One has to wonder whether the FDIC’s giving a wink and a nod to Wells Fargo’s attempt to snatch Wachovia away from Citi will prove to have been too clever by half. The apparent motivation was the lower explicit cost to the taxpayer of the Wells deal (note Wells was going to take large tax writeoffs, which reduce, indeed may eliminate the cost differential, but that point seems lost on the mainstream media), but it may also have been to keep pressure high to wrap up a deal before anyone could take too hard a look at at the supposed prize. Wachovia is looking less desirable than it once did, now that both sides have dug deeper as a result of the negotiation process, further complicating achieving a quick resolution.
This is increasingly looking like the FDIC will wind up with egg on its face. They do not want Wachovia hanging in the breeze, and a retraded deal may leave the FDIC back at square one in terms of its support for a transaction, or in a worst-case scenario, they may wind up taking control of the bank. From the Wall Street Journal:
The discussions, which began Sunday, have been snagged over the intricacies of carving up the Charlotte, N.C., bank, ranging from deposits to loans to securities. After burrowing deeper into Wachovia’s books, Citigroup and Wells Fargo have been surprised by the concentration of assets they regard as low-quality, these people said.
As a result, both banks are worried that buying even part of Wachovia could saddle them with steeper losses than previously expected.
The two would-be buyers also have been sparring over the computer system used in Wachovia’s 3,348 retail branches, one person familiar with the discussions said Wednesday. Citigroup, known for its hodgepodge of technology that hasn’t been fully integrated, wants full control of Wachovia’s system when the deal closes. Wells Fargo has countered that the two banks should share it temporarily.
Also adding jitters to the Wachovia talks were Bank of America Corp.’s struggles on Tuesday to sell $10 billion in stock. Citigroup and Wells Fargo have said they plan to sell stock as part of their competing takeover offers for Wachovia, but that could be more difficult than they previously thought.
People close to the discussions said they remain hopeful that a deal can be reached. But the slow progress risks creating more turmoil for Wachovia, which was in danger of being seized by federal regulators less than a week ago,
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Yves: good writeup.
There’s one other aspect of this story worth pointing out: Citi and Wachovia are discovering things that the bank examiners should have turned up. (And compare how FDIC’s loss estimate on IndyMac doubled in the weeks after it failed.) I suspect that Paulson’s (OCC’s and OTS’s) “see no evil” examination policies explain why FDIC has been singularly unable to pass assets to acquiring banks lately — neither FDIC nor the acquirer knows what they are really worth. Interesting unintended consequence of this Administration’s fictional approach to asset valuations.
Any quick deal would allow Paulson’s Pal, Bob Steel Wachovia’s CEO, to recoup his investment of 1M shares at $16 Each when he took the helm. Most likely with profit since Paulson asked him for this personal favor.
Quelle surprise! (as Yves likes to say). I wonder if there’s a single big bank out there that, once we get to see what’s actually on its books, isn’t in worse shape than it’s reporting. That includes Wells, JPM Chase, and the other “good banks”.
James B;
Deja vu. After the S&L crisis of 1979-86, people asked, "Where were the auditors"? They will ask that again.
Re: " They do not want Wachovia hanging in the breeze, and a retraded deal may leave the FDIC back at square one"
>> I see that as: They do not want Wachovia hanging in the breeze, and a retarded deal may leave the FDIC back at square one
It kinda works either way, oui?
the taxpayers don’t lose so much from the tax write-off that Wells would enjoy if they purchased Wachovia. The tax write-off is more of a timing issue, instead of booking the losses over time, Wells gets to book the losses up front and benefit from the tax relief today. Any buyer of Wachovia will get tax benefit from the impairment losses sooner or later.
I said this before, and I will say it again, if the FDIC is involved, the bank should have been taken over by default. The uncertainty of it is what causes panic.
Speaking of the FDIC, did anyone notice that they are going to double premiums? That is because they more than doubled protection. I was under the impression that the MOAB was supposed to pay for at least a year of protection. Asking banks to pay more now just adds to the problems.
Can anyone clarify this? Was adding the protection just another way to get another 100 billion out of the congress, and then ask the banks to pay for it?
Sergei,
US companies in general, and US banks in particular, have very low effective tax rates. Citi is able to keep its taxes down via its global footprint (there are huge transfer pricing issues, and my understanding is that international banks can play this game very well). That is not a game Wells can play.
The huge disparity between the nominal initial offers, and the fact that Citi’s sweetened offer was still well short of the Wells deal suggests to me that Citi was not able to fully avail itself of the NOL carryforwards. Citi’s bid should have been far more competitive.
FYI:
http://dealbreaker.com/2008/10/gasparino-wachovia-deal-could.php
Gasparino reported a deal was mostly done; CNBC says oh no no no ..meanwhile the party never stops; there’ s a party somewhere all the time…
http://www.latimes.com/business/la-fi-lazarus9-2008oct09,1,1597017.column
anon @ 2:49 –
the plan to raise premiums was in the works in late june – well before the current meltdown. once the fdic recognized that indy mac would fail, they realized that the fund would fall below the mandated level of 1.15 pecent of domestic deposits, and thus would need a restoration plan. the chairman wanted to tweaked the riskedbased premium system at the same time (see: http://www.fdic.gov/news/board/08107memo2.pdf) the recent bailout legislation prohibts the fdic from charging premiums on the increased coverge, though no one is sure how that will work since the increased covergae will depleate the fund fsater, forcing bank to have to build it up again via premiums.
Good lord they were surprised? not a good sign.”we expected a steaming pile of crap,but not the heartworms”.Freaking Reggie middleton detailed this months ago from public sources.
Should we perhaps be a bit skeptical of the claims by C and WFC to be surprised? If they are so surprised, why isn’t one of them walking away and letting the other deal go through? Might it not be in the best interest of buyers to denigrate the quality of the item up for sale?
If the FDIC wants to wrap this up, they should play hardball with WFC and/or Citi and tell one of them to get lost or else.
Yves, what sweetened offer from C are you referring to? Has a new offer been made public?
Matt Dubuque
One consistent theme connecting the numerous recent takeovers and collapses, from Bear Stearns to AIG to Fannie and Freddie to Wachovia and to Lehman among others, is that the LONGER we have to look at their books, the WORSE we learn the finances of these troubled entities actually are.
I can’t think of a single exception.
Matt Dubuque
nospammdubuque@yahoo.com
Sorry to post on this particular article but wanted to thank your for the following comment:
“Dear readers,
I have noticed an increase in the snarkiness of comments lately. Based on traffic stats, we have a lot of new readers. If you are one of them, please be advised that unlike many other bloggers, I regard the quality of reader input as a vital asset of this site. Indeed, some have said that this site has the best comments of any of the financial blogs.
I welcome substantive, robust discussion. But there has been a lot of hostility in recent weeks, often as not in comments that are also substantively dubious. I don’t know if this is because new readers may not understand how the community here works, or that readers are stressed out by the markets and may be unconsciously getting more aggressive. Regardless of the cause, the decline in civility undermines the quality of discussion, and the methods I have to deal with it are pretty blunt (such as moderating comments). I thus encourage you to clean up your act.”
This seems to have started about the time of your vacation, when you invited guest bloggers to post on your site. The comments on this blog are excellent and very helpful in forming opinions on all sides of a subject. As a novice, I don’t post very often but wholeheartedly agree, “Keep this site clean” if you don’t have anything constructive to say don’t post.
Thanks Yves and keep up the great work.
I have an off-topic but Citi-related question/observation (always with the questions). Recently Citi has begun actively promoting to users of Citi debit cards to use them as credit cards, rather than debit cards. It’s not entirely clear what the benefit for the user is, but the benefit for Citi is obvious–credit card transactions garner a higher fee than debit transactions. This would seem on the face of it to smell of serious desperation. Do you think this is a fair reading?
All the regionsal are down 15-20% today. Wells and C are probably looking at the prospect of raising 10-20 billion and thinking diluioton dilution dilution. Wells should be the most nervous with its puffed up valuation. Distortion of the no short rule for sure. Those advocating a suspension of the mark to market should be sidelined once and for all. Chanos took a former FDIC chief apart on CNBC this am. They guy sounded foolish, essentially arguing that these things are worth a lot mmore than firesale. What he couldn’t anwser is whether tbeing market at 70 or 80 is the likley recovery? perhaps the right mark is 50 not 20, but the implication is the same — insolvency and or massive dilutive capital.
there is a simple reason that explains why the interbank market has frozen up. Each bank is saying to itself “if they have done what I have done I am not getting my money bank”. I remember an old adage “how can I believe you if I know that I would lie if I was in your position”
There is only one solution- force an honest mark to market using conservative assumptions and nationalize the failing banks. The only question for policy makers is who is going to take hit and how far up the debt structure are they going to allow it to go e.g. protect depositors but not bond holders?
I work at Wells. Internally this has been spun as “we already got the deal and the entire company will be called Wells Fargo”. Perhaps a bit premature, but I’m getting the vibe that mgmt is very confident on this. I too can’t believe they didn’t know that wachovia was a steaming pile of crap. This acquisition fills some needs, probably greatest of all is the nationwide presence now (we’re lacking in the southeast and atlantic coast). Indeed the writeoffs might be very beneficial too. Anyway, I can assure your they’re not stupid, they have a plan for this, and obviously it’s not so awful that they are walking away, which I’ve seen happen on other acquisition deals. And while Warren Buffet counts Wells among his annointed ones, they’re feeling good.
On a side note, thanks again Yves for putting out a quality blog. I’m impressed you can do this and still stay employed.
“On a side note, thanks again Yves for putting out a quality blog. I’m impressed you can do this and still stay employed.”
I, too, echo that sentiment Yves…thank you again, whenever I need answers, this is my first stop.