Wachovia: Time to Bail?

After last week, and last weekend in particular, we can’t help but wonder who’s next.
Although possibly a ploy to gain passage of the Paulson Bailout Plan, Saturday, September 27, CBS News reported that “Senator Robert Bennett (R-Utah), a key member of the Senate Banking Committee, warned that another major US bank was "teetering" on the edge of failure.”

Although we rarely take anything from a senator at face value, and I’m being kind, this time we’re believers, at least of the teetering part. However, passage of a bailout plan will have little impact at this point on whether any US financial company remains independent.

The bank Bennett is referring to likely is Wachovia. Cleveland-based National City is also on its last legs and then there’s elephant-in-the-corner Citibank, but we’re going with Wachovia.
Wachovia’s shares closed down 27% on Friday due, in part, to JPMorgan’s announcement that it will acquire the deposits, but not the debts, of Washington Mutual. This is setting a new precedent and is a major bummer for both the stock and bond holders, potentially to the tune of $28.4bn for the bondholders alone. The equity holders will be wiped out. The clincher, though, is that JPM immediately marked down the value of WAMU's mortgage-related securities by $31 billion. This creates a mark-to-market value of similar assets at other banks, which are being held at unrealistically inflated values.

Wachovia is deeply under water with the same kind of mortgages that did in WAMU. The declining value of the mortgages held by its subsidiary, Golden West Financial, was the largest contributor to the $8.9bn second-quarter loss of the parent company.

Talks to be acquired by Morgan Stanley ended on Thursday, according to Reuters. Wachovia purportedly is now in talks with other potential buyers including Wells Fargo, Banco Santander, and Citigroup. According to the Washington Post, “Wachovia chief executive Robert Steel sent an e-mail to employees on Friday saying that the company was "aggressively addressing our challenges" and expressed hope that Congress would approve some version of a plan to buy mortgage-related securities from Wachovia and other banks.” As reported by the WSJ on Saturday, “Wachovia officials don't believe they need to rush into a deal and the bank isn't feeling immediate pressure on its financial condition, people familiar with the company said.”

Sure, if they say so.

Bailout Friday has been morphing into Bailout Saturday and Bailout Sunday and the number of bailouts per weekend is increasing. Last weekend, September 19-22, the Fed and Treasury were able to squeeze in Lehman’s bankruptcy, AIG’s conservatorship, the sale of Merrill Lynch to Bank of America and, in the words of the WSJ, they took “the extraordinary measure of converting Goldman Sachs and Morgan Stanley into bank holding companies”, which will make it easier for both to acquire other banks. It looks like Wachovia will be next.”

Banks remain reluctant to lend to each other and bailout or no bailout, this will continue. How could it not.

mg