The Duplicitous Sheila Bair

After Wachovia agreed to be bought by Wells Fargo on Friday, the FDIC's Sheila Bair put out a press release saying that her agency "stands behind its previously announced agreement with Citigroup".

Except, it wasn't quite as simple as that. During that whole week, according to the affidavit of Wachovia's Bob Steel, Wachovia had been negotiating in good faith with Citigroup; there was no contact with Wells Fargo. Until, that is, quite late on Thursday night:

On October 2, 2008 at approximately 7:15pm, I received an unexpected call from Chairman Bair. She asked if I had heard from Mr Kovacevich. I assured her I had not spoken to him since the initiation of the negotiations with Citi. She advised me that it was her understanding that he would be calling me to propose a merger transaction that would result in Wachovia shareholders receiving $7.00 per share of Wells Fargo common stock and encouraged me to give serious consideration to that offer.

At that point on Thursday, the agreement between Wachovia and Citi was all but nailed down; they'd even scheduled a time to sign it -- 2pm on Friday. Of course, that never happened. And it looks very much, from Steel's affidavit, that Bair had been working behind the scenes with Kovacevich and the crew from Wells Fargo, putting together a rival deal.

Which puts her public statement on Friday morning into a bit of perspective: yes, she might stand behind the agreement with Citi. But left unsaid was her clear support for a new deal with Wells.

This isn't so much ad hoc policymaking as post hoc policymaking. The agreement with Citi was put together over the course of a very hurried Sunday, because Wachovia would have to have declared bankruptcy on Monday morning if it didn't have a deal. As Jamie Dimon would say, buying a house and buying a house on fire are two different things. Citi bought a house on fire, thereby saving it from burning to the ground. And then Mr Kovacevich waltzed in, decided that, on reflection, he rather liked the look of the house after all, and used a provision of the newly-enacted TARP legislation to gazump the hapless Mr Pandit.

It's easy to see why Citi's rather aggrieved about the whole deal; it's harder to see why Bair would so drastically burn her bridges with 399 Park. If she ever wants to work with Citigroup again, when next she needs to rescue a bank in trouble, I suspect she'll get an extremely frosty reception.