Wachovia Forced Sale is A Rip-Off of Employees, Shareholders, and US Citizens
September 30th, 2008
Wachovia was more than just a bank. It was grown through the unification of dozens of excellent regional banks. It was a premium, professional operation with 120,000 employees. The big merger that put them at risk, their bridge too far so to speak, was the purchase of Golden West at a huge premium price of $25 billion. Golden West was known in California for their very easy, lax loan requirements, even compared to competitors that were already among the most lax in the nation.
Even with that extremely serious management error by then-CEO of Wachovia Kennedy Thompson, the vast majority of Wachovia is solid and profitable. Wachovia did not face failure, like Lehman or potentially Washington Mutual, but was about to have it credit rating downgraded by the credit agencies S&P, etc. They did have billions in debt that would be rolling over in the near future, but with a bank of the magnitude, that was normal. The question apparently became could those bonds be refinanced at a reasonable interest rate, or under the present market circumstances at all?
Rather than simply getting them through that issue with a simple bridge loan, Paulson and crew decided to take a much more extreme approach. A shotgun marriage or else.
According to this morning’s Wall Street Journal, Wells Fargo another excellent bank, was very seriously looking to potentially buy Wachovia for $20 billon, which is about $10 a share, and NO GOVERNMENT LOAN guarantees. Somehow, that did not happen, but an already shaky Citibank bought them for $2 billion, under $1 per share, AND GOVERNMENT GUARANTEES to cover all loan losses on mortgage loans beyond $42 billion for the total Wachovia $312 billion mortgage loan portfolio. Meaning if the mortgage loan loss on the Wachovia portfolio is beyond 13.5% of the total (42/312 = 13.5), the government will kick in tens of billions of dollars. Given the loss rate on Golden West mortgages, etc. that is highly likely. This is an extraordinary deal for Citibank, and a terrible deal for the citizens of the USA.
What will Citibank do now? What is the fate of Wachovia’s 120,000 employees? Almost certainly over the next few years, they will close hundreds of former Wachovia local bank branches and lay-off tens of thousands of employees. What they will not do is be motivated to make sure they collect everything they can on that giant mortgage portfolio because the government will cover the losses beyond 13.5% anyway.
Instead of merely making a brief loan to Wachovia or allowing a fair merger, the choice was made to destroy billions in shareholder value (I am not a shareholder), put tens of thousands of Wachovia employees at risk, and cost the taxpayers likely tens of billions of dollars anyway.
How does this make sense? History will judge the many errors in handling this financial situation. The mishandling of Wachovia will be a sad chapter. This rescue looks a lot more like theft.
Todd Lipscomb
Founder of MadeinUSAForever.com (http://madeinusaforever.com/) a source for USA made products.
Tuesday, September 30th, 2008 at 5:32 pmand is filed under Uncategorized.
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Maybe the bailout goes through and Shareholders vote the merger down. A nice time buying strategy perhaps? Paulson and Steel are good buddies.