Vultures Covet Infrastructure in Financial Wreckage

While Citigroup (C) and Wells Fargo (WFC) might have been willing to split Wachovia’s (WB) retail branch network, they were unwilling to share Wachovia’s branch banking technology. Bank of America (BAC) said the key prize in Countrywide is its technology. And the Treasury admitted by default they could not jump-start TARP 1, the toxic asset purchase plan, without Fannie Mae (FNM) and Freddie Mac’s (FRE) people, processes and technology. Why else would the Treasury have ordered the GSEs to buy $20B each a month in subprime, Alt-A and non-performing mortgages? Certainly not to conserve them.

The financial press rightfully focuses on deposit gathering, capital ratios and asset quality. But, Bank of America determined that it was worth engaging the substantial risk of Countrywide’s very poor mortgage underwriting and legal liabilities to get its infrastructure. Countrywide’s management has already been tossed. Several press accounts cited Citigroup’s domestic retail technology as weak. Perhaps Citigroup could not handle an increase in branches without Wachovia’s computer systems. Even JP Morgan (JPM) picked up technology for prime brokerage and energy/commodity trading from Bear Stearns.

I believe the major reason that the Treasury “nationalized” Fannie and Freddie was that the government could not easily recreate them on its own. Less radical approaches could have been implemented to boost their solvency. But a less radical approach would not have allowed the Treasury to use Fannie and Freddie to save other financial institutions. Only through direct control could General Paulson use Fannie and Freddie’s technology and talent as his brigade to fight his war. Didn’t Paulson tell us that Fannie and Freddie would be run for his benefit – not the shareholders?

Technology is and will increasingly be part of the financial wars. Especially for satisfying customers and maintaining a large deposit base. And it will be even more so as the country consolidates toward fewer and larger banks.

Disclosure: Author is long BAC, C, FNM, FRE and WB.

Comments

[djsunshine:]

WB has a world saving (Golden West) component that have been doing option ARMs for years. In fact that is the only thing they did. Al these others Indymac, WAMU ,CITY Downey etc tried to copy and f'up the whole system that has been functioning for years..Eating up and digesting is two diffrent thing..

2008 Oct 20 02:21 PM

[madasiwannabe:]

You nailed it... The GSE's were not in danger of failing. Paulson admitted they were suffering from loss of market confidence, not liquidity issues, and that's why he stepped in. He felt the GSE's were dragging the entire sector down. He planned all along to gain control of them and use them to absorb the toxic sludge from the financial market. He needed the capital guarantee from Congress to pull it off.

If Fannie and Freddie were actually financially upside down, why hasn't Paulson used one nickle of the money authorized by congress in the Housing bill? Why would he order them to buy more mortgages? No one is asking any of these questions.

The bigger question is how can he get away with taking over solvent companies just to financially implode them? Conservitorship laws say they must preserve assets and return the companies to profitability. What has been done is called eminent domain, without any compensation that is. This is a violation of shareholders 5th amendment rights.

I hope congress starts figuring out they have been duped. They need to dig into what's happened and hold those responsible for this fraud accountable. If this is allowed to continue, we the taxpayers will end up doubling our national debt before it's over.

2008 Oct 21 08:38 PM