And another one bites the dust, just like that without warning FDIC swoops in and Wachovia is gone. Wachovia traded down in sympathy with Washington Mutual on Friday when the badly beleaguered Wa Mu lost its battle to remain independent to J.P. Morgan. So once again the FDIC arranges a shotgun wedding between unknowns,
Citigroup Inc., the biggest U.S. bank by assets, will acquire banking operations of Wachovia Corp. for about $2.16 billion after shares of the North Carolina lender collapsed under the weight of overdue mortgages.The all-stock deal equals about $1 a share for the Charlotte-based bank, ranked sixth by assets in the U.S. All depositors will be protected, according to the Federal Deposit Insurance Corp., which helped broker the takeover by Citigroup.
and in such a way as to not put its insurance fund at risk or burden at taxpayer, it claims.
Citigroup will absorb as much as $42 billion of losses on Wachovia’s $312 billion pool of loans, the FDIC said in a statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.
The FDIC said that it won’t have to tap its insurance fund, something the agency also avoided in the WaMu failure last week. Keeping the FDIC’s fund healthy has been a priority for U.S. regulators because its $100,000 insurance on deposits helps keep small depositors from panicking when a bank’s health is questioned.
The the agency is moving in an aggressive manner uncharacteristic of government agencies like FEMA;why? Presumably to secure the ailing banks before they can run up higher losses and more debt to the taxpayer.
“`The problem must have occurred last week with their ability to continue to attract and hold deposits after the failure of Washington Mutual,” said Gary Townsend of Hill- Townsend Capital in Chevy Chase, Maryland. “On Thursday and Friday they must have had a large run on the bank.”
Whitney said today there was “no doubt” in her mind that there had been a run on Wachovia.
No doubt, some questions maybe. Was it a run by depositors, or was it a raid by the FDIC on senior debt holders? In the case of Washington Mutual J.P. Morgan got all the goods and the senior debt holders got squat. But what if it had been a full liquidation?
Now what has the Government done here. It has confiscated the institution and sold everything except the liabilities marked equity, preferred, junior and senior. It confiscated the liquidation rights of the senior and junior debt. [It confiscated the liquidation rights of the preferreds to but that is an understood risk in owning preferreds. And whilst I lost money here I am far more angry about the other…]
If WaMu had been placed in liquidation I am pretty sure the seniors would have got something. If the senior debtors had been allowed to conduct an auction for WaMu (compromising all the junior stuff including the prefs I owned) then they would have got something.
Except that the liquation rights – well established order-of-creditor rights – were denied by a swift US Government action.
So was there really a silent run on Wachovia, or did Whitney and Townsend simply provide cover via Bloomberg once again? There is no way to know for sure, in a perfect world the government would be justified in placing taxpayers interests above the rights of debt holders in some cases, but it could just as well provide the necessary camouflage.
Now I understand that there is a strong policy presumption in favour of a quick government disposal of a failing institution – and that policy presumption might at some stage trump the rights of some holders of paper. However a pretty strong case must be made.
Has a case been made? Again it’s impossible to tell because the government confiscated Wachovia just like it did Washington Mutual and thereby confiscated paper holders rights. It is really theft. It’s really just more of the same!
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