The on again/off again shotgun marriage of Citigroup and Wachovia's commercial banking unit is off again.
Citi ends talks with Wells Fargo over Wachovia
NEW YORK (CNNMoney.com) -- Banking giant Citigroup said Thursday it had ended talks with Wells Fargo about reaching an agreement to acquire parts of the struggling bank Wachovia and is no longer looking to buy any of Wachovia's assets.
Citigroup also said that it would not seek to block the merger agreement between Wells Fargo and Wachovia but that it would still seek damages from the two banks for breach of contract.
I'm assuming the "contract" being referred to was the one Wachovia was the shotgun wedding with Citi, arranged by the FDIC after market close on September 29. Citi's deal was for $2.2 billion for Wachovia's banking operations, but not the asset management or retail brokerage units. Citi's deal also included a guarantee from the FDIC that it would cover the losses on Wachovia's $300 billion mortgage portfolio beyond the first $42 billion.
That's a pretty sweet deal, especially in the current environment.
Unfortunately for Citi, the beleaguered executives at Wachovia had other ideas:
The fight was also waged in federal court, where Wachovia asked U.S. District Judge John Koeltl to declare invalid part of the Citigroup deal that would have restricted Wachovia from considering competing bids. Koeltl scheduled another hearing for Tuesday so Citigroup could respond.
It was clear from documents filed in federal court Sunday that Wachovia was in considerable trouble when it agreed to the deal, the AP reported. Wachovia disclosed that it agreed to the deal "with the understanding that a seizure of its banking assets later that day by the Federal Deposit Insurance Corp. would occur" unless it accepted Citigroup's proposal.
Now, IANAL (I Am Not A Lawyer), but that sure sounds like "duress" to me. Contracts have to be entered willingly, and this looks like the choice between taking the deal or being liquidated - in essence, no choice at all.
Four days later, Wells Fargo made a $15 billion bid for all of Wachovia, without any assistance from the Feds. Either way you look at it - $2.2 billion for a distressed portfolio "valued" at $300 billion, or $15.1 billion for that same portfolio, plus two profitable business units - either Wells Fargo or Citi was getting a bargain.
Seems pretty straightforward, right? Wells Fargo made the better offer, both in terms of the purchase price and the degree of complexity (less). Let the market speak, right? Wrong. Citi sued to block the deal, and claimed $60 billion in damages. Wells Fargo and Citi had been trying to work out an arrangement to parcel off Wachovia, but those negotiations broke down yesterday, and Citi renewed its suit.
Now, again, IANAL, and likewise IANAB (I Am Not A Banker), but unless Citi is just blowing smoke, it sure seems like they think they could make $60 billion from the Wachovia deal. If their more careful stewardship of the Wachovia mortgage portfolio would net them that much, why didn't they just up their bid? From where I sit, it looks like Citi is annoyed that Wells Fargo knocked them out of the FDIC corporate welfare line. With their losses backstopped by tax dollars, what was to stop Citi from having a fire sale on those properties - say, 40% below the value the properties were assessed when the loans were made - and soaking the FDIC (and you and me) for the difference? Dumping those loans for $180 billion, on paper they have a loss of $120 billion. They "own" the first $42 billion, but the FDIC had guaranteed to make up the rest - in my example, $78 billion of taxpayer money.
Without any oversight.
And that stinks.
And again, IANAB, but I have been to a few garage sales. And if I buy something for $2.20 (or $15.10), and manage to sell it to someone for $180, I understand that I have made a heckuva profit. And I have bought a few houses, and the funny thing is, when I agreed to take out a mortgage for $X for a house, the house became worth $X. Why should a collection of houses be treated any differently?
The way I see it, banking executives need to go to more garage sales.