Sept. 30 (Bloomberg) -- Wachovia Corp. Chief Executive Officer Robert Steel was forced to sell the bank's consumer business to Citigroup Inc. for $1 a share just 80 days after pledging to win back shareholders' confidence.

``It was obvious he was working 24-7,'' said Thad Woodard, president of the North Carolina Bankers Association, who met with Steel two weeks ago in Charlotte. ``He told us that he simply hoped that the regulators would give Wachovia enough time.''

Time ran out after last week's forced sale of Washington Mutual Inc., the biggest savings and loan, to JPMorgan Chase & Co. amid losses tied to option adjustable-rate mortgages. WaMu's collapse heightened concern about the $122 billion of option ARMs sold by Wachovia, the No. 1 provider of such loans, according to Sean Ryan, an analyst at Sterne Agee & Leach Inc. in New York.

``The liquidity crunch is pushing a lot of banks to basically face credit issues faster than they otherwise might have,'' Ryan said. ``When it became obvious that Wachovia would have a difficult time justifying the value of their option ARMs, it became clear that their tangible equity could potentially be wiped out.''

Steel, 57, was named CEO in July. Wachovia, based in Charlotte, bet that his experience as a former Goldman Sachs Group Inc. partner and assistant to Treasury Secretary Henry Paulson would repair the company's reputation on Wall Street and in Washington. Wachovia's board in June ousted CEO Kennedy Thompson, who led the 2006 purchase of option-ARM lender Golden West Financial Corp. of Oakland, California.

Steel's Strategy

Steel cut Wachovia's dividend 93 percent, reduced spending by more than $1.5 billion, trimmed almost $20 billion in lending and securities and replaced the bank's chief finance and risk officers. He studied selling assets including an insurance brokerage, and discussed a combination with Morgan Stanley.

He declined to comment publicly yesterday after the company said it would sell itself to New York-based Citigroup, the biggest U.S. bank by assets. In an e-mail to Wachovia employees, he said ``our challenges have primarily been a function of a single bad class of assets, the current environment and the unprecedented events of the past 10 weeks.''

Steel said in early September that his spending cuts and other actions were preferable to issuing additional shares. That decision was a mistake, said former bank analyst Gary Townsend of Hill-Townsend Capital LLC. Wachovia rebounded from the mid-July low of about $8 a share to as much as $24 a share earlier this month. The stock gained $1.66, or 90 percent, to $3.50 in composite trading on the New York Stock Exchange today amid speculation it might sell its remaining businesses.

Capital Regrets

``They had chances to raise capital, but didn't, which I believe they now regret,'' Townsend said.

A Durham, North Carolina native, Steel told analysts on Sept. 9 that Wachovia had cash to meet more than three and a half years of maturing debt. During his mid-September meeting with Woodard in Charlotte, Steel expressed optimism that Wachovia could battle through investor unease caused by its option ARMs.

``I have absolutely no idea how Bob Steel defined liquidity,'' said Gary Austin, a former Wachovia bond trader who now heads PDR Advisors LLC in Charlotte. ``When you run out of assets to pledge at the window, you've got nothing left.''

Citigroup paid $2.16 billion in stock for Wachovia's 3,300 branches in 21 states. All deposits will be protected without tapping the Federal Deposit Insurance Corp. Citigroup also gets Wachovia's investment-bank and wealth-management divisions.

Merrill, Smith Barney

Wachovia retains its securities brokerage, Wachovia Securities, and the Evergreen investment-management business. The securities business is the third-largest in the U.S. behind Merrill Lynch & Co., and Citigroup's Smith Barney, while Evergreen manages more than $200 billion. Steel will remain CEO of the company, which keeps its insurance and retirement-services businesses.

The Citigroup sale was the ``best alternative for the company, enabling a resolution of the issues related to the Golden West portfolio,'' Steel said in his internal e-mail, which was confirmed by spokeswoman Christy Phillips Brown.

The FDIC announced Citigroup's all-stock deal hours before the U.S. House of Representatives rejected a $700 billion bank bailout, triggering the largest decline in the Standard & Poor's 500 Index since 1987. Congress remains unsure how to respond to a crisis that drove Lehman Brothers Holdings Inc. and Washington Mutual Inc. into bankruptcy and led to the hastily arranged rescues of Merrill Lynch and Bear Stearns Cos.

In the WaMu failure, the Office of Thrift Supervision disclosed that customers pulled more than $16 billion of deposits from the lender in the past week. The FDIC won't say whether Wachovia lost deposits last week.

``It's been mysterious to us why the FDIC was in such a hurry to push these banks aside,'' said Chris Marinac, an analyst at FIG Partners LLC in Atlanta. ``But liquidity is based on the assumption that you can roll over your debts and when the fixed- income markets are closed, then your hand is forced.''

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net.

Last Updated: September 30, 2008 16:16 EDT