Bloomberg – Former Wachovia Corp. Chief Executive Officer Robert Steel told a panel probing the bank’s near-collapse in 2008 he was ordered by the Federal Deposit Insurance Corp. to head off a meltdown of the banking system by selling his company.

FDIC Chairman Sheila Bair informed Steel on Sept. 28, 2008, that “Wachovia’s situation posed a systemic risk” and that he should begin talks with Citigroup Inc., Steel said in testimony prepared for today’s hearing before the Financial Crisis Inquiry Commission. Citigroup then made an offer supported by a loss- sharing agreement with the FDIC, only to be trumped within days when Wells Fargo & Co. bid more for Wachovia without U.S. aid.

The hearings in Washington are examining events during the financial crisis and the government’s decision to salvage firms such as Wachovia and American International Group Inc., while leaving others such as Lehman Brothers Holdings Inc. to collapse. Former Lehman CEO Richard Fuld is scheduled to testify today, while Federal Reserve Chairman Ben S. Bernanke and Bair are slated to speak tomorrow.

“The government had deemed Wachovia too big to fail; Lehman fell into a different bucket and we have lots of questions why,” said Tucker Warren, a spokesman for the commission.

Steel, the former U.S. Treasury Department and Goldman Sachs Group Inc. executive, was brought in to lead Charlotte, North Carolina-based Wachovia in 2008 as the lender struggled to recover from the aftermath of its $24 billion purchase of Golden West Financial Corp. The deal saddled Wachovia with about $120 billion of adjustable-rate mortgages that allowed borrowers to skip some interest payments and add them to the loan balance.

Loans Backfire

The concept assumed home prices would go up. Instead, the idea backfired when prices fell, leaving borrowers with mortgages that exceeded the value of their homes and Wachovia with mounting losses.

Steel’s tenure included the worst of the financial crisis in September 2008, when a run on deposits pushed Wachovia to the brink of bankruptcy. Wachovia was the fourth-biggest U.S. lender at the time, and Bair told him the situation threatened the stability of the entire banking system, according to Steel’s testimony and an October 2008 affidavit.

Prodded by Bair, Wachovia agreed on Sept. 29, 2008, to sell most of its assets to Citigroup with government assistance for $2.16 billion. San Francisco-based Wells Fargo then swooped in with a $15 billion stock offer that didn’t include government support, depriving Citigroup of a chance to bolster its own faltering health. The New York-based bank later required a $45 billion bailout.

Report Due

Steel is currently the deputy mayor for economic development in New York City. Michael Bloomberg, the city’s mayor, is founder and majority owner of Bloomberg News parent Bloomberg LP.

Congress directed the 10-member bipartisan commission to study the U.S. financial and economic crisis and issue a report by Dec. 15. The commission has called witnesses from Goldman Sachs, American International Group and Citigroup, with witnesses including former Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Robert Rubin.

Witnesses scheduled today include Scott Alvarez, general counsel of the Federal Reserve System, and John Corston, acting deputy director of supervision and consumer protection at the FDIC.

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

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