The Wachovia Meltdown

Brenda Wensil | January 2011

The morning of Monday, September 29, 2008, began like most mornings in many ways. But as I stepped from the shower listening to morning news in the background, the words not only promised to change the day, but also the course of my future and that of many others in the financial services industry and beyond.

    The announcement that Wachovia Corporation had been acquired by Citi Bank overcast an otherwise beautiful fall morning. That news was topped only four days later when Wells Fargo trumped Citi's deal in a last minute change of events in an already historic week of financial news.

    In my 18 years with First Union, and later Wachovia, we had always turned up on the winning side of the acquisition equation. As I started with the company in 1990, the loopholes in interstate banking had only recently been discovered, sparking the wave of banking buyouts that turned into an acquisition avalanche in the following decade. Through the years, I was an active participant as our bank aggressively mounted wins with confidence then arrogance that bordered on hubris.

This time we had lost the duel.

As I walked through the rest of that day and the weeks and months that followed it was clear just how severe the loss was for all of us. The glory days of my company, the financial industry and the markets as a whole were forever changed. What wasn't as clear to me then is how I would recover from a lunge that pierced so deeply. Of course, the disaster impacted my retirement timeline, like so many others. But more than that, it forever changed the way I will work, the loyalties I will allow and the warning signs of organization dysfunction that can lead to such catastrophe.

    Reflecting now, nearly two years later, I recognize that like so many colleagues, I absorbed personal impacts of wreckage that might have been avoided in a thousand different ways. But these days I have less consternation for those who made bad decisions and more curiosity about just how an organization’s culture can make the passage of those decisions possible.

    From my line of sight, it seemed that many subtle changes might have come together with a thousand other interconnected factors to cause such a cataclysmic disaster. My observations are these: A culture out of touch with history can lose an edge in forecasting future events. An organization that built its success largely on collaboration and inclusion gradually narrowed its range of decision makers, making it fragile in withstanding external pressures. And, for a complex company in such a significant industry as financial services to survive, there must be an environment that invites differing points of view, and dissension as well as healthy conflict.

    “The only thing new to us is the history we don't know;” a phrase that haunted me during the year preceding the market failures. A storm had been brewing in the external markets for awhile. A softening housing market cast dark clouds across the country. Speculators and investors refused to move in from the coming rain and instead chose to ride out the market trend that promised a never ending rate of return. But previous crashes have all been preceded by an extraneous shock of some sort, breaking the herd psychology that makes markets run high. History must have been destined to repeat itself.

Why History Matters

In 1893, the crash was foreshadowed by the bankruptcy of the National Cordage Company. In 1907, it was the collapse of the Knickerbocker Trust Company. The crash of October 1929 was by one count the 11th panic to grip the stock market since Black Friday of 1869. Stock market crashes during the 19th and early 20th centuries had invariably been associated with banking crises. The market and the banking systems have always been too interconnected not to impact each other.

    In March 2008, the United States had five great investment banks. Six months later, there were none. In March of that same year, Bear Stearns collapsed. In September Lehman Brothers failed, and Bank of America saved Merrill Lynch. One week later, savings thrift Washington Mutual under FDIC pressure was rescued by a JP Morgan buyout.

    That's when our own reality came crashing in at Wachovia. Swords were drawn when Wachovia announced the acquisition of Golden West in 2006, for a premium of $24 billion. Analysts lunged with doubts and direct questions about Wachovia's management and decision making. Wachovia countered with defensive reasoning that it was "a sound decision at exactly the wrong time." As history will have it, we had purchased a West coast sub-prime lender at the height of the market; a move reminiscent of our acquisition a decade earlier of another company-crashing sub-prime lender on the West Coast called The Money Store.

    I am no historian. And, I am surely no financial market analyst. But looking back I can’t help but wonder what might have happened had we given more credence to time honored trends that could have suggested other courses of action. Housing markets cave. Financial instruments falter. Decisions gone wrong are defended too long and past the point of belief. This was a systemic crisis. It was an old movie. And every generation that endures it, dare I say repeats it, labels it the greatest economic catastrophe of all time.

    Perhaps we forgot history. Or perhaps we chose to believe that the principles of human nature and market volatility throughout time simply did not apply to us. Either way, we lost.