The Wall Street Journal reports that Wachovia has entered into discussions of a sale of the bank. Wachovia had a recent dalliance with Morgan Stanley, but those talks struck us as the height of desperation (it was hard to see a fit between the two firms), although Morgan Stanley at that juncture needed to make a move worse than Wachovia did.
The apparent seriousness of the conversations suggests that the end-game for the Charlotte bank is nigh, sale or no sale. The fall today in the bank’s stock price, despite the absence of evil shorts, says the bank either has or is on the verge of losing the ability to raise new capital on anything other than punitive terms. That is an untenable position in this environment.
From the Wall Street Journal:
Wachovia Corp. has entered into preliminary discussions with a handful of potential suitors, including Banco Santander SA of Spain, Wells Fargo & Co. and Citigroup Inc., according to a person familiar with the situation.
The talks underscore escalating efforts by the Charlotte, N.C., bank to escape mounting loan losses and a plunging stock price. On Friday, Wachovia shares tumbled 27%, or $3.70, to $10 in New York Stock Exchange composite trading.
Wachovia officials don’t believe they need to rush into a deal, and the bank isn’t feeling any liquidity pressures, a person familiar with the company said. Still, given the uncertainty swirling through the economy, financial markets and the U.S. banking industry, Wachovia executives are exploring various strategic options.
Bank executives are expected to be in New York this weekend to discuss possible deals….
Banco Santander, Wells Fargo and Citigroup all pored over the books of Washington Mutual Inc. before the Seattle-based thrift was seized Thursday by federal regulators and its banking operations sold to J.P. Morgan Chase & Co. for $1.9 billion. Their interest in Wachovia is a further sign that the banking industry’s turmoil is triggering a streak of opportunism by banks that consider themselves strong enough to made a deal, even though that likely would mean absorbing a slew of soured loans from the acquired bank.
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Hopefully, with a little more time and a little more ink from the press about these ‘opportunities’ the lightbulbs will start going on in Congress.
I can’t believe I heard one of the talking heads say, with a straight face, that given enough time, the taxpayer may actually profit on the assets being bought out. If that was really true, then why stand in front of the private sector (presumably in the business of taking exactly that risk).
If private entities are able to see an opportunity in buying one of the “survivors” (Wachovia is next?), then the “bailout” really should focus on those institutions that – like Lehman – are worth more dead than alive.
And then, regarding those zombie banks, the same rationality should be applied: carve up the carcasses, and save your taxpayer money for direct subsidies to the defaulting borrowers on the worst of the worst loans (who can demonstrate good faith and no speculation in their initial investment motivation). The vultures and BK buyers will eat that which isn’t “rescued”, as they should.
Let’s turn some of that wall street ingenuity to the task: create an instrument for which these underwater loans can be exchanged. I liked the idea of shared appreciation mortgages, where the overleveraged bank is given a hard lien on the property. Write a 50 year mortgage at compromise rate (let it be a floater off of treasuries), where payments are leveled by a [macro swap] structured by the gov’t. Let the banks restrict assignability until they’re paid back 85-90% of their principal (in an environment where regional house prices have remained below, say, 2005 prices, else, they’re entitled to 100% of their principal), and let them account for these TARA-lite loans separately in their capital computations. If prices increase, the borrower repays the bank the full amount, if prices remain flat/continue down, the borrower keeps their home, eventually pays it off, and the bank/holder takes a fixed loss. Gov’t’s involvement is largely restricted to structuring the macro swap to enable fixed rate loans off the floating instruments.
Personally, I’d rather we were debating the merits of something akin to a private solution that capitalizes on financial engineering than on the merits of socializing economic losses.