Citigroup CEO Vikram Pandit knew a good deal when the saw one. Washington Mutual had fallen, and Wachovia was shopping for suitors while emotions were running high and the market was waiting for the next shoe to drop. Wachovia’s stock was below $2, and it was time to strike while the iron was hot.
The U.S. Treasury and the FDIC wanted no part of another major bank failure in this deflationary spiral. Citigroup's fire sale offer of $2.16 billion in stock to Wachovia and more than $10 billion in preferred and warrants for the FDIC – in return for almost $450 billion in deposits – seemed like an outstanding opportunity.
In fact, Pandit said to the effect that this was a low-risk opportunity. The addition of thousands of branches, and the FDIC's offer to guarantee deposits over a high bar certainly seemed like a great deal. However, Wachovia, the market and Wells Fargo knew better.
In a novel approach, Wells Fargo offered to pay real money for Wachovia’s assets, keep the bondholders whole and make the acquisition without any significant taxpayer exposure. When J.P. Morgan Chase & Co. purchased WaMu, they had insisted on an immediate consummation, but Vikram Pandit did not, and he failed to install a breakup fee. Whoops. The Wachovia board knew a better deal and gave Citibank the shaft.
So, now Citibank is crying tortuous interference. (On Oct. 6, Citigroup sued Wells Fargo and Wachovia for agreement violation. – Ed.) Good luck with that one. With all that has gone on the past several weeks, is there really a judge out there who will force Wachovia to re-enter a buyout that leaves taxpayers vulnerable to potentially billions in losses and leaves bondholders out in the cold?
We could only hope that common sense will prevail – for once. This thing is already in the courts, and the former investment banker, U.S. Treasury Secretary Paulson, wants to play King Solomon and split Wachovia up between the warring parties devoid of any federal assistance. It’s unclear how this will be resolved, but Vikram Pandit can be sure that whatever the deal is, Paulson will make it binding.
And saving taxpayer money in a deflation would seem prudent, as here comes California Governor Arnold Schwarzenegger with hat in hand.
This story originally appeared in the October 6 Daily Forecast page for the U.S. 30-year Treasury Bonds in Bill Fox's Interest Rates Specialty Service. (See full menu for EWI's Specialty Services here.)
Bill Fox is EWI's Senior Bonds Analyst. He has been involved in the markets since graduating in 1988 from Vanderbilt University. He joined EWI in 1994; most of his subscribers are professional bond traders spread around the globe.