Cross-posted at Facing South -- your source for news, politics and trends in the changing South. This in-depth report follows up on a diary by tommytutone at DailyKos yesterday.This issue needs more attention!
Wachovia Corp., a once-thriving financial giant now teetering on the brink of collapse, confirmed today that it was extending an $8 million loan to the cash-strapped National Republican Congressional Committee for last-minute activites to support GOP House candidates.
Wachovia's decision to lend money to the NRCC -- itself reeling from a damaging financial scandal earlier this year -- is sure to draw charges of favoritism, as Wachovia denies credit and freezes assets for thousands of other customers.
Allegations of favoritism are especially delicate for Wachovia, given the company's disproportionate support of Republican campaigns and organizations.
What's more, Wachovia's loan to the NRCC comes as Wachovia awaits the outcome of precarious buyout negotations which have relied on federal backing -- inviting questions over the political activities of companies whose survival depend on public support.
WACHOVIA'S BIG FALL
In a year of spectacular finance industry failures, the fall of Wachovia Corp. -- the 4th-biggest bank in the country -- was one of the biggest. This past July, Wachovia announced staggering 2nd-quarter losses totaling over $9 billion -- the second-largest bank losses in history. The crisis forced the financial giant to slash over 11,000 jobs and cut $2 billion in expenses.
Wachovia's economic tailspin this year also caused them to drastically cut back on making loans. By July 2008, Wachovia branches were turning down most loan requests that came across their desk, as The New York Times reported:
Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring. [...]
Drew Greenblatt, president of Marlin Steel Wire Products, figured it would be easy to get a $300,000 bank loan to finance a new robot for his factory in Baltimore. His company, which makes parts for makers of home appliances, is growing and profitable, he said. His expansion would add three new jobs to an economy hungry for work.
But when Greenblatt called the local branch of Wachovia -- the same bank that had been aggressively marketing loans to him for years -- he was distressed by the response.
"The exact words were, 'We're saying no to almost everybody,'" Greenblatt recalled. [emphasis added]
But Wachovia hadn't hit bottom yet. For the next three months, stock prices kept falling and losses mounted. By the time Washington Mutual failed on September 25, investors had lost all faith in Wachovia, too. Wachovia faced a "silent run" as businesses and institutions began pulling out vast sums of money.
The possibility of total collapse was so real that the FDIC, for the first time ever, used its authority to prevent a failure that could pose a "systemic risk" to the financial system by forcing Wachovia into a rescue buyout by Citigroup.
Wachovia's dramatic fall -- and uncertainty around the Citi buyout -- has forced it to further slash access to capital and credit. In a widely-publicized move, Wachovia announced days later that it was freezing the short-term accounts of nearly 1,000 colleges who invested in the Commonfund -- generating panic at campuses nation-wide, as the Chronicle of Higher Education reported:
The move has left 900 institutions unable to get access to billions of dollars they depend on for salaries, campus construction, and debt payments.
Making matters worse, Wachovia's situation has grown even more precarious over the last week, as the FDIC-engineered buyout by Citi fell apart amid a storm of lawsuits after rival Wells Fargo made a counter-offer for Wachovia's takeover.
BAILING OUT THE NRCC
It was in this context that yesterday, in a little-noticed item in Roll Call (and noted by Chris Bowers at OpenLeft), that the National Republican Congressional Committee had obtained an $8 million loan from Wachovia to help out House Republican candidates in the final weeks of the 2008 elections:
The National Republican Congressional Committee, trailing its Democratic counterpart considerably in cash on hand, has secured an $8 million loan to spend on House races during the last few weeks of the campaign, according to sources.
The NRCC reported $14.4 million in cash on hand as of Aug. 31, compared to $54 million in the bank for the Democratic Congressional Campaign Committee. As it did last cycle, the NRCC is procuring its loan from Wachovia Bank, sources confirmed.
The announcement that Wachovia is throwing a lifeline to the RNCC for the home stretch of the 2008 elections is remarkable for several reasons.
First, the timing – shortly after Wachovia had cut off credit to nearly 1,000 colleges and in the middle of precarious and bitterly-contested buyout negotiations – is a PR problem and financially risky for a company that is still on financial life support.
Wachovia's loan also raises questions about the political involvements of businesses that get the support of the federal government.
In the Citigroup buyout arrangement, the FDIC has agreed to absorb any losses Citi may incur beyond $42 billion -- and therefore ensuring Wachovia's ability to operate and make loans. Financial analyst Karen Petrou described the federal government's central role on the radio show MarketPlace:
[The FDIC-arranged Citigroup buyout of Wachovia] is not a private sector transaction. This is a government rescue.
In order to get Citi to buy Wachovia, the FDIC promised to shoulder most of the potential losses. There are a lot of them. Wachovia purchased a California lender in 2006, which was riddled with bad mortgages. That's added to what is now $312 billion in loans on Wachovia's balance sheet.
Citi is at risk for only $42 billion of that portfolio. The rest of the $312 [billion] goes to the FDIC. [emphasis added]
Since the FDIC first pushed the Citigroup buyout, rival Wells Fargo stepped forward with an alternative proposal that doesn't include federal backing. Citi and Wells Fargo are still trying to iron out a compromise.
But the Citi deal is still one the table. And most importantly, it's only due to the FDIC's promise of support that Wachovia is alive at all, as New York Times business writer Steven Davidoff observes:
According to an affidavit of Wachovia’s chief executive, Robert K. Steel, Wachovia would have filed for bankruptcy protection on Sept. 29 without some kind of government assistance. The Federal Deposit Insurance Corporation arranged to support the Citi transaction on an open bank assistance basis. [...]
It is uncertain whether Citi would have stepped up to the plate to acquire Wachovia without this assistance. From the affidavit of Mr. Steel filed with the federal court over the weekend, it appears that Wells Fargo initially stated that it would not.
By providing this assistance, the F.D.I.C. allowed Wachovia to survive as a whole entity outside bankruptcy.
In other words, Wachovia is only able to operate and make loans today because the federal government has its back. That Wachovia would turn around and use its financial position to bolster the NRCC at a critical moment in the 2008 elections raises the specter of public resources and influence being used to serve partisan ends.
A TROUBLED CLIENT
Finally, Wachovia's extraordinary move to help the RNCC now is especially interesting given that the RNCC has been a troubling client for Wachovia in the past.
Wachovia also gave the RNCC a loan for $9 million in 2006 (which it didn't pay back until March 2008). But shortly after receiving the loan, the RNCC was wracked by an embarrassing and widely-publicized financial scandal.
In what The Washington Post would describe as "the biggest campaign swindle ever recorded," evidence emerged of widespread financial improprieties. The FBI was brought in to investigate.
It was eventually revealed that the NRCC's Treasurer, Christopher Ward, had embezzled as much as $725,000. Among other misdeeds, to cover up his tracks Ward and the NRCC submitted forged audit reports to Wachovia in 2006 to obtain their loan.
But it wasn't just one bad apple: As Politico reported in February, the problem stemmed from years of financial mismanagement at the NRCC:
The accounting scandal now haunting the National Republican Congressional Committee was preceded by a series of decisions over the past decade to relax internal financial controls at the committee, according to numerous Republican sources familiar with the NRCC’s operations during those years.
As of this spring, the NRCC had failed to conduct an independent audit since 2003.
The NRCC says it has since reorganized and cleaned up its financial systems. But others seeking loans from Wachovia – including those now being denied credit or see their assets frozen – may wonder if they’d be given a similar second chance.
REPUBLICAN CONNECTIONS
The possibility that the NRCC may have benefited from favoritism at Wachovia, especially given the precarious position of both parties, is particularly relevant given the political leanings of Wachovia's leadership.
Like most financial companies, Wachovia spreads its political giving to both parties. But in 2008, Wachovia's PAC contributions to Republicans have been nearly double that given to Democrats. According to campaign finance reports at OpenSecrets.org, 62% of contributions in 2008 from Wachovia's biggest PAC went to Republican candidates and 38% to Democrats.
Wachovia's newly-installed CEO, Robert K. Steel is also a major supporter of the Republican Party. A North Carolina native, in 2006 Steel was appointed by President Bush to serve as Under Secretary of Domestic Finance in the U.S. Department of the Treasury, where he served from October 2006 to July 2008. In July 2008, Steel resigned from the Treasury and was named President and CEO of Wachovia.
According to OpenSecrets.org, Steel has contributed $99,600 to candidates and parties in the 2004, 2006 and 2008 election cycles. Of those contributions, $94,600 -- 95% -- have gone to Republicans and only 5% to Democrats, and that includes a $1,000 donation to Democrat John Edwards that was returned.
Steel's contributions to Republicans include a $25,000 gift to the National Republican Senatorial Committee and a $10,000 donation to John McCain's Straight Talk America PAC in 2006. All of Steel's 2008 donations have been to GOP candidates.
None of these facts prove that Wachovia's loan to the NRCC was politically motivated. But given the grim financial circumstances facing both parties -- and the central role of the federal government in Wachovia's fragile future -- it certainly raises lots of questions.
UPDATE 1: Thanks for rec'ing this!
Question: Can you help me get this out to places where it can get noticed -- MSNBC, other blogs, papers, etc.? I've been contacting media outlets, but it's looking like this is going to require some grassroots viral distribution.
Also: Wachovia stocks (like everyone's) tanked today by 28.85%. All the more reason they shouldn't be giving loans to risky entities like the NRCC while the deny credit to thousands of businesses, colleges and individuals.
UPDATE 2: Citi is pulling out:
Citigroup said late Thursday that it will not try to block a merger between Wachovia and Wells Fargo, but that it would continue to seek billions of dollars in damages after the Charlotte-based bank spurned a $2.2 billion deal proffered by Citigroup at the government’s behest.
That means the FDCI-brokered deal that had the feds assuming a huge chunk of potential losses is off the table. But as noted below, it's important to remember that Wachovia is only alive now because of the promise of FDIC backing -- i.e., U.S. taxpayers may not end up footing the bill, but they made the loan to the NRCC possible.
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