Wachovia -- $1 a Share???

The comments on this article are amazingly good.


Citigroup to Buy Wachovia Banking Operations for $1 a ShareSeptember 29, 2008, 7:33 am

Citigroup has agreed to buy Wachovia’s banking operations for $1 a share, a move that that would concentrate power within the nation’s banking industry in the hands of a few giant lenders, The New York Times’s Eric Dash and Andrew Ross Sorkin reported Monday morning.
The Federal Deposit Insurance Corporation said in a statement on Monday that Citigroup will assume Wachovia’s senior subordinated debt, and emphasized that Wachovia did not fail.

Although the Federal Reserve and Treasury Department were pushing for a sale, the government was resisting pressure to provide financial guarantees to the buyer, which both Citigroup and Wells Fargo had sought.
The sale to Citigroup further concentrates Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup would control more than 30 percent of the industry’s deposits.
Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors.
The talks intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry, The Times said. Only days earlier, federal regulators seized and sold the nation’s largest savings and loan, Washington Mutual, in one of a series of important deals that have reshaped the financial landscape.
As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks.
The impact will be felt on Main Street, Wall Street and in Washington. While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts. Some small and midsize banks may be unable to compete with these behemoths.
For Citigroup, the deal would be its largest acquisition since the landmark merger of Citicorp and Travelers Group a decade ago. It would also be an important milestone for for Vikram S. Pandit, Citigroup’s new chief executive who has been making the case to employees and investors that Citigroup is a “pillar of strength” in turbulent times.
With Wachovia’s branch network, Citigroup would get the domestic retail banking business that has eluded it for years. It would also give Citigroup a bigger platform to sell home loans and credit cards, and would give Citigroup access to more than $400 billion in more stable customer deposits, reducing its dependence on outside investors for funds.
For Mr. Pandit, the deal has symbolic value, too. Although Citigroup has racked up nearly $50 billion in losses since the crisis began last summer and has watched the value of its shares sharply decline, the bank was also among the first to raise large amounts of capital. Mr. Pandit may point to the Wachovia deal as a sign of progress and an indication that the worst for the bank is behind.
It also will be seen as a stamp of approval from regulators. Only a few years ago, the Federal Reserve took the unusual step of banning Citigroup from making “significant acquisitions.” Gaining their approval to do a big deal on such short notice is likely to be viewed as a big vote of confidence in Mr. Pandit’s management team.
The talks intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry. Citigroup worked feverishly to cement a deal on Sunday night, with the discussions moving past the midnight hour, according to a person briefed on the talks. Officials from the F.D.I.C. and Treasury Department stayed up late to try to get the transaction done.

Wachovia, like WaMu, has been hobbled by bad mortgages, making a merger more urgent and prompting federal regulators to push for a quick sale. Wachovia’s share price has plunged nearly 74 percent this year.
In the last two weeks, Wachovia had entered into discussions with several possible suitors. After the collapse of Lehman Brothers, Wachovia held talks with Goldman Sachs and Morgan Stanley and put out inquiries to other banks, according to The Times, which cited people close to the situation.
Last week, it held discussions with Citigroup, Wells Fargo and Banco Santander of Spain, before the foreign bank’s interested cooled.
As lawmakers worked in Washington on the financial bailout this weekend, Wachovia executives huddled in the Seagram Building offices of Sullivan & Cromwell on Park Avenue.
Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department, who took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker, The Times said. At 8:15 am. on Saturday, Citigroup and Wells reportedly took their first peek at Wachovia’s books.
Regulators pressed the parties to move quickly. Senior officials at the Federal Reserve in Washington, and its branches in New York, Richmond and San Francisco held weekend discussions with all the banks involved. Top officials at the Federal Deposit Insurance Corporation and the Treasury were also in the loop, The Times said.
Timothy F. Geithner, the president of the Federal Reserve Bank of New York, personally reached out to executives involved in the process to assess the situation and spur it along, according to the report. Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial guarantee, as regulators did with JPMorgan’s acquisition of Bear Stearns, The Times said, citing people briefed on and involved with the process.
Both Citigroup and Wells Fargo are deeply concerned about absorbing Wachovia’s giant loan portfolio, which is littered with bad mortgages, these people told The times. Bankers had little time to assess the risk.
Citigroup and Wells Fargo were unlikely to bid more than a few dollars per share for Wachovia, substantially less than the $10-a-share price where its stock was trading on Friday, according to The Times. For Wells Fargo, a deal would extend its branch banking network across the Mississippi River, creating a nationwide franchise that would compete with Bank of America and JPMorgan Chase.
Citigroup executives consider Wachovia a make-or-break deal for their consumer banking ambitions. If Citigroup were to buy Wachovia, it would gain one of the preeminent retail bank operations after struggling to build one for years. It would also give Citigroup access to more stable customer deposits, allowing it to rely less heavily on outside investors for funds. If Citigroup fails to clinch a deal, its domestic retail operations would be far behind Bank of America and JPMorgan Chase. Vikram S. Pandit, Citigroup’s chief executive, was personally overseeing the talks.
With a big presence in California, where home prices have fallen particularly sharply, Wells Fargo has suffered big losses on mortgages and credit card loans. But Wells, unlike many banks, maintained relatively high lending standards, so it has not been crippled by the bust like many of its big competitors.
Wachovia, by contrast, has been ravaged. Its 2006 purchase of Golden West Financial, a California lender specializing in so-called pay-option mortgages, has proved disastrous. The bank also faces mounting losses on loans made to home builders and commercial real estate developers, and its acquisition of A. G. Edwards, a retail brokerage firm, turned out to be problematic. In June, Wachovia’s board ousted G. Kennedy Thompson, the bank’s longtime chief executive.

3 comments so far...
1.
September 29th,20087:50 am
Dodd, Frank and Schumer created such a disaster. Schumer set the collapse of the banking system in motion when he killed Barclays acquisition of Lehman by issuing his September 11, 2008, letter declaring that banks should not be allowed to foreclose on homes. Since the value of the debt depends on the ability to enforce the terms, Barclays realized that Schumer and other democrats would wipe out the value of the mortgages. Barclays asked the US Govt to give a guarantee that they would not let Schumer’s plan go forward, but were told they could not stop Congress particularly if Obama got elected. This was the end of Lehman, which triggered AIG and nearly caused the collapse of Goldman.
— Posted by Lyle Vos
2.
September 29th,20087:53 am
So this was the secret plan all along!
Brink the country to the verge of collapse. Then buy up the assets of failing banks and create a gigantic monopoly of banking. Now THEY own the United States.
The trust busters, Teddy Roosevelt and William Howard Taft, are rolling in their graves!
Brilliant!
Steffen SchmidtProfessor of Political Science and Public PolicyIowa State University
— Posted by Steffen Schmidt
3.
September 29th,20087:57 am
Why emphasize the rosy potential future for Citigroup? Maybe you might in future discuss percentage foreign ownership of Citigroup.
— Posted by Dr G.

Wachovia and National City

By BEN WHITE and ERIC DASH
Published: September 26, 2008
As concern spread Friday that more banks might run into trouble even with a $700 billion rescue for the financial system, Wachovia, one of those hardest hit by the housing crisis, became the latest to reach for a lifeline.

Weighed down by a huge portfolio of troubled mortgage loans, the nation’s fourth-largest bank by assets entered into preliminary deal talks with Citigroup, and extended feelers to Wells Fargo and Banco Santander of Spain, people briefed on the matter said. The talks are early, and no deal may emerge from them. But it appeared Wachovia was seeking potential alternatives should the bailout plan being debated in Washington not pass quickly, or fail to provide enough help.

Wachovia has a $120 billion portfolio of mortgages loaded with adjustable interest-rate loans that allow borrowers to skip part of their monthly payments, much of which it inherited from its ill-timed acquisition of Golden West, the big California lender, at the end of the housing boom in 2006.

In July, the bank hired Robert K. Steel, 56, a former vice chairman at Goldman Sachs, from the Treasury Department, where he worked with Treasury Secretary Henry M. Paulson Jr., trying to resolve the mortgage market crisis. Mr. Steel vowed to keep Wachovia independent and sought to raise $5 billion in capital over the next year by selling noncore assets.

But the bank’s shares, which are down nearly 80 percent in the last year, plunged 27 percent Friday, to $10, as investors wondered about its health after the government’s seizure of Washington Mutual on Thursday.

“Wachovia has a real problem,” said Len Blum of the investment bank Westwood Capital. “Option ARMs are probably the worst mortgage products out there and Wachovia has a lot more of them than it has in tangible equity.”

A spokeswoman for Wachovia, Christie Phillips-Brown, said: “We are aggressively addressing our challenges and are working to strategically strengthen and manage capital and liquidity in this challenging environment.” The bank, she added, expects “that the Treasury plan under consideration by Congress is a constructive and important step toward restoring confidence and stability in our financial system.”

The discussions involving Wachovia and other banks came as Congress sought to break an impasse over the rescue plan proposed by Mr. Paulson, which would buy soured assets from troubled banks to prevent further failures. But no matter what a final package contains, analysts say it is unclear how much it would help a number of regional and community banks stretched by falling home prices.

“The Treasury Department plan will not prevent more bank failures,” said Chip MacDonald, a lawyer who advises banks at the law firm Jones Day. “The plan proposes to make purchases based on market prices, which are likely to be at a loss to the sellers. Such losses will deplete the sellers’ capital, which only strongly capitalized institutions can absorb without raising additional capital or a merging with a stronger bank.”

The Federal Deposit Insurance Corporation deemed 117 banks “troubled” at the end of June, up from 90 in the first quarter. Sheila C. Bair, the F.D.I.C. chairwoman, said Thursday that more failures are likely, although they would constitute only a handful of the nation’s 8,400 banks.

Many small and midsize banks do not have much exposure to the assets that are hardest to sell. “The sludge is primarily in the structured products, exotic residential mortgages and commercial mortgage-backed securities,” said Gerard Cassidy, a banking analyst at RBC Capital Markets.

Those securities have tended to be held by big banks and Wall Street firms. Small and midsize banks, by contrast, have built up big positions of corporate and commercial real estate loans for which there is a market, albeit a depressed one. Unless the government offers higher prices, it is unclear how many of them would use the fund.

What the bailout might do, however, is relieve pressure on the government’s insurance fund, which guarantees deposits of up to $100,000 per account holder if a bank fails. As of the end of June, the F.D.I.C. fund stood at about $45.2 billion after suffering a nearly $9 billion loss from IndyMac Bank’s sudden collapse.

“It’s not exactly a panacea,” said Mr. MacDonald. “For stronger banks, the plan will help them reduce risk, attract new capital or merger partners. For failing banks, it will help the F.D.I.C. resolve them at a lower cost to its deposit fund.” Instead, the Treasury Department coffers would directly absorb more of the losses.

Those concerns were reflected in the stock market Friday, where investors pushed down financial shares as conditions for banks continued to worsen. In addition to mortgage defaults, losses tied to auto loans, credit cards and commercial real estate are increasing along with unemployment. Analysts now project that several hundred banks could fail over the next three years, far more than the roughly 150 or so that they estimated this summer.

Smaller regional banks with troubled loan portfolios came under particular assault. Shares in National City, based in Cleveland, sank 25.7 percent to $3.71 even as the bank sought to assure investors that it remained well-capitalized and had not had an outflow of customer deposits, as Washington Mutual did.

Thomas A. Richlovsky, National City’s chief financial officer, said in an interview that investors had the impression his bank was a savings and loan institution regulated by the Office of Thrift Supervision, as Washington Mutual was. “That is like saying Tina Fey is Sarah Palin,” he said. “We are not a thrift, we are not a mortgage company, we are a bank. National City has no option-ARM mortgages on its books but is selling off a portfolio of troubled home equity, subprime mortgage and other bad loans.”

Downey Financial Corporation, a $13 billion savings and loan saddled with option-ARM mortgages, slid 48 percent to $2.03 Friday. Earlier this month, the Office of Thrift Supervision told Downey to provide a detailed plan to reduce its assets and strengthen management.

Shares in Morgan Stanley, which suspended merger talks with Wachovia last week after the investment bank changed into a bank holding company, also dropped 8.7 percent to $24.75, after investors began to doubt that the Mitsubishi UFJ Financial group of Japan would follow through on a commitment to pump around $8 billion in fresh capital into the bank.

In a memo to employees Friday, John J. Mack, Morgan Stanley’s chief executive, said that the Mitsubishi deal was moving ahead “as anticipated” and that the two banks were exploring different ways in which they could collaborate.

Michael J. de la Merced contributed reporting.