Chasing Wachovia--The Plot Thickens

Ed Kountz | October 03, 2008, 02:59 PM

Politics may make strange bedfellows, but bailouts make for strange politics.

I'm referring of course to the latest development in the reorganization of the American banking system--the announced acquisition of regional banking giant Wachovia...first by Citi, now most recently by Wells Fargo. In a year that has seen the demise of the Wall Street investment bank as it was known and a major reshuffling of the U.S. retail banking space, the ongoing activity around the acquisition of Wachovia is worth a note.

On Monday, of course, it was announced that Wachovia had agreed to be acquired by Citi, under the watchful eye of the FDIC and government regulators. This morning, Wachovia announced that it had agreed to be acquired by Wells...in an all-stock deal, minus government intervention, which upset the deal orchestrated by federal regulators earlier in the week.

It's tempting to assume that, since Wells sees value where just a few days ago there was gloom, it could be a sign that we've hit at least a temporal bottom in the current market environment for financial services shares, products and institutions. Wells indicated that it believes it will be able to incur most costs associated with any Wachvoia tainted loans, and that the deal would be accretive to earnings thereafter.

Given market action after the House-passed bailout, recognition of that value isn't necessarily happening yet. But of greater short-term note is the fallout, now unfolding, of the Wells/ Wachovia announcement on Citi's earlier deal. Sheila Bair, the chair of the Federal Deposit Insurance Corp. stated Friday that the FDIC “stands behind its previously announced agreement with Citigroup.” Citi has demanded that Wachovia and Wells not pursue their deal, and said its deal with Wachovia precuded other negotiations. The FDIC noted it intends to seek "an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.”