A Tale of Two Deals

A little less than two weeks ago, Citibank agreed to take over the banking operations of Wachovia Bank. This was a deal engineered by the Treasury Department to protect depositors of Wachovia. Although Wachovia did not technically fail, this was certainly a shotgun wedding arranged by the regulators. Citibank agreed to pay $2 billion for Wachovia.

Interestingly, Citibank agreed to pay for the first $41 billion of losses on Wachovia’s loan portfolio. After that, the Treasury (meaning we the people) agreed to indemnify the folks at Citibank for any additional losses. In other deals of this type, the government has taken the losses up front, as a sweetener to get the acquiring party to do the deal.

For example, when Bear Stearns was acquired by JP Morgan Chase earlier this year, the Federal Reserve took $30 billion of bad assets off Bear Stearns’ books before the sale went through. Since the Wachovia deal is structured the other way around, Citibank has powerful incentives to keep the losses as low as possible. This tells me that nobody, and I mean nobody, really knows which loans are going to default, and what the recovery on the collateral will be when all the foreclosures are done and the houses resold. But I digress.

So anyway, the Treasury pushes through a crash sale of Wachovia to Citibank. Three days later Wells Fargo offers $15 billion to buy Wachovia in a separate deal. The CEO of Wachovia, using the keen business acumen honed by decades of experience in high finance, quickly realizes the Wells Fargo offer is about 750% better than the Citibank offer. Wow, maybe the guy is worth the $19 million in signing bonus and severance pay he’s going to get for six months worth of work.

Wachovia’s Board of Directors quickly approves the sale to Wells Fargo. Citibank, spurned at the altar as Wachovia elopes with Wells Fargo, cries foul. All three banks hire $400 an hour lawyers and go searching for judges who will rule in their favor. The corporate equivalent of a barroom brawl erupts. Or maybe a mud wrestling match.

The latest news is that the banks have called off their attack dogs, and some kind of compromise deal is in the works. All very entertaining, but what does it have to do with us.

Just this: the guys at Treasury put together the Citigroup-Wachovia deal, and less than a week later somebody else offers 750% more for the same assets. And let’s not forget that there is no risk to the taxpayers in the Wells Fargo offer. Thirteen billion dollars is a lot of money to leave on the table in a negotiation. I mean, it’s not exactly a rounding error.

I can’t really fault the T-men either. Their priority was to protect the depositors, and get the deal done as smoothly as possible, with minimal disruption to the financial markets. Getting the best deal possible was never even on their radar screen. For the Citigroup team, getting the best deal possible is always their primary consideration, and those boys have sharp elbows. For that matter, the same could be said for Wells Fargo.

But here’s the thing. Didn’t Congress just pass legislation allocating $700 billion of the government’s money (meaning we the people) to buy up financial assets? Didn’t the money get allocated to the Treasury Department? And aren’t the T-men going to buy those financial assets from banks like Citigroup and Wells Fargo? Using our money? Forgive me if I’m wrong, but isn’t the Treasury’s primary goal to support the banks, and not to get the best deal possible?

We the people are going to get rolled like a drunk on New Year’s morning.