Wells Fargo in the Lead for Wachovia; Is Bailout Really Necessary?

At the rate this is going, the "bailout" may not be necessary.


Last week JP Morgan (JPM) swallowed Washington Mutual (WM) and now it appears Wells Fargo (WFC) has the inside track to acquire Wachovia (WB).

The WSJ Reports:

The troubles at Wachovia, based in Charlotte, N.C., and of Fortis, based in Utrecht and Brussels, signal the first time that major commercial banks are now at risk of being forced into sales or breakups since the onset of the credit crisis a little more than a year ago. Wachovia is a big lender to midsize U.S. companies, and at the end of last year, it oversaw a commercial-loan portfolio totaling $190 billion. In the real-estate industry, Wachovia had signed off on $35 billion in loans.

Federal officials are involved in the Wachovia talks and were believed to be pushing the bank to seal a deal fast to avoid further pressure to its deposit base. While Wachovia is much larger than Washington Mutual in terms of assets, Wachovia's business mix is broader, including a strong commercial bank and solid securities brokerage.

What is happening is that we are on a path to fewer, much larger banks that face more regulation. The next on the list is National City (NCC). Both Wachovia and WaMu could have survived until a gov't plan was enacted, but depositor panic, rushing to withdraw insured funds led to a massive deterioration of the capital bases of both, forcing a sale. Short sellers, it should be noted, had nothing to do with it.

So, if WaMu is gone, and Wachovia will be soon and not a single deposit has been lost, do we really need the bailout plan? Do we? I'm not sure.

If we simply better funded the FDIC and raised the deposit insurance to $250,000 per account, then we would stop the rush to withdraw we are seeing. Had we stopped the bank run last week, WaMu might have survived. Wachovia would most likely also. Now, that does not mean that either banks' shareholders would have seen appreciation in shares anytime in the near future. But, do we really need the money now that the market is seemingly taking care of it?

We also have word that the recent investment in Goldman Sachs (GS) by Berkshire's (BRK.A) is going to be used to buy????? Anyone??? Troubled mortgage assets from banks, up to $50 billion worth. These are some of the same assets, by the way, that the government is looking at buying.

We have also heard that hedge funds have been raising billions to do the very same thing. It would seem that the specter of government intervention has spurned those "waiting for rock bottom pricing" to act now before those assets were scooped by Washington.

We may still need a government package but my feeling is that it may just need to be a fraction of what was talked about last week. Perhaps just the threat of losing a bargain will be enough to shake the buyers out of the trees. It really does not matter who does the buying, it is the action of it that will solve the problem.

Disclosure: Long WFC,GS

Comments

[Ishortyou:]

lol..this is the best deal for Wachovia, now has NO DEBT which was adquired by Citi, has clean books in AG Edwards and Evergreen, and plenty of cash coming to his coffers from the sells 2billion, good move and the best thing it survived!!!!!! Now it has a lot of book value, interesting manouver and very talented CEO

2008 Sep 29 10:09 AM

[Fam62c:]

I think that we're about to see another bull market and it will be in, of all things, distressed mortgages. It sounds like some banks and private equity firms are getting ready to try to buy some of this stuff with all the money that's been sitting on the sidelines. My fear is that the private buyers will get in right before the final vote on this bill and buy the best of these "mystery bonds" at the lowest prices and by the time the government starts buying the market for these "investments" will already be in motion and Uncle Sam will will overpay for the runts of the litter.

2008 Sep 29 10:56 AM

[BDHPlayer:]

Are you sure that Wachovia has no debt. It appears that Citicorp assumed the debt of the Bank, not the holding company.

There certainly appears that there is value at the holding company. Only question is how much of that is for Wachovia 's common shareholders.

2008 Sep 29 11:03 AM

[helplessobs...:]

Glad to hear something positive here. Told my wife to sell her 300 shares a long time ago, but it was in an IRA instead of a quick sale brokerage account. Looks like she will get 20 shares of C plus own what residuals remain from Edwards and Evergreen.

2008 Sep 29 11:32 AM

[Ishortyou:]

the and improved Wachovia has not debt now.

2008 Sep 29 01:51 PM

[Ishortyou:]

hm 1 share of citi for 1 share of wachovia?

2008 Sep 29 01:53 PM

[Hana:]

I am so confused, should i sell my shares with Wachovia or wait?

2008 Sep 29 03:58 PM