bank run blog

The Federal Reserve has pulled out all the stops to get the Wells Fargo-Wachovia deal finalized before the Monday morning. One rumor is that Citi was happy to back out, for a substantial fee, after their auditors got a look at the Wachovia books. In any event, Wells Fargo is now one of the big four. Reuters is reporting :

“The Federal Reserve on Sunday gave its stamp of approval to the takeover of Wachovia Corp by Wells Fargo & Co of San Francisco, which had battled New York-based Citigroup for ownership of the wounded bank.

In an unusual Sunday afternoon announcement that appeared timed to precede the opening of shaky global financial markets, the Fed said it already had been in touch with the U.S. Department of Justice and banking regulators about the deal.

“Those agencies have indicated that they have no objection to the approval of the proposal,” the Fed assured.

The fight between Wells Fargo and Citigroup over Wachovia, which is based in Charlotte, North Carolina, was acrimonious right up to the point when Citigroup finally backed out last Thursday.”

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Bloomberg has details on what is included in the purchase agreement :

“Wells Fargo’s acquisition of Wachovia gives the company more branches than any U.S. bank and would rival Bank of America Corp. for the most deposits. The combined company would hold $787 billion collected from about 48 million customers, according to an Oct. 3 statement.

The purchase includes Wachovia’s U.S. securities brokerage and the Evergreen mutual fund unit with more than $250 billion in assets.”

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The FDIC-brokered acquisition of Wachovia by Citigroup, announced just four days ago, has fallen apart spectacularly overnight. Wells Fargo, reportedly an interested party last weekend, is back in the picture, apparently offering a better deal for Wachovia. According to the New York Times :

“In a surprise twist, the West Coast bank Wells Fargo & Company, said Friday that it had reached an agreement to acquire a rival, the Wachovia Corporation, for about $15.1 billion in stock.

The announcement came just four days after Citigroup had agreed to buy Wachovia’s banking operations of Wachovia for $2.2 billion of about $1 a share. But Wachovia, which is based in Charlotte, N.C., has now rejected that deal in favor of one where the entire company would be acquired. How Citigroup will respond to the news remained a question Friday morning.

In a statement, Wells Fargo, which is based in San Francisco, said that the deal required no assistance from the Federal Deposit Insurance Corporation or any other government agency.”

Bloomberg reports that many analysts are puzzled by the new development, which leaves Wells Fargo dangerously concentrated in its home market of California :

“Wachovia issued more than half its option ARMs in California, according to the bank’s second-quarter earnings presentation to investors. Wells Fargo is already the biggest bank based in that state. The stock gained 16 percent this year through yesterday, and the biggest holder is Berkshire Hathaway Inc., run by billionaire Warren Buffett.

‘The credit issues are the risk in this,’ Morgan said. ‘It gives them a lot of concentration in California and mortgage business in general. But they are paying a pretty low price, so it’s not out of line with their acquisition philosophy.’

Wells Fargo was advised on the transaction by Wachtell, Lipton, Rosen & Katz and JPMorgan Chase & Co., the statement said. Wachovia relied on Sullivan & Cromwell LLP, Goldman Sachs Group Inc. and Perella Weinberg Partners, the statement said.

‘The deal doesn’t sit too well with me,’ said Jocelynn Drake, an equity analyst at Schaeffer’s Investment Research in Cincinnati. ‘Wells was doing very well, and merging with Wachovia, which has such a bad rap among Wall Street investors, looks questionable to me.’”

Why did the Citigroup deal blow up? News is emerging that it was forced on a reluctant Wachovia, with the feds in panic mode as Monday morning approached. Finally the FDIC exercised extraordinary authority to force the sale. McClatchy unearths the details in this report from the Kansas City Star :

“On Friday, with its stock plunging 27 percent, Wachovia experienced a “silent run” on deposits, but the bigger worry for regulators was that other banks wouldn’t provide the Charlotte bank with necessary short-term funding when it opened for business Monday, sources familiar with the situation told The Charlotte Observer.

With Wachovia already looking for a merger partner, the Federal Deposit Insurance Corp., in consultation with other regulators, required the bank to reach a sale to Citigroup on Monday morning.

The FDIC, for the first time, used legislative authority created in 1991 to help it deal with a “very large complex bank failure” on short notice. It requires approval from heavy hitters – two-thirds of FDIC board members, two-thirds of Federal Reserve board members as well as the Treasury secretary, who must consult with the president.

When Wachovia opened Monday it would not have had a source of liquidity,’ a source familiar with the situation said. ‘It really could not have opened under those circumstances. That’s why (the FDIC) put together the assistance package.’”

New York Times : Wells Fargo in a Deal to Buy All of Wachovia

Bloomberg : Wells Fargo Agrees to Buy Wachovia for $15.1 Billion

Kansas City Star : Wachovia faced ’silent’ bank run; FDIC forced sale

Unexpectedly battered, Morgan Stanley is turning to one of the most precariously positioned commercial banks in the world for a lifeline. The Guardian reports that talks with Wachovia are entering an advanced stage :

“Morgan Stanley topped the list of major financial firms scrambling to find a buyer, while central banks rushed in $180 billion of extra liquidity to calm panicked stock and money markets.

Morgan Stanley was in deal talks with U.S. regional banking powerhouse Wachovia Corp and the negotiations have advanced to a more formal stage, a source familiar with the firm’s plan said.

The No. 2 U.S. investment bank, whose shares are down 50 percent this month, has also approached Chinese sovereign wealth fund China Investment Corp about boosting its stake in Morgan Stanley, the source said, following a $5 billion investment late last year.”

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The Associated Press is reporting that CitiGroup turned down a deal, but that Wachovia and Chinese investors Citic remain interested :

“John Mack, the No. 2 U.S. investment bank’s chief executive, has reached out to China’s Citic Group overnight about a possible investment, according to a person familiar with the talks. Morgan Stanley is also considering a combination with retail bank Wachovia Corp. and an investment from Singapore Investment Corp., one of the world’s biggest sovereign wealth funds, said the person, who spoke on the condition of anonymity because the discussions were still ongoing.”

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In what is becoming a major news story, state regulators are achieving huge settlements with top financial institutions eager to avoid criminal fraud prosecutions. The scale and terms of the deals are unheard of in state actions against the financial sector, and federal regulators have been inexplicably sidelined throughout. There is certain to be more to this than is currently being reported.

Today’s most significant development was the expansion of the New York attorney general’s probe to include three more Wall Street giants. According to the Associated Press :

“New York Attorney General Andrew Cuomo said Monday he is expanding his investigation into the collapse of the auction-rate securities market to include JPMorgan Chase & Co., Morgan Stanley and Wachovia Corp.

Last week, Cuomo’s office and the Securities and Exchange Commission reached settlements that forced Swiss bank UBS to repurchase $18.6 billion in the securities, while Citigroup agreed to buy back $7 billion of the securities. UBS will also pay a fine of $150 million, while Citigroup will pay a $100 million fine.

‘This is an industrywide problem,’ Cuomo said in an interview. ‘This is not about one or two institutions. We are now working with the other players in the industry.’

Cuomo sent letters to JPMorgan, Morgan Stanley and Wachovia telling them that his office is reviewing the banks’ behavior in the sale of auction-rate securities. The attorney general will determine if the banks knowingly misrepresented the safety of the securities when selling them to investors.”

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The Washington Post notes that with numerous state investigations proceeding simultaneously, making it all go away is becoming an increasingly expensive proposition :

“Meanwhile the office of Missouri Secretary of State Robin Carnahan on Monday announced that talks with Wachovia Securities, a St Louis-based venture jointly owned by Wachovia and Prudential Financial continue.

Cuomo’s letters to the three banks and the Missouri talks show that Wall Street has only begun to pay for its actions that left tens of thousands of investors stuck with ‘cash-like’ securities that were impossible to cash out.”

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Bad news is good news for Wachovia, as the fourth largest US bank tries to deftly skirt insolvency. CNN Money reports on Friday’s rally in Wachovia’s share price :

“Shares of Wachovia Corp. jumped Friday, one day after the ailing bank announced the planned departure of its chief risk officer.

Shares gained $1.57, or 9.1 percent, to $18.84 in afternoon trading. Shares are down 55 percent this year.

Wachovia said late Thursday that it will begin an immediate search for a replacement for Chief Risk Officer Donald Truslow, who plans to retire.

Truslow’s departure comes one week after the troubled bank announced the exit of its chief financial officer, and analysts suspect there are more executive changes to come under the new regime of Chief Executive Robert Steel.”

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Bloomberg put a slightly different spin on its coverage of the same story, divulging the poorly kept secret that Goldman Sachs might be positioning itself to “buy” Wachovia in a Fed- engineered shotgun marriage :

“Wachovia Corp. jumped to a seven-week high on renewed speculation that Goldman Sachs Group Inc. may bid for the fourth-largest U.S. bank.”

Bloomberg was able to find at least one analyst who would go on the record about the rumors driving the market :

‘The speculation is Goldman is buying Wachovia,’ said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $6 billion in San Antonio. ‘That’s why the stock is ripping.’”

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