A detail of tax law makes all the difference in Stormy’s post below. Buy the whole thing, get the tax break. Buy part of it, you don’t.*
The other half of the answer is that “timing is everything.” And playing Chicken with the FDIC often has Unintended Consequences.** So let’s turn the continuous-not-discrete timeline details over to reader A C Shareholder in comments to Stormy (minor edits for style):
While obviously I am biased because Wachovia stole 20% of my equity value on Friday, I do think it’s always fun to watch the Monday morning quarterbacks talk about Wells Fargo as if they only needed a little more time.
When you are dealing with a bank run, you do not have a “couple of days.” The “couple of days” was the FDIC trying to get Wachovia and Wells Fargo together starting on the Thursday before last weekend and then Wells bailing around Saturday night, Sunday morning. Wells Fargo played chicken with the FDIC by walking away. Do not believe for a minute that walking away from the table wasn’t a a calculated move designed to put Wachovia in receivership a la WaMu. The only problem was Wells didn’t foresee Citi putting a deal together that quickly.
So let’s try to construct what would have happened last weekend if Citi doesn’t step in. Wells leaves Wachovia at the altar Sunday night. Not a great sign of confidence for Wachovia. Market and business opens on Monday. Everyone had been anticipating a deal over the weekend—without one, CFOs and Treasurers get antsy. Noon, the House votes down the bailout package. Immediately, wire and ACH transactions begin hammering Wachovia. Suppose they get through the day, overnight banks refuse to lend to Wachovia. Wachovia’s funding dries up (look at LIBOR and the TED spread). Tuesday, money continues to pour out of Wachovia. After a brief pop, the market is hearing more about Wachovia precarious position and starts trending lower. Without funding sources, Wachovia is at the Fed window for all monies. Tuesday overnight, still Wachovia cannot borrow from its peers—deposit base is down 15 – 20 billion. Wednesday, FDIC seeing that the market has lost confidence in Wachovia steps in and puts Wachovia into receivership.
As for the FDIC’s ability to get anymore deals done, it doesn’t absolutely stop them. However, now all deals will be receivership deals like WaMu. Wells, Chase, and BofA are all just under or over the 10% deposit base limit so none of them have the ability to merge anymore. The only bank with the ability to merge balance sheets is Citi. As for the others (US Bancorp, PNC, and BB&T), they may be able to do something but they have much smaller asset base in which to spread out losses. If you are VikrAm Pandit, are you going to do another OPEN transaction again with the FDIC or are you going to have the FDIC put ’em in a body baG and wipe out all debt and equity holders? Every regional bank shareholder that goes to receivership from here on out can thank Wells and Wachovia when there debt and equity gets wiped out.
So in return for my use of capital and stock last week that came in at the 11th hour and saved Wachovia and then floated them for an entire week of the worst funding environment in decades perhaps ever – I get a 20% loss as the CEO of Wachovia was smiling and grinning as late as Thursday. This knife in my back belongs to Wachovia’s CEO Steele.
*This is nothing Citigroup wouldn’t have known. The next step in the process is to realize that C valued the non-banking operations of “WalkAllOverYa” at less than the net value of the tax break. The implications of that are left to the reader. UPDATE: This is not necessarily so—see my follow-up post—they valued the net value of the non-banking operations as less than the Expected tax break’s value, which was even lower than the value Wells is using.
**In this case, we have to assume the consequences really were Unintended, since assuming that Citigroup would buy the banking operations if Wells walked away would—as has become the case—make the acquisition more difficult for Wells. Which is as it should be.