Wachovia: Man of Steel to the Rescue?

This is very interesting.

Did Wachovia hire a new CEO or did the Treasury Department acquire a major money center bank? Such is the background of former Treasury Undersecretary Robert Steel that you gotta wonder.

Steel was Treasury Secretary Henry Paulson’s go-to guy, both at Treasury and at Goldman Sachs. Steel has been at the center of the feds’ attempt to manage and control the unfolding credit crisis. That approach has essentially involved finding healthy buyers for bad assets. Wachovia, primarily via Golden West, has bad assets. Everybody knows that. So what does Steel do?

First, no matter if he views his boss as Wachovia shareholders or Paulson, is brutally assess the damage. This is what ousted CEO Ken Thompson did not do. Steel can take massive write-downs if need be.

Next, in light of what he finds, decide if Wachovia is a going concern or not. I think it is premature to assume, as some have, that Steel makes it more likely for Wachovia to merge with Goldman Sachs or JP Morgan. The feds would view that as a last-resort type move. Much preferred is keeping as many healthy players as possible in the financial sector. Cobbling together a massive entity might avoid the horror of an outright collapse, but also sets you up for even bigger trouble in the future.

Besides, I think Treasury and the Fed have a different role for Steel to play at Wachovia. The biggest problem right now resides in Fannie Mae and Freddie Mac. An explicit federal bailout seems likely. What role might Wachovia and Steel play in that?

Think government cheese. The feds create low-grade government securities out of Fannie/Freddie’s remains and feed the result to…Treasury’s man at Wachovia. Maybe not the most nutritious diet, but if Steel is at the same time shoveling out the muck Thompson bought, a net improvement.

The upshot is that in the short-term Steel at Wachovia makes a merger or buyout less likely. Everyone on Wall Street understands Steel has Paulson’s halo around him, it will buy Steel time. And only time will tell if he is superman.