Citigroup (C) & Wells Fargo (WFC) Bidding for Wachovia (WB)

Two questions/comments - I was wondering why Wells Fargo was so strong Friday and where is Citigroup getting the money for this when they themselves are a huge risk? Hmmm....

Before you read this article, if you do not know what an option ARM loan is you need to read this [Aug 13: Option ARMs - Who Thought Up These Time Bombs?] Then after you read that, consider Wachovia has $122B of this type of mortgage on its balance sheet. And consider, by the time it is said and done, my belief is 70-80% of these option ARMs (the most toxic of all mortgages) will be "walk aways" and hence dead money. Which means there is no income stream and its just an empty piece of paper. Then consider this is the type of mortgage that the government will be sopping up and putting onto our national balance sheet while talking the talk that "hey if we hold these long enough we could make money on the deal!". No, option ARMs are going to be for the vast majority - dead. If home prices don't rise their usefulness is deemed nil.

This is one bank, granted the 4th largest in the nation, and on one balance sheet $122B of that $700B could be used. For ONE TYPE of MORTGAGE. This is why I think $700B is just a fraction of what is really needed and after an initial happy period we are going to be gulping again. But if you are Wells Fargo and you buy Wachovia optionARM-less, handing the risk off to you and me (taxpayers) you are one smart cookie. Don't hate the player, hate the game.

Again I keep asking what happens if one of the big 3 gets in trouble anytime in the next decade? Citigroup, Bank of America - Countrywide - Merrill Lynch, or JPMorgan - Washington Mutual - Bear Stearns. They obviously cannot be allowed to fail... what happens then? Much like we've found the answer to "easy money" policies of Alan Greenspan to be ... well a lot more easy money; so have we decided that the answer to "too big to fail" is.... well create even larger entities. Do you see how we never learn from past mistakes? Or in times of desperation there are no good solutions?

• Federal regulators on Sunday night were pressing for the sale of yet another troubled bank — this time, the Wachovia Corporation — in a move that would concentrate power within the nation’s banking industry in the hands of a few giant lenders.
• Wachovia, the nation’s fourth-largest bank, was negotiating to sell itself to Wells Fargo or Citigroup. Although the Federal Reserve and Treasury Department were pushing for a sale, the government was resisting pressure to provide financial guarantees to the buyer. (oh really? well there are 2 ways to skin that cat - instead of direct loan guarantees ala Bear Stearns, why not just a direct sale of toxic loans to US government - it's now not only AN option, but THE option - so what exactly is the government "resisting"?)
• A sale to either Wells Fargo or Citigroup would further concentrate Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and whichever bank acquired Wachovia. Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors. (unintended consequences - less competitors, less choices) While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts.
• Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department who, took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker. At 8:15 am. on Saturday, Citigroup and Wells took their first peek at Wachovia’s books. (Robert K Steel - another Goldman man who in the span of 4 months will receive an enormous payout - while the stock will most likely drop 70-80-90% on his watch) Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial backstop, according to people briefed and involved with the process.
• People involved in the talks said Citigroup and Wells Fargo were unlikely to bid more than a few dollars per share for Wachovia, substantially less than the $10-a-share price where its stock was trading on Friday. (or $16 that it was earlier in the week)

Eyeing Wells Fargo