On Friday, September 26, 2008, the run on Wachovia started. Alarm bells were ringing loud in Steel’s office. The day before, the FDIC had seized Washington Mutual. Steel was desperate. He had to find a buyer, and he had two potentials: Wells Fargo and Citigroup. On Sunday, Steel had breakfast with Dick Kovacevich, CEO of Wells Fargo, and he briefly thought that Kovacevich was ready to make a firm offer. But it never came. Meanwhile, the Fed was getting into the act, brokering a deal with Citigroup.
For an entire week it appeared that the Citigroup purchase was a done deal—all over but the toasting. Then, on Friday, October 3, Wachovia and Wells Fargo made a joint announcement, stating that Wachovia had accepted a Wells Fargo bid of $15 billion for the bank. Over at Citigroup, no one was amused. In fact, Citi was threatening legal action, saying it had already assumed risk. When I spoke with Steel and Kovacevich later that day, both men shrugged off Citi’s claim. “There was no merger agreement,” Steel said. I could tell he was delighted to be a part of Wells Fargo. “It’s a win-win,” he said. “Good for the government—not a penny of government money. Also, we have similar values and ethics, and operate in similar communities.”
I was curious about how Wells Fargo managed to rise above the devastation, and I asked Kovacevich. “We just didn’t make some of the mistakes that others did,” he said. “We still made some mistakes, and that’s very unfortunate. In some cases, we should have known better. In general—and I don’t know if I take much pride in this—we’re probably the least ugly of the ugly ducks because we did not participate in some of the excesses.”
Warren Buffett, Wells Fargo’s biggest shareholder, was on CNBC October 3 defending the deal. He was unconcerned about Citigroup’s threat of legal action. “I know it’s a better deal, obviously, for the Wachovia shareholders,” he said. “And I know that there is no company, there’s no banking institution, during the last six months, that has done a better job for its holders, for its depositors, and for its borrowers, than Wells. Wells has been lending more and more money. They’ve been pumping money into the economy during the last six months while other institutions have been contracting. So I think Wells is a wonderful home for Wachovia.”
Steel was a happy man. He had weathered the storm. But these were frightening days for the average person. People were asking, “Is my money safe?” This lack of confidence was reflected in the plummeting stock numbers.
“I always ask, what did we do wrong?” a government source told me. “Well, what we did wrong was we should have started capitalizing the financial sector back in March of 2008, maybe even a little bit earlier, to make sure companies had sufficient funds to withstand these liquidity runs. But the problem was we couldn’t even get Congress to pass it the first time after the Lehman failure, after the AIG failure, you know, with Wachovia and Washington Mutual, with Fannie and Freddie failing, with the runs on the investment banks. You still couldn’t get them to pass it. So there was no chance we could have gotten them to pass it earlier. I think the evidence is clear on that, that you needed some pretty catastrophic events to get this stuff through Congress.”
He added that he always got annoyed when people started pointing fingers at the sellers and not the buyers. “Everybody’s to blame,” he said. “If you were to add up all the blame, it would equal seven hundred percent. But, in my mind, the people who were most problematic were the people who bought these assets and didn’t think them through.”
As 2008 wound to a close, Hank Paulson was in a contemplative mood. He was preparing to leave Washington at the end of the Bush administration and was looking forward to spending more time on his farm in Illinois. He planned to write a book and had been offered a teaching fellowship at Johns Hopkins University. He knew his life would be full. But he also knew that his career would be defined by the events of 2008, and he wasn’t shy about defending his decisions and actions during those critical months. We sat down together for one final conversation before Paulson left the Treasury.
“Where are we in terms of recovery?” I asked.
He smiled. “Well, Maria, that’s the question everybody is asking.” I could see that he wanted to analyze what had been achieved. Paulson had been sitting atop the bucking bronco for nearly a year. He was proud that he’d taken firm control and had not allowed a complete collapse of the system. “We stemmed a string or cycle of financial institution failures, which could have led to a downward spiral—a freefall for the economy,” he said, adding that the less sexy, long-term work of stabilization was still ahead.
I looked Paulson in the eye and asked, “Do you regret allowing Lehman to fail?”
He sighed. I imagine he’d been asked that question hundreds of times, and given his decency, he’d probably lost sleep over it. He seemed mildly frustrated to have to go back over it—the fact that pre-TARP, the government had no authority to save Lehman. Although it clearly pained him that a solution had not been found that weekend, he was quietly defiant about the suggestion that he could have done anything differently. However, I noticed that when he left the interview, Paulson did not have the old spring in his step. The crisis had aged him and changed him. He’d be turning over the reins of the Treasury to the man he had worked with so closely,
