Much has been said about the $700 billion dollar bailout package (I don’t need to link to that right? I mean everybody knows about it who is paying attention), but in the midst of this, a little backstory is developing over Wachovia.Â It is said that Wachovia faced a “silent run” on the bank, and with Wachovia in the news, and the failure of Washington Mutual, I guess it makes sense that the FDIC moved to act quickly to resolve the situation, and thus brokered the deal that the banking operations would be sold to Citibank.
In that deal however was some agreements that were for the most part overlooked, or at least not highly scrutinized, such as (emphasis added):
In agreeing to purchase Wachovia’s bread-and-butter banking business, including its infamous $120 billion in troubled and so-called option-ARM mortgages, Citigroup will also in essence give the FDIC $12 billion in preferred shares to guarantee that Citi will not face more than $42 billion in losses related to Wachovia’s troubled businesses.
So, the FDIC in what it seems to me is a conflict of interest (I am of course not a lawyer), would become shareholders in Citibank, and would pay off losses from the loan portfolio for anything over $42 billion.Â This means the FDIC is potentially on the hook for a boatload of money.Â So, when Wells Fargo came along and came up with a deal for the entire operation of Wachovia that put zero FDIC money at risk, the FDIC should have been thrilled (on would think), but this was not the case.
I don’t know if it is the allure of getting a $12 billion stock “payment” to insure the portfolio, but suprisingly instead of being happy that a deal was done that didn’t require the FDIC to bail out any money, instead the FDIC announces that it still is backing the Citi-Wachovia deal.Â Citi of course is livid, and is taking their case to court.Â This doesn’t surprise me, and it all but solidifies in my mind what a deal Citi believes it is getting here.
The FDIC should not be involved in this any longer, to this extent.Â If Citi wants to take over Wachovia, it should now step up to the plate on its own, and make an offer that is better than the one Wells Fargo has put on the table, and without any guarantees from the government.Â There is obviously no reason for the government to help Citi make this acquisition if there is another institution out there willing to do it without FDIC help.Â Period.Â Anything else really is corporate welfare on behalf of Citi.