Richard Kovacevich

You've said very clearly, "We caused this crisis." You, the banks.

Well, the financial services industry. It really [was] what people refer to as banks -- because, you know, investment banks. But what really it was, it was the noncommercial banks, or those that we call deposit institutions. It was investment banks, primarily, and savings and loan associations.

It was also some of the big commercial banks that merged with investment banks and got into that business.

But even that, the only one that was big in this business that was a commercial bank was really Citicorp. Later on, Merrill Lynch merged with Bank of America. But this was after the crisis occurred.

So the other commercial banks, other than Citicorp, really were not huge into the process. In fact, even [ranking member of the House Financial Services Committee] Barney Frank [D-Mass.] said that if only deposit institutions, insured deposit institutions, if only those were involved, this crisis would never have occurred. It was outside of insured deposit institutions, or outside of the general commercial banking industry.

What's your opinion of the Occupy Wall Street movement? They are vilifying bankers. You have said here that banks caused this crisis, investment banks caused this crisis. Occupy Wall Street says the same thing.

Well, they really put all banks into this. There are 6,000 commercial banks, insured deposit banks. And add another few hundred for investment banks and S&Ls and so on. And again, about 20 of them sinned. And yet everyone's being equally vilified, demonized and, quite frankly, regulated for something they really didn't do.

Why do you think that is?

Oh, I think, first of all, it's political. I think that's being done in Washington, D.C., by Congress and the politicians in Washington, D.C. And I think a lot of other people are just uninformed, and they're angry, and they're suffering. And they should be angry. And it's unfortunate that they're suffering. But I think they're putting the blame, a blanket blame that's, quite frankly, undeserved. In fact, those institutions that didn't participate in this lost market share, lost potential profitability during that period because they knew it was wrong and said, "We're not going to participate in it." I mean, they did the right thing, and they're being -- we've socialized the punishment and put it against everyone, when, again, about 20 institutions are the ones that really caused this.

And so I don't -- I mean, I blame them for not being informed, but I can certainly understand why they think it's everybody, because that's been the mantra coming out of Washington, D.C., and, quite frankly, the media. I don't know what happened to investigative journalism. The media has let people say things that are totally untrue and have not done a very good job of describing who is guilty and who is innocent. They just repeated what politicians and others have said.

What does the MF Global [derivatives brokerage] affair tell us about bankers today, about regulators?

Well, again, I don't think you would describe MF Global as a bank. It's a financial institution. We've got to be very careful about -- at least I describe a bank as meaning a commercial bank. I don't even call an investment bank a bank. Now, they're part of financial institutions, but they're not a bank.

I think it says that -- something I’ve believed a long time is that the problem that we have is not about regulations; it's about the lack of regulators using the authority they have. The ink is not even dry on Dodd-Frank [Wall Street Reform and Consumer Protection Act], and yet we have MF Global. (Laughs.) How can this happen? If you listen to the authors of Dodd-Frank, and again the supporters in Washington, they said: "OK, we're not going to have a financial crisis again. We've solved this problem. We've got Dodd-Frank now. We're protected."

The ink’s not dry, and we have another institution that presumably has $1.2 billion of customer funds that were supposed to be separated, that was not separated, and that those small businessmen, consumers are not yet getting their money back. And what they said is with Dodd-Frank, that's not going to happen anymore.

How could regulators miss that?

I don't know. All's I can say is they missed the financial crisis. This has been happening for generations. And I believe what you have to work with is that regulators will miss financial problems. We have to make financial institution failure bearable, possible and tolerable. Because they have failed in the past, they will fail in the future, and no amount of regulation can make up for ineffective regulators.

So I just say we've got to have a process that assumes that the regulators are going to fail and financial institutions are going to fail. And how do we make sure that that failure is manageable, that it doesn't turn into systemic risk and a massive recession and so forth? I believe there are ways to do that, but we're going to have to change our process, and we're going to have to admit that regulators are not capable, with all the regulations you want to put on, are still not capable of keeping financial institutions from failing.

I want to come back to that later. I want to wind back the clock. We had this tremendous period of growth in the financial industry. Why? What happened over the last 20 years to cause Wells Fargo to go from $50 billion to $610 billion?

Well, there's two things. One is simply wealth generation. This is the greatest wealth growth that's ever occurred in the world. And so you have the very advanced economies where there's a lot of money, a lot of wealth being generated that needs to be managed, that needs to go back into the economy so you continue to get growth, and people need help in how to do that.

But the United States is really unique in that prior to approximately -- it's only been 20 years ago that banks were allowed to provide services across state lines. They were confined to their state. They could do banking all over the world; it was easier to go to Brazil to bank for Citibank, say, to go to Brazil to bank than go to New Jersey. And so they were stymied in their ability to serve the customer. And quite frankly, this caused a lot of bank failures and so on, because they had geographic concentration.

They weren't diversified.

They weren't diversified geographically or by product, because there was also tremendous regulatory constraints on what they could offer, and even their prices and so on.

So when I think Congress quite intelligently decided that this was not good, because there were bank failures, that we had to let them diversify both geographically and by product, they basically, if you will, instantaneously could be 50 or 60 times bigger by just going to 50 states instead of the state that they were in.

Now, that was not true of worldwide banks. And so this was unique to the United States. Canada has always had -- in fact, practically every country in the world has had countrywide institutions. So you didn't see the same type of growth in those countries, because they always had nationwide financial institutions. We were unique in that.

So with the combination -- that was probably a greater reason, is the finally allowing banks to offer more products and services, and also to be anywhere they wanted geographically. And then just add that financial -- you're always going to see increases in the growth of financial institutions, because money never declines, right?

That was the beginning, in some sense, that deregulation that allowed banks to go outside their states -- that was the beginning of too big to fail. It didn't have to be. And you've spoken for years against too big to fail. But allowing banks to grow so much later and spread their, as some would say, tentacles into so many places, you create a more systemically linked institution that people fear becomes too big to fail.

Well, I think that's the conventional wisdom; I just think it's wrong. First of all, the largest bank failure we had up until this date was the Continental Bank, who was confined to Illinois before interstate banking, who failed. And at that time, it was the largest bank failure, and it had to be rescued, etc.

I would argue that if a bank, let's say a financial institution has a well-diversified product line and has, let's say, a 10 percent market share in every one of the 50 states -- well diversified, not concentrated by any particular product, relatively small market share per state -- that institution might be $3 trillion in size. And I would argue that that institution, assuming it's well managed and so on, has a less likely chance of failing than an institution that may have 50 percent market share in a state and only in that state, or let's say, have 60 percent of its balance sheet in commercial loans or residential loans, or something, and maybe only be $10 billion in size.

And if you look back about which institutions fail, more small institutions fail than big institutions because of this concentration. So size is not the issue. The only issue about size is if you are big and concentrated, then of course you are worse than small and concentrated. It's about concentration.

So that's why the failures were in the investment banks that were more focused on a narrow line of business?

Yes. But you can go back, again, before interstate banking, and I don't know if you remember, but Texas banks all failed in the late '80s, early '90s. They, before their failure, the Texas banks were considered to be some of the most successful banks in the entire United States. But because they were confined to Texas, they were basically confined to commercial real estate, because Texas was booming at that time because of energy, because of the embargo. And when both the commercial real estate and the energy industries collapsed, then the Texas economy collapsed, and all the big Texas banks failed.

You remember the S&L crisis. And there's no single S&L that was that big, but they were all in commercial and residential real estate. And when that hit nationally as a problem, remember, we had to spend $150 billion to bail out the S&Ls. They weren't big.

So there's many examples of relatively small institutions that have failed in this. Even in this crisis, the originators of mortgages, there was two big originators. There was Washington Mutual and Countrywide. The rest were all very small. There was IndyMac, New Century Financial, First Franklin, WMC Mortgage, Option One, Fremont. You didn't even hear of those names. All relatively small, but they were the very significant portion of the subprime exotic mortgages that were originated. And they all failed, and they caused the problem more than any of the big institutions in terms of origination. Now, their brethren, the investment banks, were the ones who distributed that.

So I think there's lots of evidence that there is no general relationship between bank failure[s].

The second issue relative to too big to fail, however, is that I think the FDIC [Federal Deposit Insurance Corp.], which is the agency that handles bank failures, insured bank failures, had made a great mistake in the past. They had basically bailed out everybody, not just insured depositors, when a bank fails, and I think therefore there was very little due diligence being done by other investors because they were always bailed out before. I think that's a huge mistake. We have to get to market discipline.

Moral hazard.

Moral hazard. And what the FDIC did by bailing out everyone kept increasing moral hazard. Big mistake. What should happen in any bank failure is that everybody except the insured depositor takes a haircut to solve the problem between the liquidation of the bank and what the net worth is. Whatever issue remains between the value of the assets, the liabilities should be distributed among the investors, all taking a haircut, so that the FDIC fund, and certainly even the taxpayer, doesn't have to pay a dime.

And if we were to start doing that, and if we had done it years ago, I don't think we would have the failures today, because there would be a lot more market discipline.

You're not worried about systemic risk when the ripples from the large bank failure with lots of haircuts from lots of investors occurs?

Well, I think it is a risk. But I think there's a greater risk, that if you don't start this process -- what you should do, at least in my opinion, is that you don't bail out anybody. Systemic risk occurs after two or three of the liquidations. Then you might have to do something. But again, there was a lot of people concerned that when Continental Bank failed, oh, we're going to have -- the interconnectedness is going to be a big problem. It worked out.

Drexel Burnham failed. We got through that...

We're going to have crises; we've had them forever. We had [them] with the robber barons. We had them during the Michael Milken days and insider trading. We had it with the Internet and the equity crisis. And they can lead to what I would call minor recessions that you have problems with.

But they're worked out. They don't become as massive as this one did. And I think that what happened here is, in the effort to bail everybody out, we not only didn't solve this problem, I think we made it worse. But even more problematic is you're setting it up for even a bigger problem next time, because of moral hazard and everyone believes that everyone's going to get bailed out.

You've got to bite the bullet.

The role that derivatives and financial innovation played in destabilizing the banking sector, or the financial sector as you would put it, what were you seeing? As this was going on, what were you thinking?

Well, there's nothing wrong with financial innovation and derivatives and so on if they are properly done, properly understood, and, I guess most importantly, properly rated by outside parties who are supposedly objective and you can rely on them.

And I think one of the most important reasons that this crisis got as big as it did is that these, the exotic forms of these particular instruments, incomprehensibly some of which were rated AAA by the rating agencies -- I cannot imagine how they could come up with subprime mortgages AAA-rated.

And therefore, particularly when it's AAA-rated, people don't do due diligence. I mean, they say that they're off by a little bit, so then they're only AA. (Laughs.) It's still -- they just bought this stuff.

And I'll make this statement, that if the rating agencies had not rated so much of this, what I would call toxic subprime mortgages, AAA, this crisis would have been small enough to be manageable and would never have gotten to the size it did, if just the rating agencies had done their job.

The rating agencies were paid by the banks, would have lost business had they not awarded those --

Not really, because there's only three of them. So the instruments either would have been issued at such a small volume it would never have made a difference, or now they made more revenue by rating these OK, but they wouldn't have lost anything, because there was nothing to lose, because there was nothing there.

That's the incentive to rate them highly.

Well, supposedly not. They're supposed to be independent.

Supposed to be.

Yeah.

But they weren't.

That's correct. Now, again, I'm not trying to make excuses for the management who originated this stuff, but we have in this country checks and balances. And if people want to know why this crisis got as big as it did, one of the major culprits, and there are some more, were the rating agencies rating subprime mortgages AAA, which to me was totally incomprehensible.

So what I was saying was bubbles occurred. In fact, we said it in our annual reports, that the spreads on all risk classes were way too narrow, as if there was no risk in the system. And we saw risk all over the place. And there was hardly no [sic] distinction between what we would say were high-risk activities and low-risk; they were all way overpriced.

In fact, we didn't even participate in the exotic subprime side of the mortgage, because we knew that this was absolutely wrong for our customers if we would have done it, and it would have been wrong for us because we think this thing is going to blow up.

What did your fellow bankers say to you when you told them that you thought this stuff was toxic and you weren't going to bite?

Well, the ones that were in it said I was wrong, and "Everything's fine. We don't see any losses occurring in this. We think it's improving homeownership. It's good for low-income people who have not had a chance to buy a home." And my answer to that was, "The only reason you're not seeing losses [is] because you're seeing massive delinquencies, 30 to 40 percent delinquencies." Sometimes, in a significant amount of cases, people weren't even making their first payment.

But what was hiding the losses was the fact that home prices, between 2000 and 2006, rose by 120 percent. Never happened over any six-year period in the entire history of the United States. And what happened is that because the prices increased, even when there was a foreclosure, you could resell the house at about the level of the mortgage, and so no one lost money.

Because your collateral was so good.

And all's you knew for sure, as soon as those prices didn't increase at this rate -- they didn't even have to go down -- didn't increase at this rate, you were going to have massive losses. And that's why -- we weren't the only one to see this. There were hedge funds; [founder and president of Paulson & Co.] John Paulson has supposedly made a lot of money on this; [founder and president of Greenlight Capital] David Einhorn. There's all kinds of people who -- for people to say no one could have seen this is a total mistake.

Like I say, we even mentioned it in our annual reports that this stuff was getting crazy. And that's basically -- and that was my argument, is that it is a problem that was being hidden by house prices. So we had our differences of opinion.

You were sitting down with regulators. Where, in Washington?

Usually in Washington.

And Countrywide is there. And [Countrywide CEO Angelo] Mozilo was there. Other bankers are there from Citigroup. What happened?

Well, oftentimes what would happen at these meetings is the regulators would be there, like Chairman [of the Fed Ben] Bernanke and the head of OCC [Office of the Comptroller of the Currency], as a guest. And they would often go around the room and say: "Well, what are you guys seeing out there? What's working? Are you concerned about housing?," trying to get input. And there might be, I don't know, 30 or 40 people in the room, 30 or 40 bankers, CEOs actually of banks and financial institutions.

Like yourself.

Exactly. And we would just go around the room. And when they came to me, I would say: "This is toxic waste. We're building a bubble. We're not going to like the outcome. I'm very concerned." And some other people would either say nothing or they might say: "We don't see that concern. These things are performing fine. And we think option ARMs [adjustable rate mortgages] and negative amortization ARMs and low-doc and no-doc mortgages are OK."

And there was a difference of opinion.

[Former Citigroup CEO Charles O. Prince] famously made a statement at one point. Can you recall that?

Yeah, I think he said something like "The music's still playing, so we've got to keep dancing."

In what context did he say that?

I think it was in London or something, and people were saying we're seeing -- even then, outsiders were saying, "We're seeing issues relative to LBOs --"

Leveraged buyouts.

Leveraged buyouts and --

Was that a meeting? Who was there?

I don't know. I think he was. I don't know if he was at an investor conference there or whether it was with media or whatever, but someone said, "Are you concerned?," something to the effect, "Are you concerned, because we're seeing leveraged buyouts that don't get done, etc.?" And he said, "The music's still playing, so we have to continue to dance," or something to that effect.

But what he also said is that if we didn't -- I don't know if it was the same time or later, he said if we didn't, then all of our people would leave us who were in that business and so forth, because everyone else is doing it.

I'm just shocked. The whole idea of risk management is you have to stop, even if the music is playing. And if it's the wrong thing to do, let them go, right? I mean, you can't do the wrong thing. It's not ethical, but it's not even the right thing for your stockholder. You, the whole idea of risk management is -- because what we do know, what has always occurred and what always will occur is that bubbles will begin to happen. It's happened in the past; it will happen in the future.

And particularly in a risk management business like financial services, you have to recognize that there's a bubble occurring, and you have to stop. That's the key. And your reward, because it's -- and it's going to cost you something, because at least in our case we're always early. We see bubbles occurring. We stop and we think the bubble is going to burst in six months or a year from now, and often it's two or three years. So we're --

We, meaning your management team at Wells Fargo.

Management team at Wells Fargo. In fact, during the financial --

The bubble.

The bubble, the subprime mortgage bubble. We were the leading mortgage originator in the country before that, number one originator in mortgages. Between 2005 and 2007, each of those years, because we didn't do the exotic subprime -- again, I want to keep saying that --

You didn't keep dancing.

We didn't keep dancing. We lost 4 percent market share in each of those years, $160 billion in originations in 2006 alone, and we fell to number two to Countrywide. They were hiring our people. Our people were leaving. Mortgage originators are basically on commission. They were leaving us and going to Countrywide because we would not play. So we let them leave. Unlike what I heard -- now, I don't know if Chuck Prince said any of this, I should say. I read it in the paper that he said these things, so I'm not --

So you have to let them leave if it's the wrong thing to do.

You worked very hard for the repeal of Glass-Steagall.

Did.

Took hundreds of trips to Washington, worked over many years. There's others that think that is the beginning of the problems.

Yeah, I totally disagree with it. In fact, I would argue that if we would have repealed Glass-Steagall 20 years ago, this problem may not have occurred. I'll go back to what Barney Frank said: If all financial institutions would have behaved like the insured deposit institutions, this crisis would never have occurred.

Now, Barney Frank and I don't agree on a lot -- (laughs) -- on most things when it comes to financial services. We do agree on that. The investment banks were the big problems in this. And I don't even think Citicorp would have got into the problems it did. But it was competing with the investment banks. And it gets back to, our people are going to leave us if we don't do these things.

Now, again, I am not excusing the management. You still should be able to stand up and say: "I don't care if they leave us. We're not going to do it. This is wrong to do." But it's harder to do if you see some competitors out there making a lot of money, taking your people away.

And none of us know for sure if there's a bubble. I mean, this isn't 100 -- if it was 100 percent sure, it would never occur, right? So there is some risk. And I say we're always early. As it gets later in the cycle and it still hasn't happened, I must tell you that some members of my management were questioning whether this was the right thing to do.

What was on Bear Stearns' books that was scaring [Tim] Geithner and Bernanke?

Well, I would say that unfortunately none of it scared them until the market seized up with lack of liquidity. I wish it would have scared them -- (laughs) -- and it would have stopped it.

But it was scaring somebody. The market, the investors were scared, pulling their money out. Therefore there was a liquidity problem.

Yeah, but that's my point. It wasn't until the liquidity occurred that it appeared that the regulators got on this.

So you think Geithner and Bernanke were pretty clueless about what was happening over at Bear?

You'd have to ask them. I would say this: The primary regulator of Bear Stearns is the SEC [Securities and Exchange Commission]. Geithner was head of the New York Federal Reserve, and Bernanke was the chairman. So it's not that they couldn't have known or shouldn't have known. The one that should have known what was going on and totally failed was the SEC.

Did you know what was on their books?

Yes.

You knew that they were holding a lot of these complex financial instruments, CDOs [collateralized debt obligations], synthetic CDOs?

Yes.

And did that scare you?

Yes.

What's your personal assessment of Hank Paulson, [Treasury secretary, 2006-2009]?

I know Hank very well, and I have a lot of respect for Hank.

But yet you said he made a big mistake.

I think he made a huge mistake.

Several.

Yes.

So what's your assessment of him? What's the flaw?

Well, I think, first of all, it's very hard to put yourself in someone else's shoes when going through a crisis, etc. And I want to say again, I don't think there was anybody not trying to do the right thing. I mean, you can make mistakes because you're consciously doing the wrong thing, or you can just make mistakes --

Yeah, and I'm not even suggesting that by any means. I want to say another thing: Every weekend for a while, they were working on a troubled institution. These people were like zombies -- 24 hours and so on.

You were talking to them during that period.

Well, yes. But I think the mistake that was made in terms of process was not talking more to people about what should be done and what are the ramifications if we do thus and so, and so on. And this culminated in the infamous October meeting when we were all called to Washington. And I believe the TARP [Troubled Asset Relief Program] decision of forcing people to take money they didn't want or didn't need was one of the worst economic decisions in the history of the United States.

Now, obviously, Hank was involved in that decision. My own intuition is that he was prodded to do that by others. Then he became convinced it was the right thing to do. But I don't think it was his idea or that he was the primary proponent of that process.

Who prompted him to do it?

I think regulators were the ones that were --

Which regulators?

I think the Fed was probably number one.

Bernanke.

Well, Geithner as head of the New York Fed. Most of this happened in New York. And New York Fed is a permanent member of the FOMC [Federal Open Market Committee] They're the operation that -- they do the transactions of issuing debt, Treasury debt and equity for the Fed and so on. So they're kind of the money market and capital markets engine for the Fed.

And I believe that they felt that the world was coming to an end and we had to save the world, and this was the way to save the world.

Do you think Geithner convinced Paulson?

I think a number of regulators, primarily the Fed, convinced Paulson that that's what they had -- remember, he came out with this toxic assets, they were going to use $700 billion for toxic assets.

And the second thing is --

On that point, were they overstating the problem? Were they panicked?

No, I don't think they were. They were not -- well, I don't know whether they were overstating the problem or not. It was their execution that was wrong. They caused the panic by very poor execution.

So let me say, but I think another issue is that Hank was an investment banker, right? That's his background. That's what he knows.

He was at Goldman Sachs.

So if you're sitting -- and you probably think you run a pretty good bank, right? You've been there for whatever, 30, 40 years, and when he saw that every investment bank was in trouble, and he thinks he runs a pretty good institution or whatever, he just I think assumed then everybody else had to be in trouble, because we know how to run things and we're good, and so it can't be our fault; it must be the world's coming to an end. Possibly, and therefore maybe been easier to convince.

And I'm sure he was talking to investment banks at least more than he was talking to us. And again, I'm not -- I think you can make mistakes still trying to do the right thing. And I have no doubt everybody was trying to do the right thing. I don't want to give any indication, and I really believe that this is --

But I think they did exactly the wrong thing.

So let's walk through that meeting in mid-October 2008. How does it come about? Did you get a phone call?

So I'm playing with my grandkids on Sunday night and having dinner. And my wife answers the phone and says, "Hank Paulson's on the phone." So OK. He says, "Dick, I want you in Washington tomorrow, I don't know, 3:00 meeting," or something like that. And we were in the midst of acquiring Wachovia, and I said: "Well, Hank, I'd like to, but we're very busy. We're in the midst of Wachovia." He said, "Dick, I want you in Washington tomorrow at 3:00." "Oh," I said, "OK, I misunderstood you."

And so I jump on a plane, get into Washington at 3:00 in the morning, da, da, da. I don't even know what it's about. In fact, I had thought it was just a meeting with me. I used to meet with Hank every now and then. We used to talk about a lot of things. And there was a crisis, so he probably wants to do that.

And I won't tell you how I found out, but I found out that there was going to be eight other banks there by the time the meeting started, etc., or nine, or whatever the number was.

And so we walk into this meeting, and there's alphabetical order of banks. Because we're a W, we're at the end, on one side. And there's the regulators, Geithner and Bernanke and [then-FDIC Chair] Sheila Bair and [then-Comptroller] John Dugan and Hank on the other side. And there's some people around the rooms and so on.

So you're sitting there looking across the table. How does Hank look?

He looks like he's beat up. I thought it was like death [warmed] over. These guys were working so hard, no sleep.

You were shocked at how bad he looked.

Yes.

And so the meeting opens. What does he say? As much as you can remember, tell me what he said.

I’ll paraphrase it a little bit. He says: "Look, as you know, we're in the middle of a crisis. There's all kinds of issues and problems, and we're here today to talk about what we think we need to do to handle this crisis."

He says that "Some of you here today are in fine shape and have adequate capital, etc. And there are some of you here today that have inadequate capital."

Did he look at anybody in particular when he said that?

I remember when he was looking about adequate capital he was looking at me. At least I perceived he was. But everyone knew who needed it and who didn't, or at least pretty close. But he said: "The most important thing that you all benefit from is if there's confidence in the banking industry. And the banking industry, as we all know, is the engine that keeps the economy going. We have to have a vibrant banking industry, and we have to do everything possible to make sure that that is the situation. And it's at risk at the moment with what's going on."

And he said: "So what we're going to do is we're going to ask all of you to take some capital, enough capital such that this will lift the confidence level of the entire industry, because there will be sufficient capital by the industry, the leaders." And he said: "We'll do you first, and then we're going to be doing others. But we've got to take the biggest institutions first." And that, "you will all benefit. Whether or not you need this capital or you don't, you will all benefit because the confidence level of the industry will go up."

Let's be clear. Capital means they're going to give you money, billions of dollars, and in return you're going to give them some shares.

Well, I will tell you. I'm just repeating what he said, and we were kind of all nodding our heads and said, "Well, yes, if you believe that." And he said: "Basically we're going to do this capital -- you will not be able to repay it for three years. It's going to be at 5 percent interest rate. It will be preferred shares. We're going to take 15 percent once on that. After three years, if you haven't paid it back -- you can't pay it back before three years. After three years, if you haven't paid it back, then it goes up to 8 percent. You know, it will be basically no other really restrictions on it. We're not going to force you to change your lending practices. We're not going to force you to change your compensation practices. You will be able to do business as usual."

But basically you were getting this money from the government, and there were no conditions.

No conditions.

And Geithner is talking as well?

Geithner is actually the one who I should say who gave us these -- that listed what the conditions were.

So Paulson makes this introduction and passes the baton to Geithner. And then he starts to list the kind of --

It was a two-page thing with not much in it. And even executive compensation came up. He said, "No, no, we're not in there." And he said and some people came up with, you know, "You got to tell us that we've got to make loans that we don't want to" -- "No, no, you keep your own lending decisions, etc., etc. This is to raise confidence

And then Geithner told us -- he turned it over to Geithner, and he said, "Here's how much you're going to get." And he went around the room, and “25 for you,” and he came to me, and said, "Twenty-five billion dollars." (Laughs.) And then the rest of them -- and I almost fell out of my chair. I said, and I think was looking at both Geithner and Hank. I said: "Hold up, just let me make sure I understand. You're going to give $25 billion to Wells Fargo, who is the only AAA-rated bank at this table. And you believe by giving $25 billion to Wells Fargo that that's going to increase the confidence level in the industry? Is that what I understand?"

And he said, "Yes." And I said: "I can't believe that you believe that. I think it's going to have the opposite effect, because if you give $25 billion to somebody that is AAA-rated and most people in the industry think has behaved in this crisis, they're going to think that Wells Fargo is even in trouble, and therefore the whole industry is in trouble. And it's going to cause the confidence level [in] the whole industry to go down."

And I said: "Furthermore, we're in Washington, D.C. There's kind of a political environment here, right? I can't believe that you believe that there isn't going to be a firestorm of protest from congressmen and senators, because if you're giving $25 billion to companies who do not need it, and you're not giving it to automobile companies and steel companies, and everybody else who was suffering, the senators from those states are going to go berserk. It makes no sense. So this is going to be a failure on your confidence." And then I don't know how much further we went before I was interrupted by Hank, who said: "Your regulator is sitting right next to me. And if you don't take this money, on Monday morning you'll be declared capital-deficient."

"Oh, " I said, " I misunderstood you. Where do I sign?" No…(laughs)

What did you say?

I was stunned. And I was going to say some things, and I decided not to say [them].

Well, share with us now what you --

But just think about this contradiction just for a minute.

I mean, you're upset.

I am more than upset.

So you're pissed.

Really pissed. I'm pissed because it's the wrong decision. See, it's not about Wells Fargo. If I believed that this would increase the confidence in us, I'd be right there.

So you think it was a dumb policy move.

One of the worst economic decisions in the history of the United States, because it's not going to work, and you're putting too big to fail in forever.

So you talked for a while. Paulson interrupts you and says again?

That the regulator is sitting right next to me.

Bernanke.

Yes, Bernanke. I assume that's who he was referring to. He was on his left side. "And he will declare you capital-deficient on Monday morning." Now think about this contradiction: He admits at the beginning of the meeting you don't need it, but if you don't take it, we are going to not tell the truth to the American public that you really did need it. We're going to lie.

Translate for us what that means when the Fed tells a bank that they're capital-deficient.

Well, first of all, we had not closed on the Wachovia deal. This was October, and we wanted to close on Dec. 31. The first thing is, you cannot acquire somebody if you're capital-deficient, so number one. Number two, you can't do anything if you're capital-deficient. You can't grow. I mean, they'll put the conditions on you, but usually you can't grow; you can't buy anything; you might have to shrink; you can't pay dividends. Once they don't want you to do something -- once you're capital-deficient, anything they don't want you to do you don't do.

You might as well shut your office and go home.

And you're certainly not going to acquire Wachovia.

That's a threat.

No, it's not a threat; it's Godfather. What was the phrase? Give me a proposition I couldn't refuse?

"We're going to make an offer --"

Yeah, make an offer that you can't refuse.

That's what you were hearing.

Clearly. But the point I want to make is, I was arguing this was a mistake for America.

What did he say to that?

Well, there was no discussion. That's what I said. He said, "your regulator is sitting right over here. " Then he said, "Now, you can think about this." I also said: "I can't even make this decision. How can I make a decision on $25 billion without a board of directors?" He says, "You have an hour. Your regulator will come and talk to you. " In this case, it's the OCC for us. And give us your decision in an hour."

And basically the meeting was over.

Did any of the other bankers speak up?

No, basically not. A couple of them signed the paper right away, gave it to them.

So they move paper in front of you.

Yeah, these two pages that Geithner read to us to sign. A couple signed it right away and went home. I can't remember other -- there were some minor questions about -- I can't remember what they were, but nothing that was important.

But in terms of questioning the move, you were the only banker in the room that questioned the policy?

Yes. But after what they did to me, I don't know what anybody else was going to question. (Laughs.) That's why I suspect that maybe some of them already knew what this meeting was all about or something. I don't know. I was shocked that no one else stood up. Remember, many of them there needed the money.

Bank of America, Citigroup. Anybody else need the money? Goldman?

The rumors were that Morgan Stanley and Goldman were next on liquidity.

That they were going to run out of cash to fund their operations.

You can determine by yourself.

So you walk out of the building.

No, no, we only have an hour to decide whether we were going to sign on with OCC saying, "This is a huge mistake," da da da. So I call my CFO and say: "Look, here's the situation. I don't think I can convince anyone not to do this. Call the three directors of our major committees, tell them what's going on. Tell them I don't see any choice if you want to do Wachovia. I've tried everything." And we discussed, you know: "Did you tell them this? Did you tell them that?" I was talking mostly with John Dugan of OCC at this time.

And just before the hour that we were given, I was the last to sign, and I signed. And I figured I have no choice. And I still think it was a terrible decision.

Now, the amazing thing to me -- keep talking about conventional wisdom -- is I believe that conventional wisdom is that TARP worked. But there's nothing in the facts that suggest that was the case. The Dow Jones, which I would say -- would you say Dow Jones is a pretty good indicator of investor confidence? So just take that: [It] fell from that day until early March of 2009, five months or so, fell 40 percent. Bank stocks fell 80 percent.

So if bank stocks fell 80 percent, is that increased confidence in the industry, or did it not increase confidence in the industry? It's pretty clear.

What if there had been no TARP fund?

Well, I should have said this. I have no issue if a financial institution needs money. It's not bankrupt, it's not failing, but it's got liquidity issues. It can be rescued; it can give back. If the government wants to give money to a financial institution to get them through a crisis, to make sure the crisis doesn't expand, they need the money, I have no issue with that. That's been done a lot over a long period of time.

My objection was that if you give it to people who are perceived not to need it, it's going to destroy confidence in the industry; it's not going to restore confidence in the industry. And that's exactly what happened. They exacerbated the panic. And it's evidence of the fact -- so we were told to take -- just think about this -- $25 billion that we never wanted and never used, paid it back within a year at a cost of $2.5 billion in interest and warrants out of our capital base. And our stockholders went from a stock price of $33 down to $7.80 in that period of time. And does anyone care about the thousands of stockholders who lost in some cases a very substantial part of their net worth for an untruth?

You said that we caused this crisis.

I said, "We, the financial services industry, caused the crisis." There's 20 institutions. Yes.

You had attended meetings prior to the crisis in which you had alerted regulators. Tell me about that.

Well, as I said earlier, we were going around the room and talking about what's happening, what's going on. And they would specifically ask all the time about residential real estate and the increase in prices and so on. And I said the subprime mortgage business was using exotic instruments, no-doc, low-doc, option ARMs. Stated income [loans] was an invitation -- originated by brokers; 70 percent were outside brokers -- it was an open invitation for fraud, and it's toxic waste. As you know, I tend to talk in English.

And someone else on the other side would say: "We don't see any issues here. We went through this before." I say, "The reason you don't see any issues is because home prices are going up, and as soon as that stops --" And there was disagreement.

What did the regulators do?

I don't see that they did anything. And that surprises me.

So when you say, "We caused this crisis," you're in a sense standing shoulder to shoulder with other bankers across the financial industry. So there's a view that you bear therefore, whether it was Wells or not, you bear collectively some responsibility for the crisis. But on the other hand, you're saying that it was Washington; it was regulators at fault here for failing to listen to people like yourself. So where is the blame here? Is it equal parts banks and Washington? Where do you lay it?

I'd state it this way. There has always been abhorrent behavior by financial institutions. We can go back centuries, we can go back decades, whatever it is, by some financial institutions. There always will be, and regulators seem to be incapable of stopping it. In fact, it even leads to bank failures. So I'm just assuming that's always going to be the case.

What happened here, no question, is why did it get so big? It's management. You know, you may have a few problems and issues, but it doesn't turn into the worst and longest recession we've had since the Depression. Why did that occur? That's the question.

Well, the first statement is that yes, it occurred, but primarily with 20 institutions who were investment banks and S&Ls mostly, not commercial banks. And then why did it get so big if it was only between 20 institutions?

Because of the failures of regulators is your view.

Well, five institutions. Rating agencies is not a regulator.

But they're part of the checks and balances.

Right. The SEC who regulated the investment banks did nothing about their liquidity and leverage, the federal banking regulators who had all the authority they needed to reign in, say, Citicorp. Congress -- this crisis could never have occurred [if it] hadn't been for Fannie [Mae] and Freddie [Mac]. Seventy percent of all subprime mortgages, all pay mortgages and other risky mortgages, were guaranteed by Fannie, Freddie or some other government agency. For 20 years -- I'm not exaggerating; look in the record -- I've been warning members of Congress that the portfolios and the risk at Fannie and Freddie were to such an extent that one day they were going to blow up and cost taxpayers $100 billion or more.

To date, it's cost $150 billion. I believe it's going to at least double. Three hundred billion dollars of taxpayers [money] is more than all the costs of banks, automobile companies and insurance companies by a factor of 10.

The cost.

The taxpayer costs of $300 billion, the estimate of TARP is about $30, so it's going to cost 10 times more. Where's the outrage with Congress? Every administration for the last 20 years has told Congress that Fannie and Freddie are risky. Every regulator has told them.

I think people have given up on Congress.

So why aren't we occupying Washington, D.C.?