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Apologies for repeating. This is a crucial credit event...

Litigation World | Citigroup v. Wachovia | 3 Oct 2008

NEW YORK - Wachovia says it agreed to be acquired by San Francisco-based Wells Fargo & Co. in a $15.1 billion all-stock deal. But Citigroup now demands that Wachovia abide by the terms of its earlier deal to buy Wachovia's banking operations.

The clash sets up a battle over who will win Charlotte, N.C.-based Wachovia.

The Citigroup deal would have been done with the help of the Federal Deposit Insurance Corp., but the Wells deal would be done without it. The head of the FDIC said the agency is standing behind the agreement it made with Citigroup.

Citigroup says its agreement with Wachovia provides that Wachovia will not enter into any transaction with any party other than Citi or negotiate with anyone else.

Hostile Takeover | Wachovia LBO taps Wells Fargo | 3 Oct 2008

NEW YORK (Reuters) - Wells Fargo & Co agreed to buy Wachovia Corp for more than $16 billion, besting a U.S. government-backed Citigroup Inc bid for some of its assets, in a deal that would catapult Wells Fargo to the top ranks of national consumer banks.
[...]
Wells is buying the whole of Wachovia, including its retail brokerage Wachovia Securities, and its asset management unit, Evergreen. Citi had just bid for Wachovia's banking assets.
[...]
A Wachovia spokeswoman said neither Citigroup nor the Federal Deposit Insurance Corp is involved in the transaction. Citi officials were not immediately able to comment, although the Citi/Wachovia deal was featured prominently on Citi's website Friday morning.

"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," said Wachovia President and Chief Executive Robert Steel [GS alum, Under Sec. Treasury a/o July 2008, Blueprint signatory a/o March 2008].

and an augur of Centurion Paulson's wars to come ...

Diversity is the key to economic and political evolution.

by Cat on Fri Oct 3rd, 2008 at 12:21:29 PM EST
Wells Fargo offer is stock swap for holding company and all subsidiaries. Citigroup offer is cash and credit for Wachovia Bank. Both Wells Fargo and Citigroup are bank holding companies whose markets are OCC, FDIC valued "core bank", top five consolidated assets.

Bloomberg

Citigroup, led by Chief Executive Officer Vikram Pandit, dropped as much as 15 percent in New York trading after San Francisco-based Wells Fargo said it would buy Wachovia in an all- stock transaction. Citigroup announced a $2.16 billion offer for parts of the company four days ago.

"Citi has substantial legal rights regarding Wachovia and this transaction," the New York-based company said in a statement. "Wachovia's agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia."
[...]
"The FDIC stands behind its previously announced agreement with Citigroup," FDIC Chairman Sheila Bair said in a statement today. "The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest."
[...]
The Wells Fargo transaction values Charlotte, North Carolina-based Wachovia, led by CEO Robert K. Steel, at $7 a share, the companies said in a joint statement today. Wachovia traded at $6.80, up 74 percent from yesterday. Wells Fargo rose 8 percent to $38.16.

More GS games, promised shareholder dilution

"It provides superior value compared to the previous offer to acquire only the banking operations of the company," Richard Kovacevich, 64, chairman of San Francisco-based Wells Fargo, said in a statement. "Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world's great financial services companies."

Wachovia shareholders get 0.1991 shares of Wells Fargo common stock for each share they own. Wells Fargo expects charges related to the acquisition of about $10 billion, and the company said it will issue as much as $20 billion of new securities, mostly common stock.

PR claims Wells Fargo is "saving" taxpayer funds. That is a specious argument. Further, if Wells Fargo passes the judicial test despite Citigroup's contract, the legitimacy of "taxpayer equity" claimed by Paulson's extraordinary authorities in the Bailout Bill is effectively void. (Which isn't to understate the arbitrary powers extended to Treasury's agents in principle and in any event.) International investors will balk at risking capital for any equity claims on US-domiciled banks.

Diversity is the key to economic and political evolution.

by Cat on Fri Oct 3rd, 2008 at 12:45:09 PM EST
[ Parent ]
PR claims Wells Fargo is "saving" taxpayer funds. That is a specious argument.

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.  While current FDIC funds come from bank fees, with the pending increase of guarantees to $250,000 and pending bank take-overs, anything that preserves FDIC reserves would seem, quite likely, to save future taxpayer's funds.  Has Citi put up funds for Wachovia which it might lose?  Else why would this cause international investors to balk at future deals?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 3rd, 2008 at 01:04:08 PM EST
[ Parent ]
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.

by Cat on Fri Oct 3rd, 2008 at 02:49:58 PM EST
[ Parent ]
In other words, Wells Fargo has no skin in the game. Its offerr provides no incentive, no internal mechanism, no cash, to prevent subsidiaries' defaults which benefit from federal insurance payouts and increasing public debt.

Diversity is the key to economic and political evolution.
by Cat on Fri Oct 3rd, 2008 at 03:03:30 PM EST
[ Parent ]
Thanks for the background.  It is difficult for those of us without experience in that industry to evaluate the consequences of proposed actions.  Same for Congress.  Thanks also for the link to the Jessie's Cafe article on default swaps.  $54 trillion in bets!  Any sense how badly which firms will be hurt.  It is trying to finance the unwinding of default swaps that I find most inappropriate for the US Government to underwrite.  I cannot see how the taxpayer gets any value for such expenditures.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 3rd, 2008 at 03:39:24 PM EST
[ Parent ]
Allow me to set your hair afire.


OCC Q1 Report on Bank Derivatives Activities (pdf). Click to enlarge. The pdf is rather instructive. Take a peek. Maturity of these contracts range 2 mo - 5 years.

Notice Wells Fargo-Wachovia combined exposure is tiny be comparison (< 1%) to the top 3 "core banks." That's good and bad headline news. On one hand, derivatives trading was 4% of Wachovia gross Q1 and trending higher Q2. On the other, combined, the merger may be insufficiently capitalized to settle. Could be their positions net zero, everyone goes home relieved though.

Migeru posted an article here about notional value.

Diversity is the key to economic and political evolution.

by Cat on Fri Oct 3rd, 2008 at 05:28:42 PM EST
[ Parent ]
sems to be a party to every single derivative deal on the planet... Did anyone say 'too big to fail'??

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Oct 3rd, 2008 at 05:44:51 PM EST
[ Parent ]
how about you get a 700 billion cash injection from the government, and it turns out the financiers have already been playing pass the parcel wit the debt, and somebody is getting cast loose with the debt while the other banks run off with the cash.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Oct 3rd, 2008 at 05:48:06 PM EST
[ Parent ]
Didn't they invent CDSs?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 3rd, 2008 at 05:59:05 PM EST
[ Parent ]
here for pdf file.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 3rd, 2008 at 06:04:03 PM EST
[ Parent ]
While bank supervisors normally have concerns about market or product concentrations, there are three important mitigating factors with respect to derivatives activities.  First, there are a number of other providers of derivatives products, such as investment banks and foreign banks, whose activity is not reflected in the data in this report.  Second, because the highly specialized business of structuring, trading, and managing derivatives transactions requires sophisticated tools and expertise, derivatives activity is appropriately concentrated in those institutions that have made the resource commitment to be able to operate this business in a safe and sound manner.  Third, the OCC has examiners on-site at the largest banks to continuously evaluate the credit, market, operation, reputation and compliance risks of derivatives activities.
[Drew's WHEEEEE™ Technology]

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 3rd, 2008 at 06:06:59 PM EST
[ Parent ]

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