First, the Bailout Bill includes FDIC credit limit minimum and not limited to insurance increase of $150K per account. The Bailout Bill passed today as both Citigroup and Wells Fargo lobbyists intended.

1 Oct 2008

The agency has access to a total of $70 billion in short- and long-term lines of credit. It can also charge banks higher premiums. The 451-page Senate bill would increase the amount of deposit insurance coverage to $250,000 through next year from the current $100,000 in a bid to reverse the deteriorating crisis of confidence in the marketplace.

The FDIC had asked for an unlimited cap on insurance limits but was rejected by lawmakers, according to sources familiar with the FDIC request.
[...]
According to the legislation, the FDIC may ask Treasury for "a loan or loans in the amount or amounts...without regard to the limitations on such borrowing."

The bill also seeks similar requests for the National Credit Union Administration, the regulator of federal credit unions. The U.S. House of Representatives is "likely" to vote on Friday on a latest version of the bailout package, a House Democratic aide said on Wednesday.

FDIC Chairman Sheila Bair said on Tuesday that raising the limit to $250,000 would serve a dual purpose. It would reassure depositors and provide more liquidity to banks for lending.

Bair implies FDIC will exercise credit facility to "supervise" undercapitalized banks, i.e. to forestall bankruptcy.

Therefore the federal government pledges public debt increases of equivalent amount in the event of future bank failures resulting from underlying asset defaults.  To that extent, both Wells Fargo and Citigroup bids to acquire are backstopped. No advantage gained by either's shareholders on that credit account.

No FDIC "savings" for taxpayers; huge potential loss gained by taxpayers, regardless of M&A outcome.

AR:

Unless Citi left valuable assets on the table in their deal, Wells Fargo's offer would seem to save the FDIC money at least.  It would appear that Citi was trying to cheery pick here and Wells saw value it was willing to pay for.

Second, precisely: Citi cherry-picks Wachovia FSB asset Wachovia Bank. Together internal asset valuation and market conditions ("distress") justify the offer of cash ($1.9B) and credit (i.e. explicit FDIC financing, in addition to Citigroup explicit loss reserve of $42B, of Wachovia Bank outstanding liabilities, including demand depositors' insurance).

Cash (USD) is a "valuable asset" if CDS participants are to be believed.

Third, Wells Fargo's offer is a stock swap only that dilutes the equity of both companies' shareholders. The fact [!] that Wells Fargo values Wachovia FSB at ~$16B of Wells Fargo outstanding shares (priced mark-to-market) attests only current market conditions ("distress") --AND-- incentive of controlling shareholders to profit from sale of preferred and trust preferred warrant during a period of arbitrageuer volatility that typically accompanies M&As.

More important, in acquiring Wachovia FSB brokerages along with Wachovia Bank, Wells Fargo-Wachovia controlling shareholders benefit from huge Bailout Bill money market and ASB guarantees (so-called insurance) payouts for cheap priced "troubled assets". It is not now evident how the two firms valued Wachovia "troubled assets" engrossed by the wholesale deal. If FDIC valued Wachovia depositors alone at $282B, bet your life the Wells Fargo values "troubled assets" at ZERO.

AR:

Else why would this cause international investors to balk at future deals?

Would you purchase common or preferred shares of a US-domiciled bank at any price, if the US did not protect your contractual rights? I wouldn't even if my name were Warren Buffet. Because I'd have to buy a few circuit court judges, too, for life.

Diversity is the key to economic and political evolution.