Wachovia Is Sold As Depositors Flee

If a bailout plan passes Congress, the government could soon own stakes in many more banks because of provisions in the legislation awarding it the right to obtain stock in firms that sell their assets to the Treasury.

The tension between regulating banks and profiting from their success could influence a wide range of policy decisions, such as whether to lift the ban on short selling of financial stocks and how to reform banking regulations. It could also discourage the government from challenging the companies if they take advantage of their size to manipulate the market.

"Obviously, to the extent that you've created an oligopoly in the banking industry, you need to be concerned that the industry participants will not be using their market power at the expense of consumers," said David S. Ruder, a professor at Northwestern University School of Law and a former chairman of the Securities and Exchange Commission. "Hopefully, the government will not take actions that are not in the public interest merely for the purpose of increasing its equity stakes."

Bair and other regulators pushed Wachovia to agree to a sale during a long weekend of talks with Citigroup and other bidders. The Charlotte company has been crushed by losses on mortgages, and regulators were increasingly concerned that it might collapse, forcing the FDIC to cover its depositors.

Wachovia bought many of its troubles in 2006 with the $25 billion acquisition of Golden West Financial, a major mortgage lender based in California. Like Washington Mutual, which failed late last week, Golden West specialized in "option" mortgage loans, which allow customers to choose how much they pay each month.

Yet also like Washington Mutual, Wachovia was ultimately laid low not by its mortgage losses but by a lack of cash. The bank basically foundered because people lost confidence in its ability to survive.

In the 10 days before regulators closed Washington Mutual, depositors withdrew $16.7 billion, leaving the bank without the money it needed to stay in business. And the failure of Washington Mutual on Thursday led to increased concerns about Wachovia because it held an even larger portfolio of troubled mortgage loans.

By Friday, customers were beginning to withdraw money, according to people familiar with the situation. The bank also was struggling to raise money from other sources, such as sales of short-term debt to investors and loans from other banks.

On Saturday, Wachovia's primary regulator, the Office of the Comptroller of the Currency, notified the FDIC that the company's situation was critical.

Wachovia's executives were in New York, negotiating with two possible suitors, Wells Fargo and Citigroup. As late as Sunday afternoon, federal officials believed that a sale would happen without federal intervention. But Wells Fargo declined to pull the trigger, and Citigroup insisted on federal aid.

Regulators worked through the night to hammer out the final deal.