practice may be appropriate, additional consideration should be given to a more rigorous and frequent credit stress test regimen given the expectation of a return to a more normal credit loss environment. Operational risk metrics continue to evolve as management develops methodologies for quantifying top-of-the-house metrics. CONFIDENTIAL FCIC-134583 Messrs. Thompson and Neubauer 5 April 4, 2007 Internal Controls Corporate-wide internal controls are satisfactOlY. We note the improvement in the control environment, which is reflected in the results of internal audits, external reviews, and regulatory examinations. However, long-standing weaknesses with IT/Operational controls remain. It is expected that completion and validation of the four key IT remediation projects will address many of the weaknesses with operational internal controls. Data center risk has also been a longstanding concern, but we are satisfied with the company's progress on the issue and management's plans to utilize the third data center in Birmingham as a meaningful backup resource. Other control functions, including business line risk management and compliance, demonstrate a solid understanding of the risks facing the company. Internal audit remains satisfactory and it appears the sclcction of former controller Julian to replace retiring General Audit Schild is reasonable. Credit review continues to demonstrate its stature as an independent control function which helped reinforce the risk tolerance of the company. Credit risk pOltfolio hedging continues to be proactive by implementing measured credit risk mitigation activities. While not currently an issue, management should ensure that any future cost reduction and efficiency improvement targets do not affect the control functions in compliance, risk management, or audit. FINANCIAL PERFORMANCE Wachovia's Financial Condition rating is Satisfactory, or "2", unchanged from our assessment one year ago. Within the sub-components of this rating, we have lowered the Liquidity rating from" 1" to "2" reflecting a shift in the funding structure to an increased reliance on wholesale funding subsequent to the Golden West acquisition. Financial Performance Satisfactory (2) Asset Quality Strong (1) Earnings Satisfactory (2) Capital Satisfactory (2) Liquidity Satisfactory (2) Asset Quality Asset quality remains strong, reflecting lower than peer levels of nonperforming and criticized assets. While charge-offs have increased moderately with the acquisition of West Corp Financial, this increase was expected due to the subprime nature of the portfolio. Overall the firm's credit risk exposure is well diversified by industIy and concentrations are not a supervisory concern. The acquisition of Golden West has lowered the average FlCO score of the consumer portfolio with 20% of the acquired pOltfolio having a FICO score below 620 (the secondary market standard for subprime mortgages). This credit risk is offset by the emphasis on collateral coverage. Earnings Consolidated earnings are satisfactory. The acquisitions completed in 2006 suppOited strong annual earnings growth. However, the flattening yield curve environment led to a further contraction in net interest margin, which was compounded by an expansion of long term debt in anticipation of the Golden West acquisition. Provisioning for loan losses increased as a result of Westcorp charge-offs. The benefits of diversified noninterest income streams were seen during 2006, with improved capital market related revenues towards the close of the year compensating for some reduction in banking fee growth. Stronger revenues, including through acquisition, improved overhead efficiency ratios. Earnings relative to average assets and average equity improved on a year-on-year basis, but trended lower over the second half of the year and continue to lag peers. CONFIDENTIAL FCIC-134584 Messrs. Thompson and Neubauer 6 April 4, 2007 Capital Wachovia continues to maintain adequate capital, although its core capital ratios trended lower over the course of the year and continue to track below peer norms. In 2006, the corporation shifted the mix of regulatory capital by significantly increasing the level of tier 2 capital through subordinated debt issuance. The WITS issuance in the first quarter of 2006 lifted tier I capital, but the effect was more than offset by an active share re-purchase program. The company plans to adjust repurchase activity as necessary in 2007 to compensate for tier I capital requirements, including the reduction associated with prior leveraged leasing arrangements. The company has an economic capital model and granular analysis further SUPpOltS the adequacy of the firm's capital base. The dividend payout is reasonable and consistent with the company's stable earnings stream. Liquidity The company's liquidity position has shifted with a greater emphasis on wholesale funding. The GoldenWest purchase resulted in an increase in borrowing from the Federal Home Loan Bank and the cash requirements of the purchase terms necessitated the issuance oflong-term debt. As a result, traditional liquidity measures are lower that that in 2005 and the "2" rating reflects this change. Notwithstanding, the company's debt ratings have improved with the industry as a whole and current funding mix does not raise supervisory concerns. IMPACT OF PARENT AND NON-BANK SUBSIDIARIES The parent company and the non-bank subsidiaries present limited likelihood of a significant negative impact to the depository institutions and the Impact rating is "2". Although the parent company is less liquid due to the cash used to purchase GoldenWest, cash flow to meet funding needs is in excess of 12 months. Of the non-bank subsidiaries, the retail and wholesale broker dealers poses the highest degree of potential stress through losses or litigation costs. In our discussion with functional regulators and through knowledge gained from our continuous supervision program, it was noted that the control environment has improved in these businesses. Other parent investments including the private equity holdings pose little risk relative to the corporation as a whole. In closing, thank you for your attention to the information in this letter. Should you have any questions or comments, please contact me at (704) 358-2558. In addition, please note that this letter contains confidential supervisory information and should be treated accordingly. As such, the contents of this letter are subject to the rules of the Board of Governors of the Federal Reserve System regarding disclosure of confidential information. Sincerely, Richard F. Westerkamp, Jr. Assistant Vice President Central Point of Contact CC. Donald K. Truslow, Senior Executive Vice President and Chief Risk Officer Thomas WUltZ, Senior Executive Vice President and Chief Financial Officer Jerry Enos, Jr., Senior Executive Vice President and Head of Operations Peter J. Schild, Senior Vice President, General Auditor David Wilson, Office ofthe Comptroller ofthe Currency Robert Burns, Federal Deposit Insurance Corporation CONFIDENTIAL FCIC-134585 July 22, 2008 Federal Reserve Memo 2008 Smith Chaim1an of the Wachovia Corporation South Charlotte, North Carolina 100 This assessment of Wachovia Corporation (Wachovia) as of June 30,2008, the RFIIC (D) for bank holding The IS on the results of our continuous supervision program over the past which consists monit0l1ng activities conducted by a team and a examinations. assessment also the examination work other primary bank and functional and the RFI/C CD) rating is m::m::tg(;menr, including board and senior (MIS) and risk monit0l1ng, coupled vUl\.vllvU financial condition ofthe corporation, led by poor capital cushion. Since our dne to disruption write-downs, required over enors. were partially due to "top ofthe house" board was inadequate or 111 not fully business lines. Going forward, we " ~ " " " " ' ' -
BHCs in this group exhibit a combination of weaknesses ill risk management and financial condition that range from fair to severe. These are less resistant to the onset of adverse business conditions and would deteriorate if concerted action is not effective in the areas of weakness. more than normal financial surveillance. of the company, of the llondepository entities on the CONFIDENTIAL FCIC-134717 Smith 2 July will to 3 2 2 institution, as of June 2007. will be adjusted as needed. -3 We have downgraded our assessment ofWachovia's from "satisfactory" to based on concerns with the efficacy of board and senior HH;"lUjSvl oversight and the quality and flexibility and risk monitoring. Board alld Senior 1YHUlU.t::C..W Oversight Fair or of directors and senior oversight is considered This our concerns about the of management provided by the board of adequacy of risk management including its independence and of and response to errors. Also, the board of directors and The board of established by not always developed clearly defined risk tolerances for of risk functions. direction lWlrvr,l'"\fcOllcerns and have the MRIAs may rcpresem c".>;"a,,",u.tH criticisms that have escalated in due suggest a means communicated in the report or CONFIDENTIAL m " v w t · ~ " t and that the must or that FCIC-134718 3 July board of directors must conduct an at and of the of the I " " , + ~ d to the positions, the risk in nonbank bOITowers in the conCC111S are partially offset by some where the functioned adequately both in business lines and with centralized function. With trading book VaR limits, management and the business or obtained overlimit exceptions from chief risk bank (Crn) took actions to limit risk and sold much orthe super originate to distribute model. lack strong independent risk management functions also contributes to our concem with oversight, especially with investing outside the nom131 course of business. p31iicular concem shared by this Bank and noted in recent examinations completed by the ace is the lack of strong independent over the Treasury and We understand to usc treasury functions to additional tax benefit appropriate. risk is usually taken in the form of structured andlor other investments and many of transactions have not performed as planned. fOlward, it is incumbent on risk to insure that investments are made within corporation's appetite and potential dmvnside risk is ll\oLHoL'C>. management must conduct an independent both as a function and within the the overall and areas of the CONFIDENTIAL FCIC-134719 4 July 2008 company. Finally, the leadership at the banking and will have to Policies Procedures and Limits oversight is also influeneed by changes in has a limited in traditional culture ofthe company. Policies, procedures, and limits generally worked effectively during the market dis11lption and as the market began to tU111. Established limits helped to note quickly the depth and serious nature of the market dis11lption. VaR limits and trading controls worked adequately and appropriate attention/approval was The company monitored counterpaliy limits, despite in exposures within limits, company hedged on counterpmties. Accounting policies were conservative and the company was quick to recognize losses in thcir especially in the eno book. It is expected that policy limits will need to be to reflect weakened condition of the company. areas include capital liquidity policies and credit approval limits. Risk Information or monitoring and is fair. The corporation's MIS did not fully which contributed to identification. VVJlHU.Hhl> minimal content to other institutions and are oftcn more business/product-focused which assessment cumbersome. CONFIDENTIAL FCIC-134720 5 2008 Management must take to improve overall MIS. inability to in a prompt fashion and the overall MIS. assessmenl of the adequacy fceding is nel:;essar stress can be conducted effectively. An emphasis should be placed on UHLLUU5 number of manual required to complete consolidated MIS over key risks. where manual processes are involved include, but are not limited, the production consolidated liquidity reports, counterpart credit and CDO Internal Controls or Internal controls are satisfactory and we are pleased with the company's effOlis to address long standing IT infrastructure our 2006 which required a satisfactory plan to remediate the unacceptable level of proximity with two vVinston Salem data centers, progress on the Oxmoor data center conversion has been satisfactory. It is our that this project will continue to adequate funding despite almounced reduction effOlis. The IT remediation projects are substantially complete, but distributed server access controls umesolved. Additionally, the control enviromnent has benefited iiom a satisfactory audit hl 2008, the company successfully transitioned to a new general auditor and it appears the stature of the department is improving. discussed further enhancements the audit depmtment should to help organization improve include continuing to define and communicate audit's role as a reassurance line It is that audit will become CONFIDENTIAL FCIC-134721 Smith 6 July -3 has the appropriate steps to ensure capital adequacy, but recent and capital proj cctions highlight the vulnerability of the capital to current business conditions and SUppOlt a capital affair. September 30, the company has significant capital funds to insure adequate capital. In December 2007 January 2008 Wachovia raised a combined billion in preferred capital and in April 2008 Wachovia an additional S8.0 billion of common and conveltible equity. To capital, the corporation has cut the dividend and is adopting strategies to limit asset , even after these actions, 1 capital ratio is projected to be 7.8% at 2008 versus the 9.0% projection for year-end in Aplil. With rapidly changing projections, the l capital ratio will continue to move to the "dated" pre-disruption policy limit Required economic capital has grown also as the profile of the company has been largely due increased credit In addition, the required provision in 2009 will continue to strain capital ratios. a result, \Ii'e to consider additional actions including nnther reducing its dividend additional capital to ensure that corporation maintains sufficient capital. must update and maintain current capital policies and plans. expect to f01111ally its current for the tier one capital ratio in light of the corporation's cunent condition and near term and asset quality deterioration. In board of to update plan to include capital would require action as as providing the potential ",{'f'A,""" of 3 indicates that the consolidated BRC exhibits a combination of weaknesses severe. The company has less than modest substandard asset qnality, weak or liquidity the BBC and its subsidiaries are less resistant to adverse business conditions. The financial condition of the BBC will deteriorate if concerted action is not taken to COHect areas of weakness. The cash flow is sufficient to meet inullediate but may not remain if action is not ta ken to coneet weaknesses. rmcpnllPllT." the BRC is vulnerable and more than normal Overall financial and are still such as to pose only a remote threat to the of the company. CONFIDENTIAL FCI C-134 722 7 July 2008 3 concems are estate "''''' ~ h ~ 1 property CUlTent to is probable and as a result management to dimensi011 the extent of the embedded in portfolio is quickly and the cumulative loss rate is estimated in excess 9%. Nonperfonning assets for this portfolio are to $11.4 billion by year-end 2008. In total consolidated to grow to S 1 billion and will 3.71 oftota! outstanding and other estate owned by year-end. Portfolio net loss rates are very dependent on the underlying value of residential real estate which is projected to as housing markets decline. The projected in nonperfonning assets and loan losses will continue to negatively consolidated asset To date, has taken steps to increase collections and explored mitigation The analysis developed to isolate FICO score, loan-to-value, and geography of the is a positive and further mitigation strategies will be necessary to lower credit risk. actions to provide additional funds for loan loss reserves and the company's recognition of projected housing declines in the reserve model are also appropriate. on To dimension extent of potential write downs and to understand vulnerabilities, company must pCliodically stress at p011folios and sub portfolios. The stress tests should both regional concentrations and product concentrations. Once the stress tests are completed, mitigation should be to reduce -3 While the corporation was prC>1ltabJle historical nonus to ..n,"',Hu,,,,,'4U' the fourth . The billion in the CONFIDENTIAL FCI C-134 723 8 July -2 must update and continually liquidity policies and plans. in our Liquidity inspection letter dated June 2008, management must update the CFP with an assessment of all potential funding and various that could the corporation's access to both and tenl1 funding. In addition, must undertake a of in the treasury funds management group and identified key man ensure continual and appropl1ate management of liquidity across all well as on a consolidated basis. -2 The likelihood that the or nonbank subsidiary will have a impact on the depository institution remains limited
4 but is increasing. The parent has acted as a source of strength to the depository institutions by capital funds and the market for additional liquidity. Nonbank. assets remain low relative to the of the consolidated organization and nonbank activity has not required additional equity funds. the COll)Oration's most significant nonbanks, have not required additional liquidity and are self-
funded with , the parent has expe11enced wlite-downs on investment an insurance subsidiary, purchased assets at a loss from a money market fund and another fund advised by a subsidiary, and liquidity support to another nonbank. draw on parent company resources that would be available to support subsidiaries. 4 Likelihood of excessive dividend payments from subsidiaries. The the control risk corlcerltratlorls, or or reputational issues within the 1l0l1depos,1tOl the normal course ofbusincss. CONFIDENTIAL FCI C-134 724 · Smith Richard Westerkamp, Jr. Assistant Vice President Central Point of Contact ce. Joseph Robelt Steel, Dave Wilson Robert Burns FDIC Nicholas Dyer, 5 THIS DOCUMENT IS STRICTLY CONFIDENTIAL 9 July This document has been an examiner selected or by the Board of Govemors of the Federal Reserve The document is the of the Board of Govemors and is fumished to directors and management for their confidential use. The document is and confidential under the Board of Governors has forbidden its disclosure in any malmer without its in limited and circumstances in the law ns.c 1 and 1831111) and in the of the Board of (JovemOIS C.F.R.261 Under 110 circumstances should the auditors disclose or make this document or any in accordance with law and "'ES,·.,uo.,v,,,, of the Board of Govemors. unauthorized disclosure of the document may the person or or such information to the of Section 641 of the U.S. Criminal Code (18 Each director or tmstee, in with his or her should become fully infonned the contents oft11is document. In this it should be noted that this document is not an and should not be considered as such. CONFIDENTIAL FCIC-134725 July 27, 2008 Federal Reserve Memo Restricted- FR Date: September 27, 2008 To: Jennifer Burns, VP-LCBO From: Elizabeth Gress, Senior Examiner 2, Market risk Team John A. Beebe, Market Risk Team Leader Subject: Wachovia Liability Structure The following memo
1. Deposit structure outlines some key features of Wachovia’s liability structure. It provides reference points for how their liabilities divide into major classes. This memo should be reviewed in conjunction with the Wachovia Large Funds Providers memo of the same date. Key information included in this memo include: 2. Liability breakdown 1. Deposit structure: According to SNL, Wachovia ($393 bn in deposits) was the third largest deposit holder in the United States as of the end of 2007, behind Bank of America ($663 bn) and JPMorgan ($440 bn). Wachovia had the fourth largest number of branches at 3,348. As of September 24, 2008, the deposit base breaks down as follows: DDA Sav & NOW MM Time Total
53,521 $ 74,785 $ 118,011 $ 133,267 $ 379,584 $ September 24 2008
As of 9/24, they are reporting $26.8 bn in brokered deposits. 1
This memo was constructed using various MIS reference reports. As a result there may be timing or data aggregation differences in some of the numbers. The differences are not significant in relation to the main themes of this memo. Restricted- FR Deposits by source/business line are as follows: FDIC Sweep AGE Sweep Comm Sweeps Int'l E$ Sweep CIB GBG CMG Wealth
29,832,752 22,949,731 12,773,000 7,066,000 9,302,532 254,751,870 50,673,913 11,460,425
Core Interest Bearing Deposits
2. The liability structure breaks down as follows: Wachovia Liabilities
Non Final Numbers: source G/L
DDA 53,521 $ Sav & NOW 74,785 $ Money Market 118,011 $ Time 133,267 $ Total Core Deposits 379,584 $ NonCore Deposits
National Market Brokered CD 26,873 $ Foreign Deposits 24,365 $ Other 8,427 $ Total Noncore 59,665 $ Total Deposits 439,249 $ Short Term Borrowings
Fed funds Purchased 15,129 $ Repos & Lent Securities 28,904 $ CP Paper 2,992 $ Other ST Borrowings 6,363 $ Total Short Term Borrowings 53,946 $ Trading Account Liabilities 86,893 $ Total Shorter Term Debt 140,839 $ Bank Long Term Debt
Extendible Notes 5,300 $ CIB Borrowings 1,984 $ Senior Notes - Foreign 6,507 $ Medium Term Notes 35,486 $ Subordinated Notes 19,617 $ Total 68,895 $ FHLB Borrowings
FHLB Borrowings 57,391 $ Corporate Long Term Debt
Corporate Senior Notes 35,308 $ Corporate Sub Notes 2,007 $ Other Corporate Notes 1,250 $ Other Borrowings 17,752 $ Total Corporate 56,316 $ Trust Preferreds 58 $ Congress Notes (Canada affil) 374 $ Risk Mgt Derivatives 669 $ Total Long Term Debt 183,704 $ Equity
Minority Interest 2,629 $ Equity 77,457 $ Total Equity 80,086 $ Total Liabiltities & Equity 843,878 $ Restricted- FR Date: September 27, 2008 To: Jennifer Burns, VP-LCBO From: John A. Beebe, Market Risk Team Leader Subject: Wachovia Large Funds Providers The following memo
1. Fund holdings of Wachovia debt (Systemic risk-“break-the-buck”) outlines some key features of Wachovia’s large funds providers, looking at the composition of these providers through various prisms to show their links with the financial system. Key systemic integration points include: 2. Broker-dealer money markets (Systemic risk-market confidence) 3. Financial institutions A key issue to consider under a Wachovia lead disruption is that they would more resemble a Bear Stearns or AIG case, where counterparties have not had time to reduce their exposure to Wachovia. This is unlike WaMu or even Lehman, which had long periods where investors had time to reduce exposure. Even in the latter two cases, the disruption to the liquidity markets has been severe. 1. Fund holdings of WB liabilities represent a significant systemic risk. Based on the August 31, 2008 report, US Mutual funds hold $66.1 bn of WB’s liabilities. This breaks down into the following debt types: a. Corporate Notes: $34.6 bn b. CDs: $10.1 bn c. Floaters: $7.5 bn d. Tender Option Bonds: $8.0 bn 1
This memo was constructed using various MIS reference reports. As a result there may be timing or data aggregation differences in some of the numbers. The differences are not significant in relation to the main themes of this memo. Data for provider by Wachovia legal entity was not available. Restricted- FR Exposed Funds include
2. US broker-dealers are also large investors in Wachovia with investments totaling $38.9 bn. The investment banking sector is already weak and exposed to low levels of confidence. Broker dealers could become even more reliant on Federal Reserve support programs, such as the PDCF, to support operations in the event of a Wachovia lead disruption. Wachovia liabilities on BD balance sheets include $23.9 bn in money markets
, $5.7 bn in ABCP (VFCC), $4.3 bn in corp notes, and $2.0 bn in Tender option bonds. 3. Financial institution exposure to Wachovia is $15.4 bn, primarily in the form of corporate notes of $9.4 bn. Again, this is a weak sector exposed to already eroded confidence. 2
The fund listing was done by large fund provider by name, not provider type. Other large fund providers may also have been included in the categorization, but that data wasn’t readily available. 3
The money market volume is notable in reference to WB liquidity, since it is likely to leave the company quickly should a Wachovia specific event occur. Restricted- FR 4. Breakdown of investors by investor type and product Stated as Combination BOOK VALUE/P OUTSTANDING LIABILITIES
Tender Option Bonds VFCC-CP
Hamilton Bank Notes BKEL CD CDEL
Deposit Note EUROS
Fed Funds (ON)
Fed Funds (Term)
Corporate Notes MMDA MMDEPGIC PC Loan Part TDOA
Affiliate 513 (0) - - 20 - 503 165 - - 344 - - 10,102 - - - 1 - Broker/Dealer(US) 364 2,012 5,663 685 622 - 1,338 26 0 1 - - - 4,298 23,944 - - - - Corporation/Companies(US) 1,016 100 959 60 220 - 1,915 1 3,842 - 3,214 41 - 6,800 - 2 0 - - Fed Govt & Agencies 1 - - - - - 1,385 - - - - 12,500 250 841 - - - - - Financial Institutions(FGN) - - - - 129 - 376 - 206 - 1,437 24 - 7,021 - 500 - - - Financial Institutions(US) 1,577 236 - - 2,477 - 642 0 - - 9 808 225 9,388 - - - - - Individual(US) 142 - - - - - 0 - 4 - 0 - - (0) - - - - - Mutual Funds(US) 7,481 8,043 4,121 1,255 206 - 10,108 - 250 - 16 - - 34,607 - - - - - Other(FGN) 96 131 1,388 - - - 104 (0) 11 - 871 - - 4,121 - - - - - Other(US) (559) 90 - - 4,908 30 50 159 11 - 41 - - 12,112 - - - - - State & Muncipalities 1 22 43 - 50 - 275 - 123 - 24 - - 1,109 - 40 0 - - Trust 10 - - - - - 20 - 15 - 8 - - 201 - 0 - - - 10,639 10,633 12,175 2,000 8,631 30 16,717 352 4,462 1 5,965 13,374 475 90,600 23,944 542 0 1 - 5.3% 5.3% 6.1% 1.0% 4.3% 0.0% 8.3% 0.2% 2.2% 0.0% 3.0% 6.7% 0.2% 45.2% 11.9% 0.3% 0.0% 0.0% 0.0%
* includes inventory and unidentified contras
WACHOVIA BANK and WACHOVIA CAPITAL MARKETS, LLC
as of 08.31.2008
September 28, 2008 Federal Reserve Memo Restricted Controlled (FR) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Date: September 28, 2008 To: Board of Governors From: Staff
Subject: Considerations regarding invoking the systemic risk exception for Wachovia Bank, NA Background Wachovia Corporation (“Wachovia”), a financial holding company, provides commercial and retail banking services and other financial services in the United States and internationally. The company has a very large retail operation, offering households and businesses deposit and credit products. The company also provides a wide range of investment banking, private banking, and asset management services. The company is headquartered in Charlotte, North Carolina. At the end of the second quarter, Wachovia Corp. had assets of $812 billion, making it the fourth largest banking organization in the United States in terms of assets.
Monetary Affairs (Madigan, English, Nelson), Research and Statistics (Parkinson and Kwast), Banking Supervision and Regulation (Bailey, Stefansson, Wassom), Reserve Bank Operations (Marquardt, Stehm), and Legal (Alvarez, Fallon). Its main bank subsidiary is Wachovia Bank, NA, which had assets of $671 billion. Total assets of the insured depository institution subsidiaries of Wachovia Corp. are about $782 billion (about 95 percent of the holding company), with two thrift subsidiaries comprising about $105 billion. Wachovia’s depository institution subsidiaries have more than 27 million deposit accounts. As of September 24, 2008, deposits of Wachovia’s depository institution subsidiaries totaled $439 billion, including nearly $30 billion of foreign deposits. 2
All asset, deposit and capital data are as of June 30, 2008, unless otherwise stated. As of September 24, 2008, Wachovia Corp. had assets of $805 billion. Restricted Controlled (FR) Page 2 of 11 Wachovia reported tier 1 capital of $49 billion and tier 2 capital of $29 billion. The consolidated tier 1 capital ratio of Wachovia was 8.0 percent and the total risk-based capital ratio was 12.7 percent. The company reports a tangible net capital ratio of 5.1 percent. Wachovia Bank, NA reported tier 1 capital of $39 billion and tier 2 capital of about $23 billion, resulting in a tier 1 ratio of 7.3 percent and a total risk-based capital ratio of 11.6 percent. Wachovia owns a very large retail-oriented broker-dealer network through Wachovia Securities and the recently acquired AG Edwards, Inc. Combined, these firms have more than 3,500 brokerage locations and employ approximately 15,000 registered representatives throughout the United States. Recent difficulties Over the first half of this year, Wachovia posted losses of $9.6 billion, reflecting writedowns on available-for-sale securities and high provisions for loan losses. In part the high provisions reflect losses on option ARM mortgages acquired in the 2006 purchase of Golden West Financial Corporation, a $125 billion OTS-regulated thrift holding company based in California. Investors have become increasingly concerned about Wachovia’s prospects in recent months as the outlook for home prices and mortgage credit quality has deteriorated. These concerns were reportedly reinforced last week by the FDIC’s resolution of Washington Mutual, under which senior and subordinated debt holders at both the holding company and the insured depositories were not supported and face large losses. Market sentiment was bolstered for a time last week by the prospect of quick agreement and passage of legislation authorizing Treasury’s Troubled Asset Relief Program (TARP). But as the legislative outlook for the TARP became uncertain late in the week, Wachovia’s stock price tumbled and CDS spreads on five-year Wachovia debt surged to more than 1500 basis points on Friday. Wachovia reported that it was finding it difficult to obtain funding and was running down its liquidity reserves. It seems likely that very soon, possibly tomorrow, the firm will not be able to fund its operations. Restricted Controlled (FR) Page 3 of 11 Interdependencies The firm is the third largest deposit holder in the United States. As of September 24, 2008, Wachovia reported $439 billion of domestic and foreign deposits including almost $12 billion from state and other political subdivisions. Total deposits include $30 billion of sweep accounts that are swept into accounts that are insured by the FDIC and $40 billion of other sweep accounts. Uninsured deposits total $183 billion, including $4 billion to foreign governments and central banks. Wachovia Bank, NA has $12.5 billion of borrowings outstanding in the Term Auction Facility (TAF) program and $57.4 billion in FHLB borrowings. Debt issued by Wachovia’s depository institution subsidiaries is $68.9 billion, of which $19.6 billion is subordinated debt. The holding company has $56.3 billion of debt, of which $13 billion is subordinated debt. Commercial paper outstanding is $3 billion. Senior debt issued by the holding company is rated A1, while that of Wachovia Bank, NA is rated Aa2. Subordinated debt issued by the holding company is rated A2, and subordinated debt of Wachovia Bank, NA is Aa3. The main financial entities exposed to Wachovia are given in table 1. Mutual funds are prominent among these counterparties; they hold $35 billion of notes among other obligations. The amount held by money market mutual funds is not clear. In addition to being a market maker in the debt and equity markets, the firm is a large correspondent banker in Latin America and Asia. Wachovia’s bank in Hong Kong is considered critically important by Hong Kong authorities. In the United States, Wachovia clears significant values over CHIPS and Fedwire and is a participant in the full range of systemically important clearing and settlement systems. Wachovia Bank, NA settles foreign exchange transactions through CLS as a third party and is a direct participant in the Fixed Income Clearing Corporation (FICC) for settling U.S. government securities, and is a settlement bank and participant in the Depository Trust Company (DTC). Its securities affiliates directly participate in FICC, DTC, NSCC and various derivatives clearing organizations. In addition, Wachovia processes the most trade-related SWIFT messages, significant ACH volumes, and as much as 30 percent of Restricted Controlled (FR) Page 5 of 11 . all checks drawn on the U.S. east coast. Thus, staff would expect some payment and settlement concerns with a Wachovia failure. The firm’s retail brokerage is the second largest in the United States in terms of client assets, with $1.12 trillion in client assets and $259 billion of assets under management. The firm’s mutual fund company, Evergreen, is the 22nd largest in the US with $113 billion of fund assets. Least-cost resolution The FDIC has conducted a planning exercise for the failure of a bank much like Wachovia Bank, NA. The conclusion of the exercise was that the FDIC could likely resolve Wachovia Bank, NA through a least-cost resolution at zero cost to the Deposit Insurance Fund because there are sufficient uninsured obligations (including foreign deposits, senior debt, and subordinated debt) to absorb all of the bank’s losses. Potential least-cost resolution options that would be available to the FDIC under the FDI Act would include a liquidation and deposit payoff. In addition, because of the substantial franchise value associated with Wachovia’ businesses, there almost surely would be other least-cost resolution methods – such as an assisted acquisition after appointment of a receiver – that would satisfy the least-cost test and be less disruptive than a liquidation. Nevertheless, given the forecasted size of the losses at Wachovia Bank, NA, it appears likely that any assisted transaction effected by the FDIC under a least-cost framework would require that the FDIC impose significant haircuts on subordinated debtholders of the bank and quite possibly senior note holders as well. In addition, absent invocation of the systemic risk exception, the FDIC is prohibited from using deposit insurance funds to benefit the senior or secured debtholders of the holding company. Staff believes that a least-cost resolution of Wachovia Bank, NA would have significant adverse effects on financial markets. Term funding markets have been under considerable stress for more than a year, and these pressures increased greatly following the failure of Lehman Brothers, the difficulties at AIG, and the closing of WaMu. Libor rates have jumped more than 100 basis points since early September. Commercial paper Restricted Controlled (FR) Page 6 of 11 rates have also risen dramatically, and the volume of financial paper outstanding has declined sharply. In both of these markets, the maturity of new issues has shortened a great deal as investors have become much less willing to lend beyond overnight. Concerns about actual and potential losses on financial institutions’ obligations caused outflows from prime money market mutual funds (MMMFs) totaling nearly $400 billion over the past two weeks. Since these funds are normally substantial purchasers of commercial paper and short-term bank obligations, these outflows added to the pressures in those markets. More generally, investors appear to have become more concerned about the outlook for a number of U.S. banking organizations, putting downward pressure on their stock prices and upward pressure on their CDS spreads. In this environment, a least-cost resolution of Wachovia Bank, NA, with no assistance provided to creditors of Wachovia and the potential for meaningful losses imposed on the debt of the bank, would almost surely have significant systemic consequences. A default by Wachovia and a partial payout to debtors of Wachovia Bank, NA would intensify liquidity pressures on other U.S. banks, which are extremely vulnerable to a loss of confidence by wholesale suppliers of funds. Investors would be concerned about direct exposures of other financial firms to Wachovia or Wachovia Bank, NA. Furthermore, the failure of Wachovia would lead investors to doubt the financial strength of other institutions that might be seen as similarly situated. Market participants are already concerned about National City Corp. Like that of Wachovia, National City’s stock price fell sharply late last week, and its CDS spreads widened to levels higher than those of Wachovia. Other financial institutions that are seen as potentially weak – perhaps SunTrust or PNC– could also come under considerable pressure, particularly if the failure of Wachovia led to even greater dislocations in funding markets. Wachovia’s sudden failure despite its solid regulatory capital position could also lead investors to reassess the riskiness of U.S. commercial banks more broadly, particularly given the current fragility of financial markets generally and the term funding markets for financial institutions. In addition, if a least-cost resolution did not support foreign depositors (who are considered nondeposit, general creditors under the FDI Act), the resolution would imperil Restricted Controlled (FR) Page 7 of 11 this significant source of funding for many major U.S. financial institutions.
Staff believes the consequences of a least-cost resolution would extend to the broader economy. The worsening of the financial turmoil that would result from a least-
cost resolution of Wachovia Bank, NA would further undermine business and household confidence. In addition, with the liquidity of banking organizations further reduced and their funding costs increased, banking organizations would become even less willing to lend to businesses and households. These effects would contribute to weaker economic performance, higher unemployment, and reduced wealth, in each case materially. More generally, given Wachovia’s international presence, global liquidity pressures could increase and confidence in the dollar could decline. Moreover, losses on Wachovia and Wachovia Bank, NA paper could lead more money market mutual funds to “break the buck,” accelerating runs on those and other money funds. The resulting liquidations of fund assets along with the further loss of confidence in financial institutions might well lead short-term funding markets to virtually shut down. Moreover, the individuals and businesses whose deposits have been swept into non-deposit investments or foreign deposits (e.g., at a Cayman branch) would find all or part of their funds unavailable and likely face losses. In the current environment, such an event could well shake the public confidence in bank deposits. All of these effects would likely cause investors to raise sharply their assessment of the risks of investing in similar (albeit smaller) regional banks, making it much less likely that those institutions would be able to raise capital and other funding. Benefits and costs of using the systemic risk exception If the systemic risk exception were invoked, staff believes that a resolution method could be designed that would avoid all or most of the adverse impacts discussed above. In particular, if all uninsured creditors of the insured depositories were fully 3
Citibank, NA, for example, reported having approximately $478.8 billion in deposits in its foreign offices (including deposits held through Edge and Agreement corporations and international banking facilities). Restricted Controlled (FR) Page 8 of 11 protected and similar protections were provided to holding company creditors, the adverse effects would be mitigated substantially. While extending the protection only to senior creditors would presumably have some beneficial effect, allowing material losses on the subordinated debt of the bank or the holding company could still result in significant adverse effects in financial markets. Use of the systemic risk exception, however, would involve some perhaps substantial costs.
The FDIC would suffer some direct losses from its protection of uninsured creditors at both the bank and, if desired, the holding company level. The size of these losses is unknown at this time, as is the potential impact of such losses on the FDIC’s resources. In addition, moral hazard would be exacerbated and the potential for market discipline in the future reduced for the very largest depository institutions, especially if all holding company creditors were protected. Finally, if the systemic risk exception is invoked and used, the FDIC must “expeditiously” recover any losses incurred as a result of the use of the exception through one or more special assessments on insured depository institutions. Unlike normal deposit insurance assessments, these special assessments would be allocated across institutions based on average total assets (rather than deposits) and, thus, would hit larger banks proportionally harder than smaller depository institutions. Conclusion Staff believes that imposition of a least-cost resolution on Wachovia would almost surely have major systemic effects. Both financial stability and overall economic conditions would likely be adversely affected for the reasons discussed above. A non-
least-cost resolution that protects all depository institution and holding company creditors would best ameliorate the adverse effects of the failure on financial markets and the real economy. At a minimum, senior creditors of the depository institutions and the bank holding company should be protected. In creating the systemic risk exception, the Congress clearly envisioned that circumstances could arise in which the exception should be used. In view of the current Restricted Controlled (FR) Page 9 of 11 intense financial strains which have already seriously impaired the functioning of the financial system, and the likely consequences for the financial system and the economy of a least-cost resolution of the fourth-largest commercial bank in the United States, the staff believes that circumstances such as the Congress envisioned are clearly present and that invocation of the systemic risk exception can readily be justified. 4
Invoking the systemic risk exception does not lift the guidelines on discount window lending to troubled institutions established by the Federal Deposit Insurance Company Act (1991). Restricted Controlled (FR) Everen Capital Corp. Prudential Financial Inc Wachovia Securities Holdings Wachovia Securities Financial Holdings Wachovia Securities/A.G. Edwards Wachovia Securities Financial Network First Clearing Wachovia Insurance Services Palmer & Cay Wachovia Capital Markets Wachovia Capital Investments Wachovia Investors Wachovia Development Corp Union Hamilton Reinsurance Bluepoint Reinsurance Wachovia Corp. Wachovia Bank N.A. Evergreen Investment Corp. Wachovia International Banking Corp Wachovia Securities International Capital Finance Canada Wachovia Financial Services Wachovia Re Monument Street Int. Funding I&II Cardinal International Leasing Wachovia Bank of Delaware N.A. Golden West Financial Corp Wachovia Mortgage FSB, CA Wachovia Bank FSB, TX Atlas Securities Bank Edge, Agreement or Edge Sub. Domestic & Foreign Insurance Sub. Thrift or Nonbank Hold. Co. of Thrift Broker/Dealer, Investment Firm, or Hold. Co. Investment Banking August 4, 2008 OCC Letter and Exam September 29, 2008 FDIC Memo to the Board MEMORANDUM:
The Board of Directors ~
Mitchell L. Glassman, Director ~ ~
Sandra L. Thompson, Director i3 \ ~~
James R. Wigand, Deputy Director ~
Franchise and Asset Marketing Branch
Herbert J. Held, Assistant Directo.ø~
Wachovia Ban, National Association, Charlotte, North Carolina
Wachovia Bank, FSB, Houston, Texas
Wachovia Ban of Delaware, National Association, Wilmington, DE
Wachovia Card Services, National Association, Atlanta, Georgia
Wachovia Corporation (Ban Holding Company) Information
(As of June 30, 2008):
Total Assets: $781,883,478,000
Total Deposits (including Foreign): $475,172,374,000
Uninsured Deposits: $157,100,000,000
Foreign Deposits: $53,170,000,000
Tier 1 Leverage/Total Risk Based (Lead Bank): 6.27%/11.58%
UFIR Rating (Lead Bank): 3-3-3-4-5-2/3 (9/28/08 Interim Downgrade)
Staff recommends that the Board find that the failure of Wachovia Corporation and its
affliate banks and thrifts would have serious adverse effects on economic conditions and financial
stability. Its failure would seriously and negatively affect already disrupted credit markets, including
short-term interban lending, counterparty relationships in Qualified Financial Contract markets, and
ban senior and subordinated debt markets, and would further disrupt the related markets in
derivative products and other markets. Staff recommends that the Board accept the bid of Citigroup,
Inc., as the least costly available method of dealing with this systemic risk, and that the Board
authorize staff to take all steps needed to implement this decision. Based on preliminary
information, staff estimates no loss to the Deposit Insurance Fund.
Wachovia Ban, NA (Bank) is a nationally chartered ban founded in 1879 that is wholly
owned by Wachovia Corporation, a financial holding company regulated by the Federal Reserve.
The Ban is the fourth largest ban in the country and the predominant legal entity within
Wachovia Corporation, representing 83 percent of consolidated holding company assets. The
insured legal entities ofWachovia Corporation consist of three national bans and two Federal
savings bans. Other significant holding company subsidiaries include Wachovia Capital
Markets, LLC, and Wachovia Securities, LLC. The Ban operates approximately 3,400 banking
centers in 21 states, primarily along the eastern and gulf coasts and in California, and engages in
foreign activities. The risk profie ofthe Ban is declining rapidly because of deteriorating
liquidity and poor quality assets. Liquidity has reached crisis proportions, such that the Bank is
unable to meet its obligations. Most recently, on Friday, September 26,2008, the Ban was
unable to roll $1.1 bilion of its asset backed commercial paper. More short term obligations are
due this week that the Bank wil likely be unable to pay and there are an estimated $157.1 billon
in uninsured deposits.
The company's rapidly deteriorating financial condition is due largely to its portfolio of
pay-option ARM products, commercial real estate portfolio, and weakened liquidity position.
On Friday September 26,2008, market acceptance ofWachovia liabilities ceased as the
company's stock plunged, credit default swap spreads widened in excess of 1,400 points (to over
2,000 points), some paries declined to advance the Bank overnight funds, and counterparies
advised that they would require greater collateralization on any transactions with the Bank.
Citigroup, Inc., and Wells Fargo performed due diligence in an attempt to acquire the
Banks in a private transaction; however, neither were able to reach definitive agreements. The
FDIC entered into negotiations with Citigroup and Wells Fargo on September 28,2008. Both
Banks submitted open bank assistance bids to the FDIC on September 28,2008; however, only
the Citigroup proposal resulted in serious negotiations.
Based on the analysis of Citigroup' s proposal, staff recommends accepting the Citigroup,
Inc. bid to resolve the five insured depository institutions and to resolve the systemic risk posed
by a possible failure of Wachovia Corporation and its affliate banks and thrifts.
Supervisory History and Condition
Unless the Ban immediately attracts a merger partner, the FDIC and other regulators
project that the Ban wil likely be unable to pay obligations or meet expected deposit outflows.
The FDIC and the OCC anticipate a number of funding outflows during the week beginning
September 29,2008. Near-term funding outflows include:
. Maturing asset-backed commercial paper, which is not expected to be placed with
external paries and, therefore, will need to be funded by the Ban;
. Maturing repurchase agreements, which are not expected to be placed with external
paries and, therefore, will need to be fuded by the Bank;
. Maturing Variable Rate Demand Notes supported by liquidity facilities/letters of credit
issued by the Ban which are not expected to be placed and wil be put to the Ban;
. The loss of overnight sweep deposit representing large commercial deposits;
. The loss of a substantial portion of money swept from retail brokerage accounts
maintained with affliated entities; and
. An assumed 1.5 percent daily deposit ru-off, which is based on recent experience by
other large insured institutions experiencing extreme stress.
Total Cash Equivalents & Sources
Less: Actual Maturity & Stress
1. 1.5% Daily Deposit Outfow
2. Corporate Sweeps 100% outflow
3. Retail Brokerage Outflow
4. VRDN Maturity & Stress
5. Maturing Debt
6. ABCP (VFCC) Maturity
7. Maturing Repo Agreements
WIlJ:ll~
Overnight FFS
T-Bills & Term CP
Less: Overnight FFP
Discount Window (Post Haircut)
Unpledged Securities (Pre-Haircut)
Total Cash Equivalents & Sources 103.1
Potentially available funding sources considered in the above analysis include $17 billon
in liquid assets, $52 bilion of "after-haircut" borrowing capacity based on collateral already
posted with the Federal Reserve, $29 bilion in unencumbered securities, and $5 bilion of
available funding from the Federal Home Loan Bank. Additional eligible collateral for pledging
totals $117 bilion and is comprised of $97 bilion in commercial loans and $20 bilion in
consumer loans that are not pay option ARMs.
Uninsured deposits are reported at $157.1 bilion as of June 30, 2008, with $76 billon
comprised of corporate, non-time deposits that are considered highly sensitive. This could result
in deposit outflows greater than the 1.5 percent daily withdrawals included in the FDIC stress
scenario depicted above.
The insured legal entities of Wachovia Corporation are shown in the table below.
Wachovia Bank, N.A 450,929 2-3-3-3-2-2/3 a
Wachovia Mortgage, FSB 18,009 3-3-2-4-2-1/3
Wachovia Bank, FSB 2,809 3-3-2-4-2-1/3
Wachovia Card Services, N.A 0 2-2-2-2-2-2/2
Wachovia Bank of Delaware, N.A 4,814 4,175 2-2-2-2-2-2/2
(a) 9/28/08 - acc downgraded Capital to a 3, Earings to a 4, and Liquidity to a 5
4/30/08 Offsite
The Bank is subject to a continuous examination program by the Office of the
Comptroller of the Currency (OCC). The June 30, 2008, OCC examination of the Ban resulted
in a composite rating downgrade to a "3." The following table displays the Bank's historical
examination and financial data:
Total Assets $670,639,000 $653,269,000
Total Loans $413,994,000 $413,349,000
Total Deposits $450,929,000 $458,186,000
Tier 1 Leverage Ratio 6.27% 6.71%
Total Risk Based Capital Ratio i 1.8% 11.45%
Option ARM'srrier 1+ALLL 138% 146%
Brokered Deposits to Total Deposits 10.98% 8.97%
(a) 9/28/08 - acc downgraded Capital to a 3, Earnings to a 4, and Liquidity to a 5
$518,123,000
$302,764,000
$353,234,000
$472,143,000
The Bank operates under a Memorandum of Understanding issued in August 2008 that
addresses weaknesses cited in the most recent OCC report of examination.
On October 12,2007, the Ban acquired from Wachovia Mortgage FSB and Wachovia
Ban FSB (formerly World Savings Bank FSB and World Savings Ban Texas FSB,
respectively) all of those institutions' retail deposits totaling $76 bilion. The Bank also acquired
almost $90 bilion dollars in assets, including approximately $65 bilion in pay-option ARM
mortgage loans. The pay-option ARM portfolio is concentrated in the California and Florida
markets, which represent approximately 60 percent and 10 percent of the total portfolio,
respectively. Since the loans were transferred, significant declines in home prices, combined
with the effects of previously lax collateral-based underwiting by the World Savings Bank
entities, led to serious deterioration in the pay-option ARM portfolio; rising nonperforming loan
levels and the need for considerable provisions to the allowance for loan and lease losses resulted
in quarterly losses. During the week of September 22, 2008, the Ban increased its cumulative
loss estimates for the pay option ARM portfolio from 12 percent to 20 percent. The pay-option
portfolio represents approximately 138 percent of capital and reserves.
The Ban's former chief executive offcer, Ken Thompson, was removed on June 2,
2008, and Robert Steel was selected as his replacement on July 9,2008. The Bank's chief
financial offcer and chief risk officer were also subsequently replaced. These actions to replace
senior management failed to dispel market concerns regarding the Ban's condition.
Wachovia Mortgage FSB and Wachovia Bank FSB
The two thrifts retain almost $70 bilion in residential mortgage exposure, which consists
almost entirely of pay option ARMs sharing the same risk characteristics as the pay-option ARM
portfolio in the Ban. During the first and second quarters of 2008, both thrifts required
substantial capital contributions from Wachovia Corporation in order to maintain capital ratios at
Wachovia Bank of Delaware NA and Wachovia Card Services
Wachovia Ban of Delaware NA represents a more traditional institution with no pay-
option ARM exposure. Likewise, Wachovia Card Services is a recently formed credit card
An electronic data room was established by the Bans for potential buyers to perform due
diligence. No proposals were accepted.
On September 28, 2008, FDIC staff began discussions with Citigroup and Wells Fargo,
both of which submitted bids to the FDIC on the same day. Both bids sought open ban
assistance from the FDIC. The Wells Fargo bid requires that the FDIC cover potential losses on
a pool up to $127.3 bilion in assets (includes $80.7 bilion funded). Wells Fargo assumes the
first $2 bilion in losses on the pool of assets, following which the FDIC wil share in the losses
at the rate of 80 percent. Wells Fargo proposed that total FDIC loss exposure be capped at $20
h,¡iIU,i
bilion. Staff estimated this proposal would cost the FDIC between $5.6milloii to $7.2 bilion.*"
The Citigroup bid requests that the FDIC provide loss sharing on a $312 bilion pool of
assets. Losses would be shared as follows: (i) the first $30.0 bilion of losses in the pool,
Citigroup assumes 100 percent, and (ii) Citigroup assumes $4 bilion a year of losses for three
years. Additionally, FDIC wil receive face value of$12 bilion in preferred stock and warrants.
Wachovia Corporation submitted an open ban assistance proposal. Approximately $200
bilion of the Bank's loans would receive FDIC credit protection, of which the Bank would
provide $25 bilion of first loss protection. In return, Wachovia would issue to FDIC, $10 bilion
of preferred stock and warrants on common shares.
Considering current market conditions, staff estimates the Citigroup transaction could
result in aggregate losses ranging from approximately $35 to $52 billon. However, based upon
the terms of the Citigroup proposal, these losses would be absorbed by Citigroup and result in no
loss to the Deposit Insurance Fund.
All proposals submitted required some form of regulatory capital relief from their
primar federal regulators.
Given the forecasted size of the losses at Wachovia Bank NA, it appears likely that any
transaction effected by the FDIC under a least-cost framework would require the FDIC to impose
significant losses on the Bank's subordinated debt-holders and, possibly, senior note holders. In
addition, absent invocation ofthe systemic risk exception available under the FDI Act, the FDIC
is prohibited from using deposit insurance funds to benefit senior or secured debt-holders of a
However, staff believes that a least-cost resolution ofWachovia Ban NA would have
significant adverse effects on economic conditions and the financial markets. Term funding
markets have been under considerable stress for more than a year, and these pressures have
increased greatly following the failure of Lehman Brothers, the difficulties at AIG, and the
closing of Washington MutuaL. LIBOR rates have increased more than 100 basis points since
early September; commercial paper rates have also risen dramatically, and the volume of
financial paper outstanding has declined sharply. In both of these markets, the maturity of new
issues has shortened a great deal as investors have become much less wiling to lend beyond
overnight. Concerns about actual and potential losses on financial institutions' obligations have
caused outflows from prime money market mutual funds totaling nearly $400 bilion over the
past two weeks. Since these funds are normally substantial purchasers of commercial paper and
short-term ban obligations, these outflows have added to the pressures in those markets. More
generally, investors appear to have become more concerned about the outlook of a number of
U.S. banking organizations, putting downward pressure on their stock prices and upward
pressure on their collateralized debt security spreads.
In this environment, a least-cost resolution ofWachovia Bank NA with no assistance to
creditors and the potential for meaningful losses imposed on the Bank's debt would be expected
to have significant systemic consequences. A default by Wachovia Corporation and a partial
payout to debtors ofWachovia Ban NA would intensify liquidity pressures on other U.S. banks,
which are extremely vulnerable to a loss of confidence by wholesale suppliers of funds.
Investors would likely be concerned about direct exposures of other financial firms to Wachovia
Corporation or Wachovia Bank NA. Furthermore, the failure ofWachovia Corporation would
lead investors to doubt the financial strength of other institutions that might be seen as similarly
situated. Wachovia's sudden failure could also lead investors to reassess the risk in U.S.
commercial bans more broadly, paricularly given the current fragility of financial markets
generally and the term funding markets for financial institutions.
In addition, if a least-cost resolution did not support foreign depositors (who are
considered non-deposit, general creditors under the FDI Act); the resolution could imperil this
significant source of funding for other U.S. financial institutions. More generally, given
Wachovia's international presence, global liquidity pressures could increase and confidence in
the dollar could decline. Further, losses on Wachovia Corporation and Wachovia Ban NA
paper could lead more money market mutual fuds to "break the buck," accelerating rus on
those and other money funds. The resulting liquidations of fud assets, along with the further
loss of confidence in financial institutions, might well lead short-term funding markets to
virtually cease. Moreover, the individuals and businesses whose deposits have been swept into
non-deposit investments or foreign deposits (e.g., at a Cayman branch) would find all or part of
their funds unavailable and likely face losses. In the curent environment, such an event could
shake the public's confidence in ban deposits. All of these effects would likely cause investors
to sharply raise their assessment ofthe risks of investing in similar (albeit smaller) regional
bans, making it much less likely that those institutions would be able to raise capital and other
Staff believes the consequences of a least-cost resolution could extend to the broader
economy. The financial turoil that could result from a least-cost resolution of Wachovia Bank
NA and the likely consequent failure ofWachovia Corporation would further undermine
business and household confidence. In addition, with the liquidity of baning organizations
further reduced and their funding costs increased, baning organizations would become even less
wiling to lend to businesses and households. These effects would contribute to weaker
economic performance, further damage financial markets, and have other material negative
Staff believes that the imposition of a least-cost resolution on Wachovia would almost
surely have major systemic effects. Both financial stability and overall economic conditions
would likely be adversely affected for the reasons discussed above. A resolution that protects all
depository institution and holding company creditors would best mitigate the adverse effects of
the failure on the financial markets and the broader economy.
In creating the systemic risk exception, Congress clearly envisioned that circumstances
could arise in which the exception should be used. In view of the curent intense financial
strains, as well as the likely consequences to the general economy and financial system of a
least-cost resolution of the fourth-largest commercial bank in the United States, staff believes
that circumstances such as Congress envisioned are clearly present and that invocation of the
systemic risk exception is justified. Staff fuher believes that the Citigroup proposal represents
the least cost alternative available for dealing with this systemic risk.
If you have any questions concerning this case, please call Herbert Held at extension 8-
7329, or Sharon Yore at extension 8-7336.
This recommendation is prepared by:
Franchise and Asset Marketing
DRR - Washington
This recommendation is supported by:
Deputy Director, DSC
a+r~.L~
~a A. Kelsey I.. -
RESOLUTION - Citibank
WHEREAS, staffhas advised the Board of Directors ("Board") of the Federal
Deposit Insurance Corporation ("FDIC") that Wachovia Bank, National Association,
Charlotte, North Carolina, Wachovia Mortgage, FSB, North Las Vegas, Nevada,
Wachovia Ban of Delaware, National Association, Wilmington, Delaware, Wachovia
Ban, FSB, Houston, Texas, and Wachovia Card Services, National Association, Atlanta
Georgia ("Banks"), are in danger of default; and
WHEREAS, the Division of Resolutions and Receiverships ("DRR") has solicited
bids from financial institutions for the resolution ofthe Bans; and
WHEREAS, DRR has received no closed bank proposals for the resolution ofthe
Banks from other financial institutions; and
WHEREAS, a proposal for the resolution of the Banks without the appointment
of the FDIC as receiver has been received from Citigroup, Inc., New York, New York
("Citi"), which involves the merger or consolidation of the Banks with another insured
depository institution or the sale of any or all of the assets of the Bans or the assumption
of any or all of the Banks' liabilities by another insured depository institution, or the
acquisition of the stock of the Bans, any of which would benefit the shareholders of the
Bans and except under limited circumstances is precluded by Section I I (a) (4)(C) of the
Federal Deposit Insurance Act, as amended ("Act"), 12 U.S.C. 1821(a) (4)(C); and
WHEREAS, the Board has been advised that the Citi bid wil be less costly than
the other bid received and that it represents the least costly of the available methods of
resolving the systemic risks presented by the failure of the Banks; and
WHEREAS, staff has presented to the Board information indicating the
liquidation of the Banks under Section 11 of the Act, 12 U.S.C. 1821, would have serious
adverse effects on economic conditions or financial stability; and
WHEREAS, staffhas advised that assistance to the Bans under Section 13(c) of
the Act, 12 USC 1823(c)(1), without the appointment of the FDIC as receiver wil avoid
or mitigate the serious adverse effects on economic conditions or financial stability; and
WHEREAS, staffhas advised that severe financial conditions exist which
threaten the stability of a significant number of insured depository institutions or of
insured depository institutions possessing significant financial resources and the Banks
are insured depository institutions under such threat of instability.
NOW, THEREFORE, BE IT RESOLVED, that by the vote of at least two-thirds
of the members of the Board, the Board finds that the liquidation of the Banks, as well as
the likely consequent failure ofWachovia Corporation, would have serious adverse
effects on economic conditions or financial stability and would create systemic risk to
BE IT FURTHER RESOLVED, that by the vote of at least two-thirds of the
members of the Board, the Board finds that the proposal received from Citi which
involves the merger or consolidation of the Bans with another insured depository
institution or the sale of any or all of the assets of the Banks or the assumption of any or
all of the Bans' liabilities by another insured depository institution, or the acquisition of
the stock of the Bans and which requires the provision of assistance under Section
13(c)(2) of the Act, 12 USC 1823(c)(2), in the form ofloans to, deposits in, the purchase
of assets or securities of, the assumption of liabilities of, guarantees against loss to, or
contributions to, the Banks or their acquiror wil mitigate the serious adverse effects on
economic conditions or financial stability that would be caused by the Banks' failure.
BE IT FURTHER RESOLVED, that severe financial conditions exist which
are insured depository institutions under such threat of instability and that the Board takes
this action in order to lessen the risk to the Corporation, and systemic risks, posed by the
Banks, and that the proposal by Citi wil do so in the least costly of all available
BE IT FURTHER RESOLVED, the Board hereby authorizes the Chairman, or
her designee, to provide the written recommendation to the Secretary of the Treasury
specified under Section 13(c)(4) (G)(i) of the Act, 12 USC 1823(c)(4)(G)(i).
BE IT FURTHER RESOLVED, the Board hereby authorizes the Director, DRR,
or his designee, and all other FDIC staff to take all appropriate action to implement the
provision of assistance authorized hereunder, including but not limited to: credit support
in the form of loan guarantees, the purchase of warrants, and loss sharing; and to take any
other action necessary and appropriate in connection with this matter.
September 29, 2008 FDIC Meeting Minutes Minutes of The Meeting of the Board of Directors of the Federal Deposit Insurance Corporation By Conference Call Closed to Public Observation September 29, 2008 - 6:04 A. M. A t 6: 04 A.M. on Monday, September 29, 2 0 0 8 , the Chairman called a speci al meeting of t he Board of Directors of t he Federal Deposit Insurance Corporation which was held by means of a telephone conference call. Sheila C. Bair, Chairman of the Board of Directors; Martin J. Gruenberg, Vice Chairman of the Board of Directors; Thomas 5. Curry, Director (Appointive); John C. Dugan, Director (Comptroller of the Currency); John M. Reich, Director (Director, Of £ice of Thrift Supervision) ; John F. Bovenzi, Deputy to the Chairman and Chief Operating Officer; Jason C. Cave, Acting Deputy to the Chairman; Jesse 0. Villarreal, Chief of St af f ; Barbara A. Ryan, Deputy to the Vice Chairman; Lisa K. Roy, Deputy to the Director (~ppointive); Claude A. Rollin, Deputy to the Director (Director, Office of Thrift Supervision); Sandra L. Thompson, Director, Division of Supervision and Consumer Protection; Arthur J. Murton, Director, Division of Insurance and Research; Mitchell L. Glassman, Di rect or, Division of Resolutions and Receiverships; Andrew S. Gray, Director, Office of Public Affairs; and Robert E. Feldman, Executive Secretary, participated in the meeting. Also participating in the meeting were: Christopher J. Spoth, John H. Corston, Donald R. H a m , and Patricia A. Colohan, from the Division of Supervision and Consumer Protection; John V. Thomas, Richard T. Aboussie, and David N. Wall, from the Legal Division; Miguel D. Browne, from the Division of Insurance and Research; James R. Wigand, Herbert J- Held, and Sharon L, Yore, from the Division of Resolutions and Receiverships; and William F. Harral, from the Division of Information Technology. Julie L. Williams, First Senior Deputy Comptroller and Chief Counsel, Office of the Comptroller of the Currency, also participated in the meeting. Chairman Bair presided at the meeting; Mr. Feldman acted as Secretary of the meeting. Chairman Bair called the meeting to order. Vice Chairman Gruenberg then moved that the Board of Directors determine that Corporation business required its consideration of the matters which were to be the subject of the meeting on less than seven days1 notice to the public; that no earlier notice of the meeting was practicable; that the public interest did not require consideration of the matters which were to be the subject of the meeting in a meeting open to public observation; and that the matters could be considered in a meeting closed to public observation by authority of subsections (c) (4), (c) (6), (c) (8), (c) (9) (A) (ii) , and (c) (9) (B) of the "Government in the Sunshine Act" (5 U.S.C. 552b( (c) (4), (c) (6), (c) (8), (9) (A) (ii) , and (c) (9) (B) ) . Chairman Bair seconded the motion and, with Director Dugan, Director Curry, and Director Reich concurring, the motion was carried. James R. Wigand, Deputy Director, Franchise and Asset Marketing Branch, Division of Resolutions and Receiverships ("DRR"), advised the Board that the prospective failure of Wachovia Corporation, Charlotte, North Carolina, and its affiliate banks and thrifts-Wachovia Bank, National Association, Charlotte, North Carolina ("Wachovia Bank, N.A.") ; Wachovia Mortgage, FSB, North Las Vegas, Nevada; Wachovia Bank of Delaware, National Association, Wilmington, Delaware; Wachovia Bank, FSB, Houston, Texas; and Wachovia Card Services, National Association, Atlanta, Georgia-would have serious adverse effects on economic conditions and financial stability. He continued, observing that Wachovia Corporation's failure would seriously and negatively affect already disrupted credit markets, including short-term interbank lending, counterparty relations in Qualified Financial Contract markets, and bank senior and subordinated debt markets, and would further disrupt the related markets in derivative products and other markets. As a consequence, Mr. Wigand set forth staff's recommendation that the Board accept the bid of Citigroup Inc. as the least costly available method of dealing with this systemic risk, and that the Board authorize staff to take all steps needed to implement the decision. He indicated to the Board that, based on preliminary information, staff estimates no loss to the Deposit Insurance Fund as a result of the transaction. September 29, 2008 (Closed) John H. Corston, Associate Director, Large Institutions and Analysis Branch, Complex Financial Institutions, Division of Supervision and Consumer Protection, informed the Board that Wachovia Bank, N.A. is a nationally chartered bank founded in 1879 that is wholly owned by Wachovia Corporation, a financial holding company regulated by the Board of Governors of the Federal Reserve System; that Wachovia Bank, N.A., is the fourth largest bank in the country and the predominant legal entity within Wachovia Corporation, representing 83 percent of consolidated holding company assets; that the insured legal entities of Wachovia Corporation consist of three national banks and two Federal savings banks; that other significant holding company subsidiaries include Wachovia Capital Markets, LLC, and Wachovia Securities, LLC; that Wachovia Bank, N.A., operates approximately 3,400 banking centers in 21 states, primarily along the eastern and gulf coasts and in California, and engages in foreign activities; that the risk profile of Wachovia Bank, N.A., is declining rapidly because of deteriorating liquidity and poor quality assets; that liquidity has reached crisis proportions, such that the Wachovia Bank, N.A., is unable to meet its obligations; that, most recently, on Friday, September 26, 2008, Wachovia Bank, N.A., was unable to roll $1.1 billion of its asset-backed commercial paper; that more short-term obligations are due this week that Wachovia Bank, N.A., will likely be unable to pay; and that there are an estimated $157.1 billion in uninsured deposits. He concluded his portion of the presentation by informing the Board that the company's rapidly deteriorating financial condition is due largely to its portfolio of pay-option ARM products, commercial real estate portfolio, and weakened liquidity position; and that, on Friday, September 26, 2008, market acceptance of Wachovia Corporation's liabilities ceased as the company's stock plunged, credit default swap spreads widened in excess of 1,400 points (to over 2,000 points), some parties declined to advance Wachovia Bank, N.A., overnight funds, and counterparties advised that they would require greater collateralization on any transactions with the Bank. Next, Miguel D. Browne, Associate Director, Division of Information and Research, informed the Board that, given the forecasted size of the losses at Wachovia Bank, N.A., it appears likely that any transaction effected by the Corporation under a least-cost framework would require the Corporation to impose significant losses on the Wachovia Bank, N.A.'s subordinated debt-holders and, possibly, senior note holders. In addition, he said, absent invocation of the systemic risk exception September 29, 2008 (Closed) available under the Federal Deposit Insurance Act, the Corporation is prohibited from using deposit insurance funds to benefit senior or secured debt-holders of a company. Mr. Browne then said, however, that staff believes that a least-cost resolution of Wachovia Bank, N.A., would have significant adverse effects on economic conditions and the financial markets; that term funding markets have been under considerable stress for more than a year, and these pressures have increased greatly following the failure of Lehman Brothers, the difficulties at AIG, and the closing of Washington Mutual Bank, Henderson, Nevada; that LIBOR rates have increased more than 100 basis points since early September; that commercial paper rates have also risen dramatically; and that the volume of financial paper outstanding has declined sharply. In both of these markets, Mr. Browne stated, the maturity of new issues has shortened a great deal as investors have become much less willing to lend beyond overnight. Mr. Browne continued, observing that concerns about actual and potential losses on financial institutionst obligations have caused outflows from prime money market mutual funds totaling nearly $400 billion over the past two weeks; that, since these funds are normally substantial purchasers of commercial paper and short-term bank obligations, these outflows have added to the pressures in those markets; and that, more generally, investors appear to have become more concerned about the outlook of a number of U.S. banking organizations, putting downward pressure on their stock prices and upward pressure on their collateralized debt security spreads. Mr. Browne said that, in the current environment, a least- cost resolution of Wachovia Bank, N.A., with no assistance to creditors and the potential for meaningful losses imposed on Wachovia Bank, N.A.'s debt would be expected to have significant systemic consequences. A default by Wachovia Corporation and a partial payout to debtors of Wachovia Bank, N.A., he said, would intensify liquidity pressures on other U.S. banks, which are extremely vulnerable to a loss of confidence by wholesale suppliers of funds. Furthermore, Mr. Browne said that investors would likely be concerned about direct exposures of other financial firms to Wachovia Corporation or Wachovia Bank, N.A.; that the failure of Wachovia Corporation would lead investors to doubt the financial strength of other institutions that might be seen as similarly situated; and that Wachoviats sudden failure could also lead investors to reassess the risk in U.S. commercial banks more broadly, particularly given the current September 29, 2008 (Closed) fragility of financial markets generally and the term funding markets for financial institutions. In addition, Mr. Browne stated that, if a least-cost resolution did not support foreign depositors (who are considered non-deposit, general creditors under the Federal Deposit Insurance Act), the resolution could imperil this significant source of funding for other U.S. financial institutions. More generally, he said that, given Wachovia's international presence, global liquidity pressures could increase and confidence in the dollar could decline. Further, Mr. Browne said that losses on Wachovia Corporation and Wachovia Bank, N.A., paper could lead more money market mutual funds to "break the buck," accelerating runs on those and other money funds. The resulting liquidations of fund assets, said Mr. Browne, along with the further loss of confidence in financial institutions, might well lead short-term funding markets to virtually cease. Moreover, he said, the individuals and businesses whose deposits have been swept into non-deposit investments or foreign deposits (e.g., at a Cayman branch) would find all or part of their funds unavailable and likely face losses. In the current environment, such an event could shake the public's confidence in bank deposits, Mr. Browne said, and, as a consequence, all of these effects would likely cause investors to sharply raise their assessment of the risks of investing in similar (albeit smaller) regional banks, making it much less likely that those institutions would be able to raise capital and other funding. Mr. Browne set out staff's belief that the consequences of a least-cost resolution could extend to the broader economy. The financial turmoil that could result from a least-cost resolution of Wachovia Bank, N.A., and the likely consequent failure of Wachovia Corporation, he said, would further undermine business and household confidence. In addition, with the liquidity of banking organizations further reduced and their funding costs increased, Mr. Browne stated that banking organizations would become even less willing to lend to businesses and households, and that these effects would contribute to weaker economic performance, further damage financial markets, and have other material negative effects. Then, Mr. Browne expressed to the Board staff's conclusion that the imposition of a least-cost resolution on Wachovia Bank, N.A., would almost surely have major systemic effects. He said that both financial stability and overall economic conditions would likely be adversely affected for the reasons discussed September 29, 2008 (Closed) above. Conversely, Mr. Browne stated that a resolution that protects all depository institution and holding company creditors would best mitigate the adverse effects of the failure on the financial markets and the broader economy. Mr. Browne expressed the view that, in creating the systemic risk exception, Congress clearly envisioned that circumstances could arise in which the exception should be used. In view of the current intense financial strains, as well as the likely consequences to the general economy and financial system of a least-cost resolution of the fourth-largest commercial bank in the United States, he affirmed that staff believes that circumstances such as Congress envisioned are clearly present and that invocation of the systemic risk exception is justified. As a result, he said, staff further believes that the Citigroup Inc. proposal represents the least cost alternative available for dealing with this systemic risk. Herbert J. Held, Assistant Director, Institution Sales Unit, Franchise and Asset Marketing Branch, DRR, then informed the Board that, on September 28, 2008, Corporation staff began discussions with Citigroup Inc., New York, New York, and Wells Fargo & Company ("Wells Fargo"), both of which submitted bids to the Corporation on the same day. Both bids, he said, sought open bank assistance from the Corporation. Mr. Held stated that the Wells Fargo bid would require that the Corporation cover potential losses on a pool up to $127.3 billion in assets (includes $80.7 billion funded); that Wells Fargo would assume the first $2 billion in losses on the pool of assets, following which the Corporation will share in the losses at the rate of 80 percent; and that total Corporation loss exposure be capped at $20 billion. He set out staff's estimate that this proposal would cost the Corporation between $5.6 million to $7.2 billion. The Citigroup Inc. bid, Mr. Held said, requests that the Corporation provide loss sharing on a $312 billion pool of assets, with losses to be shared as follows: (i) the first $30.0 billion of losses in the pool are to be assumed by Citigroup Inc. 100 percent, and (ii) Citigroup Inc. is to assume $4 billion a year of losses for three years. Additionally, Mr. Held said that the Corporation will receive face value of $12 billion in preferred stock and warrants. Mr. Held said that Wachovia Corporation had submitted an open bank assistance proposal. Approximately $200 billion of the Wachovia Bank, N.A.'s loans, he stated, would receive credit protection from the Corporation, of which the Bank would provide September 29, 2008 (Closed) $25 billion of first loss protection. In return, Mr. Held said that Wachovia Corporation would issue to Corporation $10 billion of preferred stock and warrants on common shares. Considering current market conditions, Mr. Held informed the Board that staff estimates the Citigroup Inc. transaction could result in aggregate losses ranging from approximately $35 to $52 billion. However, based upon the terms of the Citigroup Inc. proposal, Mr. Held said that staff also held the view that these losses would be absorbed by Citigroup Inc. and result in no loss to the Deposit Insurance Fund. Following staff's presentation, Vice Chairman Gruenberg noted the significance of the proposal and observed that this will be the Board's first exercise of the systemic risk exception provided by Congress to the Corporation in the Federal Deposit Insurance Corporation Improvement Act of 1991. He indicated that the staff proposal was the best of a set of undesirable options, but noted that approving the proposal would be an appropriate action in the face of extraordinary times. Director Curry agreed with Vice Chairman Gruenberg and observed that all of the elements for the systemic risk exception are amply supported in the case submitted by staff to the Board and by the circumstances both at Wachovia Corporation and external conditions within the economy at large. Director Dugan also noted the extraordinary times and said that it was remarkable that this situation has been reached because the insured depository institution subsidiaries of Wachovia Corporation are, in many ways, a quite viable, attractive franchise. However, he said that they simply could not withstand the liquidity shock that it was facing because of the extraordinary circumstances in the markets. He indicated that the proposal sets out a clear example of the need for the systemic risk exception and that the views of the Board of Governors of the Federal Reserve System and the Department of the Treasury the prior two days confirmed that. Director Dugan commended staff for doing a very good job of developing the proposal over a very short time. As did Vice Chairman Gruenberg and Director Curry, he also observed that this was the best option among competing offers and would result in no cost to the Corporation. Then, in response to a question from Director Reich, Mr. Wigand indicated that Citigroup Inc.'s proposal requires the approval of the shareholders of Wachovia Corporation, and that it is for a dollar per share purchase price of the stock. September 29, 2008 (Closed) John V. Thomas, Deputy General Counsel, Supervision Branch, Legal Division, then informed Director' Reich that the Corporation may not benefit equity holders when resolving troubled financial institutions unless a systemic risk determination is made, and that is why such a determination is necessary in order to effectuate this transaction. In addition, Mr. Thomas said that all of the senior subordinated debt holders are being assumed in the transaction. Director Reich then inquired whether litigation risk could come about from the fact that equity and debt holders were wiped out in the acquisition of Washington Mutual Bank, Henderson, Nevada, by JPMorgan Chase, National Association, Columbus, Ohio, facilitated by the Corporation just on September 25, 2008. Mr. Thomas responded that no one has a right to a systemic risk determination. Director Reich then asked whether there is any exposure to the depository institutions industry for a special assessment. Mr. Thomas responded that, if the current projection of no cost to the Corporation for the instant transaction holds up, there will be no special assessment. On the other hand, Mr. Thomas said that if it turns out that there is a cost from the transaction as a result of the systemic risk finding, then the industry would be assessed on assets minus equity rather than on deposits. Chairman Bair then added that the Department of the Treasury has already agreed that, if there are any losses attendant with the transaction, it will separately fund those so that the Corporation's cash balance would not be depleted in any way. She said that this was in contrast to the Department of Treasury's usual rule that the Corporation must spend down its entire cash balance before the Corporation can borrow from the Treasury. She expressed her thought that it would probably be remote that the Corporation would suffer any losses from the transaction, given the sizable first loss position that Citigroup Inc. has taken, but she said that it was especially important that the Department of the Treasury has agreed to fund the losses separately in that it has vigorously advocated the transaction. In response to Director Reich's question whether any other large depositor institution failures might require resolution within the next several weeks, Chairman Bair responded that National City Bank, Cleveland, Ohio, is being watched closely. Director Dugan added that, if anything were to happen to National City Bank shortly, it would be a liquidity-based issued, not a capital-based issue as in the instant case. He added that it is difficult to predict what direction National September 29, 2008 (Closed) City Bank will take given the current financial "storm" affecting the country. Chairman Bair then agreed with Vice Chairman Gruenberg that the staff proposal was one of several not-very-good options. She noted the importance of the fact that the Board of Governors of the Federal Reserve System and the Department of the Treasury had acted quickly to find a systemic risk exception. She also observed how important that outcome was to the Office of the Comptroller of the Currency. She then said that she has acquiesced in the systemic risk exception decision based on the input of her colleagues and the fact that the Federal Deposit Insurance Act gives multiple decision makers a say in this process. She said, however, that she was not completely comfortable with that decision, but that the Corporation needed to move forward with it because of the tenuous position in which the insured depository institution subsidiaries of Wachovia Corporation find themselves. Chairman Bair commended staff for going above and beyond the usual challenges of the job in that staff did not know until approximately 5 : 0 0 p.m. the previous day that the transaction would be done on an open bank assistance basis. However, she noted that, while markets move quickly, the lack of time put staff in a bind, making for a very difficult night because of the requirement that a resolution was needed by morning. Then, in accordance with the recommendation of staff and on motion of Vice Chairman Gruenberg, seconded by Director Dugan, concurred in by Director Curry, Director Reich, and Chairman Bair, the Board adopted the following resolution: finding, by the vote of at least two-thirds of the members of the Board, that the liquidation of the insured depository institution subsidiaries of Wachovia Corporation ("Banks"), as well as the likely consequent failure of Wachovia Corporation, would have' serious adverse effects on economic conditions or financial stability and would create systemic risk to the credit markets; (2) finding, by the vote of at least two-thirds of the members of the Board, that the proposal received from Citigroup Inc. which involves the merger or consolidation of the Banks with another insured depository institution or the sale of any or all of the assets of the Banks or the assumption of any or all of the Banks' liabilities by another insured September 29, 2008 (Closed) depository institution, or the acquisition of the stock of the Banks and which requires the provision of assistance under section 13 (c) (2) of the Federal Deposit Insurance Act, 12 U.S.C. § 1823 (c) (2) , in the form of loans to, deposits in, the purchase of assets or securities of, the assumption of liabilities of, guarantees against loss to, or contributions to, the Banks or their acquirer will mitigate the serious adverse effects on economic conditions or financial stability that would be caused by the Banks' failure; (3) finding that severe financial conditions exist which threaten the stability of a significant number of insured depository institutions or of insured depository institutions possessing significant financial resources and the Banks are insured depository institutions under such threat of instability and that the Board takes this action in order to lessen the risk to the Corporation, and systemic risks, posed by the Banks, and that the proposal by Citigroup Inc. will do so in the least costly of all available methods; ( 4 ) authorizing the Chairman, or her designee, to provide the written recommendation to the Secretary of the Treasury specified under section 13 (c) (4) (G) (i) of the Federal Deposit Insurance Act, 12 U.S.C. § 1823 (c) (4) (G) (i) ; and (5) authorizing the Director, DRR, or his designee, and all other Corporation staff to take all appropriate action to implement the provision of assistance authorized hereunder, including but not limited to: credit support in the form of loan guarantees, the purchase of warrants, and loss sharing, and to take any other action necessary and appropriate in connection with this matter: WHEREAS, staff has advised the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") that Wachovia Bank, National Association, Charlotte, North Carolina, Wachovia Mortgage, FSB, North Las Vegas, Nevada, Wachovia Bank of Delaware, National Association, Wilmington, Delaware, Wachovia Bank, FSB, Houston, Texas, and Wachovia Card Services, National Association, Atlanta, Georgia ("Banks"), are in danger of default; and September 29, 2008 (Closed) WHEREAS, the Division of Resolutions and Receiverships ("DRR") has solicited bids from financial institutions for the resolution of the Banks; and WHEREAS, DRR has received no closed bank proposals for the resolution of the Banks from other financial institutions; and WHEREAS, a proposal for the resolution of the Banks without the appointment of the FDIC as receiver has been received from Citigroup Inc., New York, New York ("Citi"), which involves the merger or consolidation of the Banks with another insured depository institution or the sale of any or all of the assets of the Banks or the assumption of any or all of the Banks' liabilities by another insured depository institution, or the acquisition of the stock of the Banks, any of which would benefit the shareholders of the Banks and except under limited circumstances is precluded by section ll(a) (4) (C) of the Federal Deposit Insurance Act, as amended ("Act"), 12 U.S.C. 5 1821 (a) (4) ( C) ; and WHEREAS, the Board has been advised that the Citi bid will be less costly than the other bid received and that it represents the least costly of the available methods of resolving the systemic risks presented by the failure of the Banks; and WHEREAS, staff has presented to the Board information indicating the liquidation of the Banks under section 11 of the Act, 12 U.S.C. 5 1821, would have serious adverse effects on economic conditions or financial stability; and WHEREAS, staff has advised that assistance to the Banks under section 13(c) of the Act, 12 U.S.C. 5 1823 (c) (l), without the appointment of the FDIC as receiver will avoid or mitigate the serious adverse effects on economic conditions or financial stability; and WHEREAS, staff has advised that severe financial conditions exist which threaten the stability of a significant number of insured depository institutions September 29, 2008 (Closed) or of insured depository institutions possessing significant financial resources and the Banks are insured depository institutions under such threat of instability. NOW, THEREFORE, BE IT RESOLVED, that by the vote of at least two-thirds of the members of the Board, the Board finds that the liquidation of the Banks, as well as the likely consequent failure of Wachovia Corporation, would have serious adverse effects on economic conditions or financial stability and would create systemic risk to the credit markets. BE IT FURTHER RESOLVED, that by the vote of at least two-thirds of the members of the Board, the Board finds that the proposal received from Citi which involves the merger or consolidation of the Banks with another insured depository institution or the sale of any or all of the assets of the Banks or the assumption of any or all of the Banks' liabilities by another insured depository institution, or the acquisition of the stock of the Banks and which requires the provision of assistance under section 13 (c) (2) of the Act, 12 U.S.C. § 1823 (c) (2), in the form of loans to, deposits in, the purchase of assets or securities of, the assumption of liabilities of, guarantees against loss to, or contributions to, the Banks or their acquirer will mitigate the serious adverse effects on economic conditions or financial stability that would be caused by the Banks1 failure. BE IT FURTHER RESOLVED, that severe financial conditions exist which threaten the stability of a significant number of insured depository institutions or of insured depository institutions possessing significant financial resources and the Banks are insured depository institutions under such threat of instability and that the Board takes this action in order to lessen the risk to the FDIC, and systemic risks, posed by the Banks, and that the proposal by Citi will do so in the least costly of all available methods. BE IT FURTHER RESOLVED, the Board hereby authorizes the Chairman, or her designee, to provide the written recommendation to the Secretary of the September 29, 2008 (Closed) Treasury specified under section 13 (c) (4) (G) (i) of the Act, 12 U.S.C. § 1823 (c) (4) (G) (i) . BE IT FURTHER RESOLVED, the Board hereby authorizes the Director, DRR, or his designee, and all other FDIC staff to take all appropriate action to implement the provision of assistance authorized hereunder, including but not limited to: credit support in the form of loan guarantees, the purchase of warrants, and loss sharing; and to take any other action necessary and appropriate in connection with this matter. [EXECUTIVE SECRETARY'S NOTE: On Monday, September 29, 2008, as a result of the Board's action earlier that day, Citigroup Inc. agreed to acquire the banking operations of Wachovia Corporation, Charlotte, North Carolina, in a transaction facilitated by the Corporation and concurred with by the Board of Governors or the Federal Reserve System and the Secretary of the Treasury in consultation with the President, resulting in all depositors being fully protected and the expectation that there will be no cost to the Deposit Insurance Fund. Citigroup Inc. will acquire the bulk of Wachovia Corporation's assets and liabilities on an open bank basis with assistance from the Corporation, including five depositor institutions: Wachovia Bank, National Association, Charlotte, North Carolina, Wachovia Mortgage, FSB, North Las Vegas, Nevada, Wachovia Bank of Delaware, National Association, Wilmington, Delaware, Wachovia Bank, FSB, Houston, Texas, and Wachovia Card Services, National Association, Atlanta, Georgia. Wachovia Corporation will continue to own AG Edwards and Evergreen. The Corporation has entered into a loss sharing arrangement on a pre-identified pool of loans, with Citigroup Inc. to absorb up to $42 billion of losses on a $312 billion pool of loans and the Corporation to absorb losses beyond that; and Citigroup has granted the Corporation $12 billion in preferred stock and warrants to compensate the Corporation for bearing the risk.] Documents and materials relevant to the Board's consideration of the foregoing are marked an exhibit for identification, are filed in the jacket of this meeting, and, by reference, are made a part of these minutes and the permanent files of the Board of Directors. September 29, 2008 (Closed) There being no further business, the meeting was adjourned. ~xecutiGe Secretary September 29, 2008 (Closed) September 29, 2008 FDIC Meeting Transcript NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 1 UNITED STATES OF AMERICA FEDERAL DEPOSIT INSURANCE CORPORATION + + + + + BOARD OF DIRECTORS + + + + + MEETING CLOSED SESSION + + + + + MONDAY SEPTEMBER 29, 2008 + + + + + The Board convened at 6:00 a.m. in the Federal Deposit Insurance Corporation Board Room at 550 17th Street, N.W., Washington, D.C., Sheila C. Bair, Chairman, presiding. PRESENT: SHEILA C. BAIR, Chairman MARTIN J. GRUENBERG, Vice Chairman THOMAS J. CURRY, Director JOHN C. DUGAN, Comptroller of the Currency JOHN M. REICH, Director, Office of Thrift Supervision STAFF PRESENT: Miguel Bran John H. Corston Herbert J. Held Jim Wigand NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 2 P R O C E E D I N G S 1 CHAIRMAN BAIR: Okay. I have no 2 gavel, so we'll just begin this morning the 3 meeting. 4 (laughter.) 5 CHAIRMAN BAIR: Okay. I'd like 6 to call the meeting to order. I need a 7 Sunshine motion. 8 MR. : I move. 9 CHAIRMAN BAIR: May I have a 10 second? I'll second. All in favor, say aye. 11 [Chorus of ayes] 12 CHAIRMAN BAIR: The motion's 13 agreed to. No summary agenda. There's one 14 item on the discussion agenda. It is a 15 memorandum and resolution relating to 16 Wachovia Bank, National Association, 17 Charlotte, North Carolina, and its affiliate 18 insured depository institutions. 19 Jim Wigand, John Corston, Miguel 20 Bran and Herb Held will present the case. 21 MR. WIGAND: Good morning, Madam 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 3 Chairman, members of the Board. We're here 1 to present a recommendation that the Board 2 find that the respective failure of Wachovia 3 Corporation and its affiliates, banks and 4 thrifts, would have serious adverse effects 5 on economic conditions and financial 6 stability. Its failure would seriously and 7 negatively affect already-disrupted credit 8 markets, including short-term interbank 9 lending, counterparty relationships and 10 qualified financial contract markets, and 11 bank senior subordinated debt markets and 12 would further disrupt the related markets and 13 derivative products in other markets. 14 Staff recommends that the Board 15 accept the bid of Citigroup as the least 16 costly available method, mitigating systemic 17 risk, and that the Board authorize staff to 18 take all steps needed to implement this 19 decision. 20 Based on preliminary information, 21 staff estimates that there will be no 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 4 expected loss to the Deposit Insurance Fund 1 for this transaction. 2 MR. CORSTON: Wachovia Bank is a 3 nationally-chartered bank. It's wholly-owned 4 by Wachovia Corporation. The bank is the 5 fourth largest bank in the country and is the 6 predominant legal entity within Wachovia 7 Corporation representing 83 percent of 8 consolidated holding company assets. The 9 insured legal entities of Wachovia 10 Corporation consist of three national banks 11 and two federal savings banks. The bank 12 operates approximately 3400 banking centers 13 in 21 states. 14 The risk profile of the bank is 15 declining rapidly because of deteriorating 16 liquidity and poor quality assets, and 17 liquidity has reached crisis proportions. 18 The company's rapidly 19 deteriorating financial condition is due 20 largely to its portfolio of pay option ARM 21 products, commercial real estate portfolio, 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 5 and weakened liquidity position. 1 On Friday, September 26, market 2 acceptance of Wachovia liability ceased as 3 the company's stock plunged, credit default 4 swap spreads widened, some parties declined 5 to advance the bank overnight funds, and 6 counterparties advised that they would 7 require greater collateralization on any 8 transactions with the bank. 9 Unless the bank immediately 10 attracts a merger partner, the FDIC and other 11 regulators project the bank will likely be 12 unable to pay obligations or meet expected 13 deposit outputs. 14 Miguel. 15 MR. BRAN: Thanks, John. Staff 16 recommends the Board find the least-cost 17 resolution of Wachovia and its affiliate 18 banks and thrifts, and they'd have serious 19 adverse effects on economic conditions and 20 financial stability, and would seriously 21 disrupt an already moribund credit market. 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 6 The least-costly resolution would 1 likely be a purchase and assumption after the 2 FDIC was appointed receiver. I'd like to 3 first describe some of the economic and 4 financial circumstances we find ourselves in 5 in September 2008. 6 Short-term funding mechanisms in 7 interbank lending are under considerable 8 strain. This pressure is increasing 9 following the failure of Lehman Brothers, the 10 difficulties of AIG, the closing of WaMu. 11 Libor has jumped a 100 basis points in the 12 last three weeks. Commercial paper rates 13 have risen dramatically. And this has all 14 led to a strained liquidity position for many 15 banks and has resulted in downward pressure 16 on stock prices and upward pressure on credit 17 default swap prices. 18 All of these effects would likely 19 cause investors to rise sharply their 20 assessments of the risks of investing in 21 similar, albeit smaller regional banks, 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 7 making it much less likely that those 1 institutions would be able to raise capital 2 and other funding. 3 The potential also exists for the 4 harm to extend to the broader economy. It 5 could undermine business and household 6 confidence and also cause banks to become 7 less willing to lend to businesses and 8 households. 9 If the systemic risk exception 10 were invoked, staff believes that the 11 transaction described -- 12 [Teleconference is interrupted.] 13 MR. : [inaudible] is now 14 joining. 15 CHAIRMAN BAIR: Who joined? 16 MS. : Hello. This is Julie 17 Williams [ph]. 18 CHAIRMAN BAIR: okay. 19 MR. BRAN: -- described in this 20 Board case would avoid all or most of the 21 adverse impacts discussed previously. Use of 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 8 the systemic risk exception may involve cost. 1 The FDIC could suffer some losses from 2 protection of certain asset pools, although 3 the expectation is not. The size of the 4 losses is not known and, as described by Mr. 5 Wigand, is likely to be zero. 6 In addition, moral hazard will be 7 exacerbated and the potential for market 8 discipline in the future would be reduced for 9 the very largest depository institutions. 10 In conclusion, staff believes the 11 imposition of a least-cost resolution on 12 Wachovia would almost surely have major 13 systemic effects. Both financial stability 14 and overall economic condition would likely 15 be adversely affected for the reasons already 16 discussed. 17 Staff believes we have 18 recommended the least-costly alternative, one 19 where equity holders take significant losses, 20 albeit not wiped out. A least-cost 21 resolution that protects most creditors would 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 9 best ameliorate the adverse effects of a 1 failure on financial markets and the real 2 economy. 3 In creating the systemic risk 4 exception, the Congress clearly envisioned 5 that circumstances could arise in which the 6 exception should be used. In view of the 7 current intense financial strains which have 8 already seriously impaired the functioning of 9 the financial system and the likely 10 consequences for the financial system and the 11 economy of a least-cost resolution of the 12 fourth largest commercial bank in the United 13 States, staff believes that the circumstances 14 such as Congress envisioned are clearly 15 present and that invocation of the systemic 16 risk exception is justified. Thank you. 17 Herb. 18 MR. HELD: An electronic data 19 room was established by the bank in order to 20 allow potential buyers to perform due 21 diligence. However, there were no proposals 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 10 submitted on an open basis. 1 On September 28th, the FDIC staff 2 began discussions with Citigroup and Wells 3 Fargo, both of which submitted bids the same 4 day. Both bids sought open bank assistance 5 from the FDIC. 6 The Wells Fargo bid required the 7 FDIC to cover potential losses on a pool of 8 up to $137.3 billion in assets, of which 80.7 9 billion has been funded. Wells Fargo would 10 assume the first $2 billion of losses, and 11 thereafter, losses would be shared, 80 12 percent for FDIC and 20 percent for Wells. 13 Our analysis of this proposal 14 estimated the cost to be between 5.6 and 7.2 15 billion dollars. Our exposure in the 16 transaction was capped at $20 billion net. 17 The Citi bid, Citigroup bid 18 requested that FDIC provide loss-share (audio 19 drops for about a second) on a $312 billion 20 pool. Losses would be shared first. The 21 first $30 billion of losses would be absorbed 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 11 by Citigroup. Then Citigroup would absorb $4 1 billion in losses a year for the next three 2 years and after that, FDIC would absorb all 3 the losses. These would be partially offset 4 or, we think, wholly offset by $12 billion of 5 preferred stock transference, which FDIC 6 would receive at the closing of the 7 transaction. 8 We -- our analysis of the (audio 9 breakup) group portfolio indicates that 10 losses range between 35 and (audio breakup) 11 billion dollars. And even under the most 12 severe scenario, there would be no cost to 13 the DIF fund. 14 In addition, Wachovia Corporation 15 itself submitted a proposal for open-bank 16 assistance, and it required a pool of $200 17 billion of loans to have credit protection 18 from the FDIC, and the Wachovia would cover 19 the first $25 billion in losses, and the FDIC 20 would receive $10 billion in preferred stock 21 and warrants. 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 12 Based on our analysis, the 1 proposal from Citigroup is no cost, and is 2 clearly the better of these proposals. 3 MR. : Now just for a point 4 of clarification, that is making an 5 assumption of the estimated high-end loss of 6 the range of losses. It would appear that 7 the cushion available with the transaction 8 with City would still not result in a loss to 9 the Deposit Insurance Fund, but, you know, 10 once again, you know, we have the range of 11 estimates there, and the point estimate is 12 certainly within the range of the absorption 13 amount (audio breakup) provided by Citi. 14 CHAIRMAN BAIR: Okay. Thank you. 15 Vice Chairman Gruenberg. 16 VICE CHAIRMAN GRUENBERG: Thank 17 you, Madam Chairman. I will say, this is a 18 momentous proposal that's being placed before 19 the Board. It will be the first exercise by 20 the Board of the systemic risk exception that 21 was provided in the Federal Deposit Insurance 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 13 Corporation Improvement Act of 1991. 1 It is a decision, it seems to me, 2 we reach reluctantly, and in some sense, we 3 don't have a desirable option in front of us, 4 but among the options available, this is 5 perhaps the best. 6 So it's the least bad, perhaps, 7 of a set of undesirable options, and in that 8 regard we're facing extraordinary times, and 9 this is the appropriate action for us to take 10 at this time, and I'm prepared to support 11 this case. 12 CHAIRMAN BAIR: Thank you. 13 Director Curry. 14 DIRECTOR CURRY: I agree with the 15 vice chairman. It's -- sadly, all the 16 elements of the systemic risk has seemed to 17 be amply supported by the case and the 18 circumstances both at Wachovia, and external 19 conditions within the economy at large. So I 20 am also prepared to vote in favor of this. 21 CHAIRMAN BAIR: Director Dugan. 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 14 DIRECTOR DUGAN: Thank you, Madam 1 Chairman. I think these are absolutely 2 extraordinary time. I think it's remarkable 3 that we've come to this situation where an 4 institution like Wachovia, which, in many 5 ways, is a quite viable, attractive 6 franchise, just couldn't withstand the 7 liquidity shock that it was facing because of 8 the extraordinary circumstances in markets. 9 I think that this is a clear example of the 10 need for the systemic risk exception, 11 certainly with the view of the Federal 12 Reserve and Treasury Department, and 13 discussions that we've had over the weekend, 14 I don't think we have any choice. I'd say I 15 want to commend staff. I think they did a 16 very good job of putting this together in a 17 very short period of time, and I think among 18 the competing offers, this was the best 19 option, and one that (audio breakup) no cost 20 to the FDIC fund. It certainly helps them, 21 and I support the resolution. 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 15 CHAIRMAN BAIR: Director Reich. 1 DIRECTOR REICH: Thank you, Madam 2 Chairman. There's a lot that I don't know, 3 unfortunately. I heard staff indicate that 4 equity holders would take significant losses, 5 though not wiped out, and I guess I'd like to 6 know what, what that means. Could somebody - 7 - 8 CHAIRMAN BAIR: Do you want to 9 take that, Jim. 10 MR. WIGAND: The proposal that 11 Citicorp is tendering, and of course it has 12 to be approved by the shareholders of 13 Wachovia, is for a dollar per share purchase 14 price of the stock. 15 MR. POLAKOFF: What does the FDI 16 Act require with respect to treatment of 17 equity holders? 18 MR. : John Thomas is coming 19 to the table. 20 MR. THOMAS: It requires that 21 (audio breakup) probably not benefit equity 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 16 holders unless there is a systemic 1 determination. That's why a systemic 2 determination is necessary in this case in 3 order to do this transaction. 4 I would add, I think in addition 5 to the dollar a share, there would be some 6 assets left behind in the holding company, 7 but the -- 8 MR. WIGAND: That's correct. 9 MR. THOMAS: -- bulk of its debt 10 would be assumed. I think Citi's guessing 11 about $2 or 2.60 a share value for stock. 12 That's their guess. It's not ours. 13 MR. : And what about the 14 debt holders, the subordinated debt, senior 15 debt? 16 MR. : In all cases the 17 senior subordinated debt holders are being 18 assumed in the transaction. 19 MR. POLAKOFF: How do we -- what 20 do we think we're doing, or how will 21 litigation risk be affected -- now I'm 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 17 thinking of WaMu -- equity and debt holders 1 that were wiped out. Are we -- do we run the 2 risk of increased litigation risk for -- 3 MR. : No one has a right, a 4 legal right to a systemic risk determination 5 and being bailed out. I think the answer is 6 this does not change that risk. It may 7 change the risk whether someone sues. It 8 will not change the risk where there's any 9 significant loss, risk of loss in that 10 litigation. Any time somebody sees money, 11 you may get a law suit; but it does not 12 change the legal risk. 13 MR. : Is there any exposure 14 to the industry for a special assessment? 15 MR. : If it turns out that 16 the transaction actually does cost more than 17 a simple closing of the institutions here 18 would cost, and right now it looks like a 19 zero cost -- our best estimate, zero cost. 20 If that's true, there'll be no special 21 assessment. If it turns out that there is a 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 18 cost from doing the systemic finding, and 1 doing the transaction this way, then the 2 industry would be assessed, and they're 3 assessed based on assets minus equity rather 4 than on deposits. 5 CHAIRMAN BAIR: Treasury's also 6 agreed if there are any losses attendant with 7 this transaction, they will separately fund 8 those, so that our cash balance wouldn't be 9 depleted in any way, and hopefully our 10 reserve balance*.. I guess that's still "up 11 in the air." What do they -- as an 12 accounting matter we could do that. 13 MR. : Does that -- when you 14 say that they would separately fund the 15 losses, does that mean that the industry 16 would not be assessed, or -- 17 CHAIRMAN BAIR: No. 18 Unfortunately, with our statute, there's a 19 special assessment for any costs associated, 20 or losses associated with a systemic risk 21 exception. But the usual rule for Treasury 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 19 is that we have to spend down our entire 1 balance before the will allow us to borrow 2 from them. In this case, they've agreed to 3 fund any, any losses that we might suffer in 4 connection with this transaction, so that we 5 would not have to -- it would not deplete our 6 cash balance. 7 I don't think that's going to 8 happen. I think that the -- at least given - 9 -I think staff is right, that it's probably 10 remote that we will suffer any losses under 11 this, given the sizeable first loss position 12 that Citi has taken. 13 But it was important to me, 14 especially since Treasury are the ones 15 vigorously pushing this, that they agree to 16 separately fund those losses if we do incur 17 them. And we're trying, we're still trying 18 to determine whether they could give us some 19 type of language that would allow us not to 20 have to reserve against those losses if they 21 should occur. 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 20 In other words, they would just 1 fund them immediately as they occurred so it 2 wouldn't impact our DIF balance. But we're 3 not talking about that. We haven't worked 4 that out yet. 5 MR. : Are we anticipating 6 any other possibility of a large failure 7 within the next couple weeks? 8 CHAIRMAN BAIR: Well, I know John 9 Dugan, he might have some thoughts on that. 10 We're watching that Citi closely. I think we 11 need to have more discussions with OCC. I'm 12 not aware on the staff. John, do you have 13 anything? 14 DIRECTOR DUGAN: What I would say 15 is if it happens, it will be a liquidity- 16 based issue, not a capital-based issue like 17 this one, and it'll depend on how markets 18 react, and we'll -- institutions have been 19 taking precautions but in the financial storm 20 that we're in, it's difficult to predict what 21 direction it will take for the particular 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 21 institution which Sheila just mentioned or 1 other institutions, whether supervised by us 2 or others. 3 CHAIRMAN BAIR: Okay. Any more 4 questions, John? 5 MR. : I think that's it, 6 Sheila. Thank you. 7 CHAIRMAN BAIR: Thank you. 8 Well, i think this is, you know, 9 as Marty said, one option of a lot of not- 10 very-good options. I would note for the 11 record, that both the Treasury and the 12 Federal Reserve Board "weighed in" early on 13 for us to provide a systemic risk exception. 14 In fact, the Federal Reserve Board, several 15 hours ago, voted on a systemic risk exception 16 before we'd even acted. So they clearly, 17 both pressed for this, and I know it was 18 important to the OCC as well. 19 I have acquiesced in that 20 decision based on the input of my colleagues, 21 and the fact the statute gives multiple 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 22 decision makers a say in this process. 1 I'm not completely comfortable 2 with it but we need to move forward with 3 something, clearly, because this institution 4 is in a tenuous situation. 5 I would like to very much thank 6 and commend the staff for really going above 7 and beyond a very -- you know, usual 8 challenges of the job. We did not really 9 know, until 5:00 o'clock yesterday afternoon, 10 that this was not going to get done on an 11 open bank and assisted basis, and it really 12 put us in a bind. So it is what it is, 13 markets move quickly, and we just take the 14 balls as they come, or pitched at us. But it 15 was a very difficult night and a resolution 16 that is a resolution, and we needed a 17 resolution that, whether it's the best 18 resolution I don't know. 19 So with that, I will -- may I 20 have a motion with respect to Wachovia Bank. 21 MR. : I move. 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 23 CHAIRMAN BAIR: And may I have a 1 second. 2 MR. : Second. 3 CHAIRMAN BAIR: All in favor say 4 aye. 5 [Chorus of ayes] 6 CHAIRMAN BAIR: The motion's 7 agreed to. That concludes the discussion 8 agenda. Thank you, gentlemen, for all 9 getting up so early, and John, in your case 10 staying up all night. And if there's no more 11 business, we'll conclude the meeting. Thank 12 you. 13 (Whereupon, the closed meeting 14 was concluded) 15 16 17 18 19 20 21 22 NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 WASHINGTON, D.C. 20005-3701 (202) 234-4433 24 1 2 3 4 5 6 7 September 29, 2008 FDIC Board Resolution FEDERA DEPOSIT INSURCE CORPORATION
CERTIFIED COpy OF RESOLUTION OF THE BOARD OF DIRECTORS
I, Robert E. Feldman, Executive Secretary of the Federal
Deposit Insurance Corporation, do hereby certify that the attached
is a true and correct copy of a resolution duly adopted at a
meeting of the Board of Directors of said Corporation, regularly
called and held on the 29th day of September, 2008, at which a
quorum was present, and that the same has not been amended or
rescinded and is now in full force and effect.
subscribed my name and caused the
seal of the Corporation to be
af fixed hereto, in the Ci ty of
Washington and District of Columbia,
this 29th day of September, 2008.
~~ecretary
WHEREAS, staff has advised the Board of Directors
(~Board") of the Federal Deposit Insurance Corporation
(~FDIC") that Wachovia Bank, National Association,
Charlotte, North Carolina, Wachovia Mortgage, FSB, North
Las Vegas, Nevada, Wachovia Bank of Delaware, National
Association, Wilmington, Delaware, Wachovia Bank, FSB,
Houston, Texas, and Wachovia Card Services, National
Association, Atlanta, Georgia (~Banks"), are in danger of
defaul t; and
WHEREAS, the Division of Resolutions and Receiverships
(~DRR") has solicited bids from financial institutions for
the resolution of the Banks; and
WHEREAS, DRR has received no closed bank proposals for
the resolution of the Banks from other financial
insti tutions; and
WHEREAS, a proposal for the resolution of the Banks
without the appointment of the FDIC as receiver has been
received from Citigroup Inc., New York, New York (~Citi"),
which involves the merger or consolidation of the Banks
with another insured depository institution or the sale of
any or all of the assets of the Banks or the assumption of
any or all of the Banks' liabilities by another insured
depository institution, or the acquisition of the stock of
the Banks, any of which would benefit the shareholders of
the Banks and except under limited circumstances is
precluded by section 11 (a) (4) (C) of the Federal Deposit
Insurance Act, as amended (~Act"), 12 U.S.C. §
1821 (a) (4) (C); and
WHEREAS, the Board has been advised that the Citi bid
will be less costly than'the other bid received and that it
represents the least costly of the available methods of
resolving the systemic risks presented by the failure of
the Banks; and
WHEREAS, staff has presented to the Board information
indicating the liquidation of the Banks under section 11 of
the Act, 12 U. S. C. § 1821, would have serious adverse
effects on economic conditions or financial stability; and
WHEREAS, staff has advised that assistance to the
Banks under section 13 (c) of the Act, 12 U. S. C. §
1823 (c) (1), without the appointment of the FDIC as receiver
will avoid or mitigate the serious adverse effects on
economic conditions or financial stability; and
WHEREAS, staff has advised that severe financial
conditions exist which threaten the stability of a
significant number of insured depository institutions or of
insured depository institutions possessing significant
financial resources and the Banks are insured depository
institutions under such threat of instability.
NOW, THEREFORE, BE IT RESOLVED, that by the vote of at
least two-thirds of the members of the Board, the Board
finds that the liquidation of the Banks, as well as the
likely consequent failure of Wachovia Corporation, would
have serious adverse effects on economic conditions or
financial stability and would create systemic risk to the
credi t markets.
BE IT FURTHER RESOLVED, that by the vote of at least
two-thirds of the members of the Board, the Board finds
that the proposal received from Citi which involves the
merger or consolidation of the Banks with another insured
depository institution or the sale of any or all of the
assets of the Banks or the assumption of any or all of the
Banks' liabilities by another insured depository
institution, or the acquisition of the stock of the Banks
and which requires the provision of assistance under
section 13 (c) (2) of the Act, 12 U.S.C. § 1823 (c) (2), in the
form of loans to, deposits in, the purchase of assets or
securities of, the assumption of liabilities of, guarantees
against loss to, or contributions to, the Banks or their
acquirer will mitigate the serious adverse effects on
economic conditions or financial stability that would be
caused by the Banks' failure.
BE IT FURTHER RESOLVED, that severe financial
institutions under such threat of instability and that the
Board takes this action in order to lessen the risk to the
FDIC, and systemic risks, posed by the Banks, and that the
proposal by Citi will do so in the least costly of all
BE IT FURTHER RESOLVED, the Board hereby authorizes
the Chairman, or her designee, to provide the written
recommendation to the Secretary of the Treasury specified
under section 13(c) (4) (G) (i) of the Act, 12 U.S.C. §
1823 (c) (4) (G) (i) .
the Director, DRR, or his designee, and all other FDIC
staff to take all appropriate action to implement the
provision of assistance authorized hereunder, including but
not limited to: credit support in the form of loan
guarantees, the purchase of warrants, and loss sharing; and
to take any other action necessary and appropriate in
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Sign up to vote on this titleUsefulNot usefulMcKinley v FDIC Wachovia Package of Regulatory Documents and Board Materials (Lawsuit #1) by Vern McKinley0.0 (0)EmbedDownloadDescriptionDocuments FDIC turned over in September 2010 pursuant to McKinley v. FDIC litigationDocuments FDIC turned over in September 2010 pursuant to McKinley v. FDIC litigationInterests: Types, Business/Law, Court FilingsRead on Scribd mobile: iPhone, iPad and Android.Copyright: Attribution Non-Commercial (BY-NC)Download as PDF, TXT or read online from ScribdFlag for inappropriate contentShow moreShow less
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