Wachovia, Citi and the FDIC or Wachovia, Wells Fargo and the Fed

Whilst all eyes were upon the Bailout negotiations, there was a little changeroo in the Wachovia rescue package.

According to Reuters on October 3, “Wells Fargo & Co agreed to buy Wachovia Corp. for more than $16 billion, besting a U.S government-backed Citigroup Inc. bid for some of its assets, in a deal that would catapult Wells Fargo to the top ranks of national consumer banks.

For each share of Wachovia, investors will receive 0.1991 Wells Fargo share, which is equal to $7 a share based on Wells Fargo's closing price on Thursday of $35.16.

A Wachovia spokeswoman said neither Citigroup nor the Federal Deposit Insurance Corp is involved in the transaction.

Wachovia closed at $3.91 on Thursday, meaning that Wells is paying a 79 percent premium.”
That’s an extraordinary premium even for a bank in good shape, and Wachovia wasn’t. The bank was seized last weekend the FDIC due to a “silent run.” Depositors, both institutional and retail, had pulled out money above the FDIC guaranteed amount of $100,000.

It was only on the 2nd that home-town Charlotte Observer reported, “With Wachovia already looking for a merger partner, the FDIC, in consultation with other regulators, required the bank to reach a sale to Citigroup on Monday morning.

The FDIC, for the first time, used legislative authority created in 1991 to help it deal with a “very large complex bank failure” on short notice. It requires approval from heavy hitters – two-thirds of FDIC board members, two-thirds of Federal Reserve board members, as well as the Treasury secretary, who must consult with the president (emphasis added).

In the resulting agreement, Citigroup agreed to buy Wachovia's banking operations and most of its assets, with assistance from the FDIC. The agency will pick up losses above $42 billion on a $312 billion loan book in exchange for $12 billion in Citi securities.

Money flowed out of Wachovia throughout the weekend, said Evans who heard anecdotes and received memos and BlackBerry messages from bank employees in the field. “What happened last week, and it literally happened that fast …You could go from being OK, hurt, weakened, there's no question the company was weakened… but you go from being weakened to in trouble in a matter of days,” he said. “I don't think people understand how quickly events unfolded.”
This is important to make note of. Anecdotal information on the reputable blogs and forums (see links in the sidebar for a few) are frequently reliable forward indicators of economic events. There isn’t a solvent bank out there and rumors quickly can become self-fulfilling. The takeover of Wachovia was inevitable, just like those to come will be.

The FDIC is broke; Sheila Bair said so herself. When out of funds, as what happened during the S&L bailout, the FDIC borrows from the Treasury. Presumably, that means it must be paid back through fees from member banks. The Fed has more autonomy than the FDIC, especially these days. Since the Fed began the special funding vehicles in 2007, all available pools have been increased.

So, where did Wells Fargo get so much money all of a sudden? It’s a stock deal, but there are significant expenses incurred for the merger and there will continue to be significant writedowns in mortgage portfolios by both banks.

Sept. 29 (Bloomberg)--The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.
“European governments have rescued four banks in two days and the Federal Deposit Insurance Corp. said today it helped Citigroup Inc. buy the banking operations of Wachovia Corp. after its shares collapsed.”

However, Citigroup and the FDIC are no longer part of the takeover; but, read on.
“The Fed is also increasing the size of its three 84-day TAF sales to $75 billion apiece, from $25 billion. That means the Fed will make a total of $225 billion available in 84-day loans. The central bank will keep the sales of 28-day credit at $75 billion.

Special Sales: In addition, the Fed will hold two special TAF sales in November totaling $150 billion so banks can have funding available for one or two weeks over year end. The exact timing and terms will be determined later, the Fed said. The TAF program began in December, totaling $40 billion.”

Just sayin’, that’s all.
mg