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Last October, in a stunning turn of events at the height of the Wall Street crisis, Wachovia backed out of a deal with Citigroup and agreed to a $15 billion

Last October, in a stunning turn of events at the height of the Wall Street crisis, Wachovia backed out of a deal with Citigroup and agreed to a $15 billion merger with Wells Fargo — the biggest bank merger ever. The Charlotte-based Wachovia had recently collapsed under the weight of its own mortgage portfolio and Citi had come to the rescue, offering a rock bottom $1/share that Wachovia accepted in order to avoid bankruptcy. A few days later, Wells Fargo swooped down with an offer worth seven times as much, and Wachovia gladly accepted.

The Wells Fargo deal confused most observers, infuriated Citigroup, resulted in weeks of intense legal wrangling, and ultimately went through. It was an odd marriage, pairing a Charlotte-based bank that had financed the sun belt’s housing bubble with a San Francisco-based bank that had largely avoided it.

How did the two banks come together? What was the real story behind this deal?

As it turns out, a Birmingham, Alabama-based construction aggregate supply company appears to have played a key role in this merger. Last week, I blogged about this bizarre discovery (part of our research project) without offering too much detail. Today I’ll make my case.

Wells Fargo and Wachovia didn’t have any obvious leadership ties at the time of their merger. Network graphs of their boards and top executives show no interlocks. In the graph below, the two companies are in grey and people are in green. The grey lines represent relationships. As you can see, there are no individuals with ties to both companies.

Boards of directors of Wells Fargo & Wachovia, pre-merger
Boards of directors of Wells Fargo & Wachovia, pre-merger

But that changes when you expand the graph to include Vulcan Materials, a Birmingham-based concrete supplier. On the Wells Fargo side, Donald B Rice — the chairman of Wells Fargo until 2007 — sits on the Vulcan board. And Wachovia’s board included not one but two Vulcan Materials board members: Donald M James and John D Baker II. These interlocks are diagrammed below.

Interlocking boards of Wells Fargo, Wachovia, and Vulcan Materials (pre-merger)
Interlocking boards of Wells Fargo, Wachovia, and Vulcan Materials (pre-merger)

These three individuals have very strong ties to Vulcan Materials. Donald B Rice, the Wells Fargo director, has been on the board for nearly twenty years, the second longest stint of any board member. He first joined the board in 1986, left to become Secretary of the Air Force, and returned to Vulcan when he left government in 1993.

Donald M James is Vulcan’s Chairman and CEO, and has been since 1996. James used to be a partner at Bradley Arant Rose & White, one of Alabama’s top law firms, which does lobbying work for Vulcan. John D Baker II is a relative newcomer to the company, as the former CEO of Florida Rock Industries, which was purchased by Vulcan for $4 billion in 2007. The Vulcan-Florida Rock sale was large enough to attract the attention of the Justice Department’s anti-trust division.

Strong ties to Vulcan certainly bridged the gap between Wachovia and Wells Fargo, but is this enough to conclude that the company played a key role in the merger? Probably not. These board members knew each other…so what? Corporate America’s social networks are dense.

But what happened after the Wells Fargo-Wachovia merger suggests that the Vulcan Three were key players: two of the four new seats on Wells Fargo’s board went to the Vulcan directors. This is shown in the diagram below.

Wells Fargo, Wachovia, and Vulcan boards after the merger
Wells Fargo, Wachovia, and Vulcan boards after the merger. (Dotted lines represent non-current directorships)

So the Vulcan Three were in, while a dozen Wachovia directors were granted no seat on the reconstituted board. Robert Steel, who had been CEO of Wachovia for only a few months, got a surprise seat on the board, as well (perhaps due to the generous IRS rule change pushed through by his pal Henry Paulson before the merger). Mackey McDonald was the only long-serving director with no Vulcan ties to become a Wells Fargo director.

The data can be interpreted a few different ways, but it strongly suggests that the Vulcan Three were at the center of this deal — that Rice, James, and Baker played key behind-the-scenes roles in the Wells-Wachovia merger.

The financial press typically focuses on top executives as the stars of Wall Street stories, ignoring other potential factors, and the New York Times’s take on Wells-Wachovia was no different:

It was just after 9 p.m. on Thursday, and Robert K. Steel, the chief executive of the Wachovia Corporation, listened to startling news on his phone as he stepped off a plane from New York: Wells Fargo & Company was plotting to wrest his stricken bank from Citigroup.

Only four days earlier, assisted by federal regulators, Mr. Steel had agreed to sell Wachovia to Citigroup for a fire-sale $1 a share. Wells Fargo had walked away, and Richard M. Kovacevich, its chairman, had called to wish Mr. Steel good luck.

But now Mr. Kovacevich was on the line with a far sweeter deal, one worth about $15 billion — seven times what Citigroup was offering.

But was this offer really all that startling? Or did Wachovia and Wells Fargo board members actually work together to undo the Citigroup deal in the days after it was made? The Citigroup complaint alleges just that:

During this period, numerous officers and directors of Wachovia and Wells Fargo, and numerous of their legal and other advisors, known and unknown, acted knowingly and deceptively in furtherance of a plan to violate and interfere with Citigroup’s rights under the binding Exclusivity Agreement.

The Vulcan Materials interlocks would seem to suggest that the two companies colluded in the manner that Citigroup suggested, even though the New York Times paints it as a complete surprise.

The Wells-Wachovia story may be old news, but it continues to be relevant for taxpayers, shareholders, and homeowners. FDIC chair Sheila Bair was asked about the merger just last week. By merging with Wachovia, Wells Fargo went deep into Too Big to Fail territory. That means that the US government is its guarantor, and if Wells Fargo ever suffers dire consequences as a result of Wachovia’s debt binge, US taxpayers will be bailing it out. As it stands, taxpayers have essentially subsidized this merger, which resulted in $225 million in golden parachutes for Wachovia executives.

Should we blame the Vulcan Three?