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October 5, 2008

Banking Brouhaha: Wachovia Now Wants To Self Itself To Wells Fargo – Not Citibank

 Last week we woke up to hear that Citibank “Citi” took over Wachovia’s banking/mortgage business.  Citi was to have paid Wachovia $2.1 billion in stock in exchange for Wachovia’s banking and mortgage assets (over $700 billion in deposits+assets). Citi was also going to assume about $53 billion in debt.

 Citi needed to cover losses up to $42 billion on mortgage related losses. Anything beyond that is guaranteed by the Federal government (FDIC). In exchange for that guarantee, the Feds would get $12 billion in preferred Citi stock, which pays 6% interest – so the Feds would most likely make money from the deal.

Wachovia owns a $300+ billion mortgage portfolio and has about $120 billion in option-ARM mortgages and expected losses on about 14% of those loans. The deal allowed Wachovia to keep its other businesses: Wachovia Securities, Evergreen Investments and Wachovia Insurance Services. The important question here is how much the remaining Wachovia businesses are worth – could Wachovia have sustained itself?

·       Wachovia Securities is the nation’s second largest investment firm

·       Wachovia Insurance Services is the 12th largest insurance brokerage firm

·       Evergreen Investments is America’s 29th largest asset management company

So now each Wachovia share is worth $1 – a penny stock.

In pre-market trading last week, even before any details were announced, Wachovia stock dropped 90% and trading was halted at the NYSE on Wachovia (WB) for the day. In spite of everything the S&P still maintains its hold rating on WB but will revise its price target.

Up until early Friday October 3 your deposits at both Citi and Wachovia are safe and the FDIC didn’t need to spend any money to help those 2 banks. The only difference was that your local Wachovia would become a Citibank and Citibank had plans to move its banking headquarters to Charlotte, NC while keeping its investment headquarters in Manhattan. Since Citi and Wachovia don’t have much of an overlap in branches, not much was expected to change for depositors.

Late Friday the banking industry was shaken by news that industry regulators were working to resolve rival acquisition proposals by Citigroup and Wells Fargo for Wachovia.

 Wells Fargo announced a surprise deal to buy Wachovia for about $15.1 billion in stock, four days after Citi agreed to acquire Wachovia’s banking operations in a government-backed deal valued at $2.1 billion.

So now we have a fight between Citi and Wells Fargo to see who will purchase Wachovia. Even though Wachovia said early Sunday that it is pressing ahead with its deal to sell itself to Wells Fargo for more money.

Wachovia responded to a judge’s order on Saturday to temporarily block the sale of the bank to Wells Fargo.  But Wachovia says that it does not believe the order by the judge “has any effect on the validity of the Wells Fargo agreement with Wachovia.”

Meanwhile, across the pond, hopes of a formidable European response to their financial crisis dimmed ahead of a hastily arranged weekend summit by France, Germany, Britain and Italy. Germany has already rejected a French proposal to create an emergency EU fund for struggling banks. European governments have had to step in and bail out several major banks, including Britain’s Bradford & Bingley, Belgian-Dutch Fortis and Belgium’s Dexia.

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