Fine Print - June 2009
Anyone who has lived in North Carolina longer than, oh, 15 minutes or so knows of the intense sibling rivalry between Charlotte and Raleigh. If cities had family reunions, those two would be at each other’s throat before the cover was off the first dish. In my 30 years of newspapering, the most fun I ever had was when the features editors of The Charlotte Observer and Raleigh News & Observer (where I long worked) agreed to send a reporter to the other town for the sole purpose of insulting it. I spent a weekend in Charlotte seeing everything in the worst possible light while the Observer’s guy was in Raleigh, and the resulting stories ran side-by-side in each paper on the same day. I always thought I got the best of it — but then again, I had more insult-worthy material to work with. (Bada-bing. Thanks, you’ve been a great audience.)
But as I’ve watched economic events unfold over the past year, even I — with my reflexive disdain for all things Charlotte — have found myself wincing at the indignities suffered by the city’s once-proud banking industry. That “new global banking center” thing? Charlotte can forget it. Such dreams were doomed by the combination of bad decision making by homegrown corporate executives and the federal government’s ruthless sacrifice of North Carolina’s two largest banks to serve the interests of the financial system. Like my retirement portfolio, Charlotte has taken a huge step backward. Sure, it’s still home to the country’s largest bank, but Charlotte’s place in the financial world is nothing close to what civic leaders had in mind as the 21st century arrived and ambitions blossomed.
The role played by local bank executives is well documented and need not be rehashed yet again. Their sins — believing that the housing market’s spiral headed only upward and that the securitization of debt somehow made risk go away — were not uniquely their own. Almost everyone in the financial industry has something to atone for. But the role played by regulators and federal officials in the Queen City’s diminution is only now coming into focus. They threw one Charlotte bank overboard and (caution: blunt talk ahead) made the other their bitch.
The more time that elapses since September 2008 — when Wachovia Corp. effectively ceased to exist — the more peculiar its death sentence seems. As we now know, Wachovia’s condition was no more precarious than that of many other institutions (and certainly less precarious than, say, AIG’s black hole of a balance sheet). But federal regulators ordered a speedy sale of Wachovia to Citigroup, declaring that the Tar Heel bank posed a “systemic risk” to the economy. Funny thing, though: As it turned out, another company turned out to be much more troubled and hence much more of a threat — Citigroup itself. You don’t have to be a conspiracy theorist to wonder if there wasn’t a hidden motive behind the government’s action. And after Wells Fargo derailed the scheme by making a better bid for Wachovia, the feds stopped pretending the Charlotte bank was their main concern, simply giving Citigroup $25 billion in Troubled Asset Relief Program money a few weeks later.
For its part, Bank of America — which eventually received TARP investments equal those of Citigroup — found out that accepting money from the feds was a little like taking it from the mob: You suddenly have new “partners” who prefer to operate in the shadows. After hastily agreeing last fall to buy a failing Merrill Lynch, BofA CEO Ken Lewis realized in December, when Merrill’s losses suddenly swelled to $15 billion, that he had wandered into quicksand. But when he tried to back out of the deal, Lewis was told by then-Treasury Secretary Henry Paulson: 1) No, he was going through with the purchase, and 2) If he wanted to keep his job, he’d keep his mouth shut about how bad things actually were at Merrill, because the government didn’t want to deal with any more adverse news. Lewis’ response? He did as he was told, only later revealing all this in testimony to officials from the New York attorney general’s office. (While quibbling with the details, Paulson agreed that the merger was important and that the Treasury didn’t see disclosure of certain situations as a good thing.)
Anyone who has kept up with the news knows the result. BofA’s stock has lost nearly 80% of its value since last fall, institutional shareholders unhappy at the lack of disclosure about Merrill have sued the company, and Lewis — now stripped of his title of chairman in a shareholders revolt during the annual meeting April 29 — has about as much job security as a contestant on Donald Trump’s reality show. Oh, and don’t be surprised if the U.S. Securities and Exchange Commission stirs itself into action at some point. But, hey, the financial system stabilized. Thanks, BofA!
Charlotte once had the headquarters of two of the four largest American banks in its downtown. One is now essentially a Wells Fargo branch office and the other stands revealed as a lap dog of the U.S. Treasury. As they say, the shine is off the apple.