The Battle for Wachovia: Round 2

In the banking world, nothing can go right these days. Seriously, absolutely nothing.

First, a recap of last week's events: On Monday, Citigroup (NYSE: C  ) made an offer to buy Wachovia's (NYSE: WB  ) banking operations for about $1 per share, with a fat government backstop that took care of losses beyond the first $42 billion on a $300 billion pool of Wachovia's loans.

On Friday, Wells Fargo (NYSE: WFC  ) shook things up with a surprise $7-per-share bid for the entire company, and offered to do it without any government help. Without question, the deal was far sweeter for both Wachovia shareholders and taxpayers. For the first time in recent memory, free markets triumphed, whoo-hoo!

Good news, right? In a perfect world, yes, but our markets are more like something between a soap opera and a science-fiction novel, so you know this story gets better.

Free markets, meet free courts
On Saturday, a group of Citigroup lawyers visited a New York judge at his house, persuading him to temporarily block the pending Wells Fargo transaction because Citi had an "exclusivity agreement" that prevented Wachovia from striking a deal with anyone else.

Then last night, the jesters kicked it into high gear, with that ruling being overturned by a New York state appellate court. Not surprisingly, Citigroup says it intends to appeal the ruling … and around and around we go.

What should irk you -- the taxpayer -- is that Wells Fargo's offer didn't include any government backstop, as Citi's offer did. From that standpoint alone, you'd think Wells Fargo's offer would have been ushered in by regulators, yet it was (at least temporarily) shot down by the courts. Perhaps bailouts have become so commonplace that no one knows how to handle a deal without one.

All of this just for Wachovia?
Why Citi and Wells Fargo are fighting so viciously isn't much of a surprise; Citigroup's drooling over Wachovia's $400 billion deposit base, which it can use as a cheap source of funding in lieu of short-term debt markets that have practically disintegrated. Doing so could let Citi to regain its footing over Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) -- the other two alpha banks that haven't been nearly as hammered as Citi has in the past year.

Wells Fargo could make serious headway on B of A and JPMorgan with Wachovia's presence in the East, its brokerage unit, AG Edwards, and its asset management division. Both Citi and Wells could reap a huge reward by exploiting a new tax law that'll let them charge Wachovia's writedowns as an offset on their own net income, meaning much lower tax bills could be in store for whoever gets a hold of Wachovia.

What happens from here? As has been the case in recent weeks, probably something that no one can predict and that completely bewilders markets when it happens. In its current form, the most likely outcome is either Wells Fargo prevailing, buying the entire company for $7 per share, or Citi and Wells further duking it out, divvying up Wachovia's assets between them.

Until then, the hamster wheel continues to spin at a frantic pace. Stay tuned.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2008, at 12:09 PM, Ishortyou wrote:

    Now that the 'bail out' plan came through, Wachovia needs fast to take advantage of it, it needs to sell its toxic loan portafolio from its banking subsidiaries around 122 billion if not more to the government close to even cost prices and take serious advantage of the tax break plan and remediate their banking book of business. They also need to contact their customers that did the run on the bank like chickens without head to bring their deposits back and reassure them that they are ok and there is not reason to panic because of the talking heads of FOX news and rest of media and the incompetence of the FDIC. This strategy will demonstrate to the public that the current 'bail out' plan is working and that Wachovia is the first product of it.

  • Report this Comment On October 06, 2008, at 12:23 PM, vtan2001 wrote:

    Apparently the WFC deal is worse for taxpayers because the bailout includes a provision for tax shelters. The reason WFC wants WB is so they can have billions in tax savings..Who shoulders that expense? US Taxpayers. You argue that this is a better deal for taxpayers and it really isn't.

  • Report this Comment On October 06, 2008, at 12:35 PM, wsworker wrote:

    C would be able to take advantage of the same tax treatment, so it will cost taxpayers either way.

  • Report this Comment On October 06, 2008, at 12:37 PM, fuufuu wrote:

    Is it me or does it seem that citigroup have someone in the government on their side? The deal was broker by the FDIC and citigroup got a sweet deal with the goevernment(US taxpayers ) on the hook. The deal was never approved by wachovia shareholders. The wells fargo deal is better for everybody (taxpayers, employees, shareholders). Now the government wants them to split up wachovia. Something just doesn't seem right.

  • Report this Comment On October 06, 2008, at 1:01 PM, vmj55 wrote:

    Right on fuufuu...none of these people can be trusted. Probably never could we just didn't know until now. The Wells Fargo deal is the better deal and if anyone has ever dealt with Citi they know the Wachovia style of customer service, as far as their service bank is concerned, is history. So I say WF all the way and the government should stay the hell out of it...

  • Report this Comment On October 06, 2008, at 4:55 PM, RaulChapin wrote:

    The government is to assume any losses beyond 42 Billion Dollars on a 300 Billion portfolio.

    In other words, City is to get a FREE insurance with a 14% deductible. Nice, can i get one of those for my business please??

  • Report this Comment On October 06, 2008, at 5:11 PM, RaulChapin wrote:

    OOPS sorry, the insurance is not free, i re read the article and they were to pay 12 Billion to the FDIC in prefferred C shares.

    Now you might know why the government is backing this up, if there are no losses beyond 54 billion (42 that C would assume and 12 in shares that the FDIC would hold) the government makes money and so does C. The lossers at the end of the deal? The original share holders getting $1 a share when they could be getting 7$ from wells fargo.....

  • Report this Comment On October 06, 2008, at 5:30 PM, mickaelangelo wrote:

    Why is there no mention in the article of the fact that Wells' deal supposedly contains over $225 million dollars worth of golden parachutes for the existing Wachovia senior executives?

    Sure it's a better deal for Wachovia shareholders assuming those shareholders are also senior management. Somehow I doubt that Wachovia's regular employees will be treated quite so regally.

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