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How Much Will a Wells-Wachovia Deal Cost Taxpayers?

by: Felix Salmon October 05, 2008 | about stocks: C / WB / WFC    
Felix Salmon

Felix Salmon

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Anybody following the fight between Citi and Wells Fargo has to read Binyamin Appelbaum's front-page piece in the Washington Post on the tax assumptions behind the Wells Fargo offer.

In touting the deal, Wells Fargo executives said they did not need money from the Federal Deposit Insurance Corp., which had agreed to limit Citigroup's losses on a portfolio of Wachovia's most troubled loans.
"This agreement won't require even a penny from the FDIC," Wells Fargo chairman Richard Kovacevich said.
But experts in tax law said the Wells Fargo deal actually was likely to be more expensive for the government...
The amount of lost tax revenue would depend on the future profitability of Wells Fargo and the losses on Wachovia's loans, but based on Wells Fargo's financial disclosures, it could shelter $74 billion in profits from taxation.

Meanwhile, the NYT reports that Citigroup, now armed with its latest injunction, is seeking $60 billion in damages from Wells Fargo for interfering with the initial transaction -- a number which seems to have been arrived at by the famous "think of a number and treble it" technique.

Elizabeth Nowicki and Steven Davidoff also weigh in on what the exclusivity agreement may or may not force Wachovia to do. I'm inclined agree with Davidoff here:

I think the most elegant solution is for Citi to match the Wells Fargo bid over the weekend and litigate the deal-protection devices in Friday's transaction as illegal. This is a better case to pursue than a tortious interference case on a three-page letter in New York, even though the letter is very clear on the issue.

As far as the cost to the government is concerned, I do wonder whether Sheila Bair worries overmuch about Treasury's future tax revenues, or whether there's anybody in charge who can reject the Wells Fargo offer on the grounds that it will cost the government more than the Citi offer. Now that WaPo is fronting the issue so forcefully, though, I suspect that everybody will pay more attention to it.

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This article has 8 comments:

  •  
    Oct 05 07:05 PM
    Now that the 'bail out' plan came through, Wachovia needs fast to take advantage of it, it needs to sell its toxic loan portafolio from its banking subsidiaries around 122 billion if not more to the government close to even cost prices and take serious advantage of the tax break plan and remediate their banking book of business. They also need to contact their customers that did the run on the bank like chickens without head to bring their deposits back and reassure them that they are ok and there is not reason to panic because of the talking heads of FOX news and rest of media and the incompetence of the FDIC. This strategy will demonstrate to the public that the current 'bail out' plan is working and that Wachovia is the first product of it.
    Reply
  •  
    Oct 05 07:25 PM
    I think the Wells Fargo deal was a brilliant move. It was a stupid move by Wachovia because they an opportunity their own company. Now they're are definitely either Wachovia or citgroup. If I was Citiggroup I would just just sue for the amount of what a quarter of their deposit, and If I was Wells Fargo I would oblige. I just don't think its a bad of a deal. When Wachovia is sold off, the shareholders now will get some return on the deal. Specifically the senior shareholders. The FDIC can save face just in case another bank falters. Wachovia prove incompetency, only in the instance that they signed an agreement with Citigroup. However on the flip side, if their were no agreement, their would be no Wachovia. Because Wachovia would have been bankrupt, and nobody would have gotten a huge chunk of assets, and the FDIC would have had to insure the Wachovia depoisitors. wells Fargo is a really good company as well. Citigroup is. Its just removing its problems at one time while the crisis is occuring. If they wrote off 46 billion and only incur a 9 billion dollar loss or a 3 billion dollar costs in this quarter. As well, as the credit criss is easing up. Then that's just smart from the executives and others within the company. Wachovia just didn't do completely what needed to be done to maintain themself as a seperate entity, but did do what needed to be done to save face with shareholders. As far as job cuts, concern as well, they don't have to look for entirely new employees. They can just get rid of employees who don't do their jobs, and eliminate the human resource issues that were published in previous articles. The branches will defintely retain branch managers and tellers. From there its the executive decison. Their would just be necessary cuts from an ordinary buyouts of a company with a new regime who is intersted in operations of their own company. I think the creditor will defintely get everything in the detail. As far as Wells Fargo is concerned they market traditional mortgages, so the new branches will definitely sell very good mortgages. The option ARMs weren't a terrible idea. They were just misused for personal, selfish gains by consumers, mortgage brokers, and loan officers. They were what caused risk for the bank as well as the mortgage backed securities by the bank(s). I just can't believe that option ARM's and Pick a Pay mortgages can be the primary mortgage marketed by your bank for sale and then be surprised when you ended in the circumstances. The only difficulty is that they won't need the staff from a failed bank who was able to be takenover. The staff of Wells Fargo is good enough and can definitely have more office space.
    Reply
  •  
    Oct 05 11:41 PM
    One way or another the taxpayer is going to end up picking up the tab for this bunch of miscreants. It also means that the government is going to go even more in debt but hey what's another trillion or so on the national debt, nothing.
    Reply
  •  
    Oct 06 12:26 AM
    Haven't you heard the news? Cost, you say?

    The taxpayer is going to make lots of money on all of this. Just ask Bush, Paulson, Pelosi, Frank and others... They'll set you straight!

    By 2010 we'll each have so much money from this, each taxpayer will be in a windfall tax category.

    Really!
    Reply
  •  
    Oct 06 01:56 AM
    This is a very interesting transaction. Citibank has an agreement but no remedies that make sense. They have the right to specific performance, but performance of what? Forcing WB to continue to negotiate for the 7 day term of the exclusivity agreement? They haven't really suffered any damages so I don't see a big payment coming. The injunction they have just delays and gives them the time to increase their offer. The only thing they can do if they really want Wachovia is match or better the Wells deal. Any deal would have to be approved by shareholders and that won't happen if they don't match. Wachovia won't even submit it to shareholders if they don't match.

    This whole process shows how foolish the FDIC has been in this crisis. At least the WB shareholders will get something now. The Washington Mutual creditors & shareholders are the ones who really got screwed by the FDIC.
    Reply
  •  
    Oct 06 02:44 AM
    Stay away from banks.
    Wait for the dust to settle.
    This is old & smart advice.
    Reply
  •  
    Oct 06 05:41 AM
    I think that Wells Fargo has given Citi an opportunity to ‘dodge the bullet’ over their shot-gun engagement with Wachovia. They need to settle for a payment and walk away and focus on their existing global franchise. Prudence not ego will be more useful at this time.
    Reply
  •  
    Oct 06 08:12 AM
    Are you crazy? If the Citi-Wachovia merger had gone through the US would have been on the hook for up to $270 BILLION dollars worth of losses from Wachovia worst crap assets. Assets that are still being carried at far over actual value on Wachovia's books, and declining by the day. Including over $100 BILLION dollars worth of option adjustable-rate mortgages from it's doomed acquisition of Golden Western. 100% guaranteed and backstopped by Uncle Sugar. Wells Fargo is willing to take them for nothing, and you are worried about how it will help their tax write-offs? Catch a clue guy, corporate tax rates are on a sliding scale from 15% to 35%. Which means WORST CASE the US taxpayer just got off the hook for 65% of this fiasco.
    Reply
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