Monday, September 29, 2008

Wachovia Did Not Fail, But Citigroup Takes Them Whole


It happened over the weekend. Wachovia and Citigroup worked with the government to secure another stunning transformation in banking caused by the subprime collapse.

According to an AP story, Citigroup will buy Wachovia's banking operations.

Citigroup Inc. will acquire the banking operations of Wachovia Corp., one of the nation's largest banks, in a deal facilitated by the Federal Deposit Insurance Corp.

Citigroup will absorb up to $42 billion of losses in the deal, with the FDIC covering any remaining losses, the government agency said Monday. Citigroup also will grant the FDIC $12 billion in preferred stock and warrants.

The FDIC asserted that Wachovia didn't fail, and that all depositors are protected and there will be no cost to the Deposit Insurance Fund.




Of course they didn't fail. Citigroup bought their US$42 billion in losses.

Notice that a government entity becomes a shareholder in a bank. Someone please correct me if I am wrong, but is this normal?


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7 comments:

Alex Higgins said...

Don't but the BS. Wachovia did indeed fail. Its stock price dropped from a $10.00 closing price on Friday to less than $1.75 in pre-market trading today. If the FDIC didn't takeover the bank before the markets opened this morning, Wachovia would have when belly up as soon as the bell rang.

If they didn't fail what happened to stock holders equity? Its gone, only their assets remain.

--- said...

Thanks for the comment, Alex.

Anyone would be suspicious if the government makes such a definitive statement during a procedure, if it were to happen to me, would mean that I was insolvent.

Dabi said...

I used to work for Wachovia, and I may be returning to their fold soon enough.

Wachovia screwed up royally not only through their ill-fated merger with Golden West, but through their merger with AG Edwards. This was a case of absorbing too much, and getting little in return. In other words, Wachovia got too big for its' britches (to use a Southern colloquialism).

My worry is about all those people at Wachovia that may end up losing their jobs over the lack of oversight from the Board of Directors. Ken Thompson took the fall, and deservedly so, but he wasn't the only one to blame.

--- said...

Dabi,

But they are keeping AG Edwards, so some group of people there must think they are getting their money's worth in future returns.

--- said...

Could it also be said that the market really has no idea how extensive the banking crisis is?

There are now three top banks with most of the depositary assets, but what about the extent of smaller and mid-tier banks that might have horrible balance sheets and off-balance problems?

Alex Higgins said...

If you believe that Wachovia didn't fail then maybe you'll believe that the earth is flat.

Wachovia's share price fell from $10.00 on friday to $1.75 a share when the FDIC took them over. If the FDIC didn't move before the markets opened on Wall Street, Wachovia would have gone belly up as soon as the opening bell was struck.

The Government claiming that the bank did not fail is an attempt to manipulate market psychology. Wachovia did indeed fail on the heels of news that three major European banks failing.

The Government is blatantly lying in an attempt to quell market panic. The fact is the $700 billion bailout bill that is going to cost over $18,000 dollars per US household is going to work. The failure of Wachovia is simply the markets sending a signal to the government that bailout isn't going to work.

But the Government isn't going to listen. It will ignore the markets just like its ignoring the 80% of voters that oppose this Wall Street bailout bill. Until the government acknowledges this bill isn't going to work, more banks in America and around the world will continue to fail.

Dabi said...

The way Wachovia works is the same way their crosstown rival Bank of America works: if they can do it, so can we. Yes, Wachovia is keeping AG Edwards, if only to compete with Bank of America Securities.

Both BoA and Wachovia mimic each other, but it seems BoA has a stronger market share, and, perhaps most importantly, not hemorrhaging losses in the mortgage business like Wachovia's doing with Golden West...although BoA's purchase of Countrywide was something of a headscratcher.

Alex is absolutely right about the bailout. Simply throwing a $700 million around as if it were some stimulus package isn't going to work. While it may seem that the stronger banks, like Citigroup and Morgan Chase will gobble up all the weaker banks, it can only be of benefit to those banks that are failing.

I can tell you that Wachovia has been failing for some time now. Anyone who's worked there will tell you the writing's been on the wall for some time. When hundreds of jobs are suddenly eliminated, it doesn't take a genius to realize something's wrong, and things aren't as stable as they used to be.