Citigroup Should Walk Away from Wachovia

Aside from the passage of the bailout bill, probably one of the bigger stories today is Wells Fargo (WFC) swooping in to "steal" the Wachovia (WB) buyout out from under Citigroup (C), a move that Citigroup is protesting vehemently as they already had an agreement in place and had been providing liquidity (not to mention confidence) to Wachovia.

(From the FT): "Wells Fargo on Friday sparked a regulatory and legal row with a surprise $15.1bn all-share offer for Wachovia, trumping Citigroup’s $2.2bn government-aided deal to buy most of the sixth-largest US lender.

Stunned Citigroup officials - who first heard of the Wells deal just before dawn on Friday - threatened to seek an injunction to stop the transaction or demand substantial damages.

Citi - which was left as the only bidder after San Francisco-based Wells abandoned talks with Wachovia last weekend - was also considering whether to raise its offer, with a decision expected in days, people close to the situation said.

The extraordinary turn of events left regulators and officials scrambling to resolve the tug-of-war over Wachovia, whose shares had plunged on fears over its troubled mortgage assets.

The regulators - including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation - were understood to be unhappy with the Wells offer. They were concerned that if Citigroup loses Wachovia it could discourage banks from co-operating in future rescue operations."

As a businessman I understand Citigroup's perspective, they had an agreement in place, had been providing funding to Wachovia and expect the deal to be honored, but as a taxpayer (and as someone with a vested interest in the health of our economy and financial system) I like the Wells Fargo deal better because it doesn’t require the already strapped FDIC to absorb losses from Wachovia's mortgage portfolio. Better yet, despite the rumblings around Wells Fargo they're still financial healthier than Citigroup, and it just makes more sense for Wachovia to be absorbed into Wells than into a bank that is still reporting losses and plenty of problems of its own.

Unique (and/or desperate) times call for in kind solutions and I think the Wells Fargo deal is simply a better one for the American taxpayer, our Economy and our Banking system and is the one that the FDIC should support.

The FDIC should simply rescind their support of the Citigroup/Wachovia buyout, gently encourage them (along with the Fed and Treasury) to back off, and they should require Wells to compensate Citi for the liquidity it had been providing Wachovia before the deal with Wells Fargo was announced.

Again while I respect the fact that Citigroup feels that they had a deal and it should be honored it doesn't change the fact that they can't pull it off without help from the government, so I'm rather struck by the audacity of City to more or less insist that the taxpayer help them buy Wachovia when there is another suitor around who can afford to buy the company without help from the FDIC.

Buying Wachovia is as much about protecting the economy as it is about business, and Citi should be gracious enough to understand that Wells buying Wachovia is simply better for the common good and just walk away from the situation. 

As for other banks seeing the situation as a reason to not to participate in future rescue operations: I would think that nation's banking executives as capable of behaving like adults, and understanding that this is a rather unique situation especially since one deal requires taxpayer support and the other one doesn't. Rescue operations are about protecting the larger banking system and giving healthier banks the opportunity to pick up assets on the cheap, and if the nature of this deal discourages other banking executives from participating in rescue operations (especially given everything at stake), then we have much, much bigger problems to deal with.

You can read more here [FT] and here [WSJ].

Sources

The Financial Times:"Citigroup moves to thwart Wells-Wachovia deal" --  Francesco Guerrera, Saskia Scholtes,  Joanna Chung and Krishna Guha, October 3, 2008.

Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[Ishortyou:]

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.

2008 Oct 05 04:49 PM

[Angry Banker:]

Folks, there is a misunderstanding about FDIC backed deal with Citi and the impact it has on taxpayers. The FDIC is a private institution that receives no government financial support. It is 100% funded by financial institutions. Therefore, the Citi deal with Wachovia will not cost taxpayers anything unless the merged entity receives assistance from the new $700 billion bailout package passed by Congress this week (but that assistance is available to the firms regardless of whether Citi or Wells Fargo buys Wachovia). In fact, the only reason that Wells Fargo has illegally come back and offered another deal to Wachovia is because of the $700 billion bailout package that passed this week. If that bill had not been passed, Wells Fargo would not be interested in Wachovia.

2008 Oct 05 05:20 PM

[Vobogeck:]

The "common good" is better served by respecting contract law. Citigroup had a contract and the terms of the contract should be honoured. See Pennzoil v. Texaco.

2008 Oct 05 07:58 PM

[oneijoe:]

The Citi suite is nothing but an exercise in legal isotonics. By the written agreement, the sale of WB's bank was contingent to shareholder approval.

What are the odds of the shareholders voting "yes" knowing WFC has a better offer waiting ?

2008 Oct 05 09:27 PM

[ResourceWise:]

I think that Wells Fargo has given Citi an opportunity to ‘dodge a bullet’ over their shot-gun engagement with Wachovia. They need to settle for a payment and walk away and focus on their existing global franchise. Prudence not ego will be more useful at this time.

2008 Oct 06 05:43 AM