Citi Buys Wachovia: It's 'Not A Failure'

Posted by urbandigs

Mon Sep 29th, 2008 09:06 AM

A: Umm, sure, ok, whatever you say! Citigroup is the winner of the Wachovia buyout talks and agrees to take on as much as $42,000,000,000 of losses from Wachovia's $300+ Bln portfolio of toxic mortgages. After that, the FDIC will take on losses in exchange for preferred stock and warrants. This action was deemed by the FDIC as 'NOT A FAILURE'. With Wachovia stock trading down some 94%, to $0.75/share, shareholders can enjoy some relief that this is NOT a failure; it just feels like one!

Amazing. Not a failure! Give me a break, puh-lease! Here is the news via Bloomberg, "Citigroup Agrees to Buy Wachovia's Banking Business":

Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the Federal Deposit Insurance Corp. said today in a statement. The FDIC will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.

Wachovia is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and Washington Mutual Inc. into bankruptcy and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos. The purchase gives Citigroup about 3,300 branches and offices in 21 states. Wachovia will continue to own the A.G. Edwards Inc. brokerage and the Evergreen mutual-fund family.

Wachovia is the largest holder of option ARMs, ahead of Washington Mutual, the Seattle-based lender that collapsed last week. Option ARMs allow borrowers to skip part of their payment and add that sum to their principal. Monthly payments increase after five years or once the loan balance reaches a predetermined limit, usually 110 percent to 125 percent.

For the average option ARM borrower, payments will rise 63 percent, or by an additional $1,053 per month, when their rates reset, according to a Sept. 2 report by New York-based Fitch.
Thats it folks, I'm OUT OF FAILURES! They all happened. Now what the hell am I going to do?

No seriously, it appears that we are nearing the end of the shotgun marraige SHOCKS for the major American institutions. That is not to say we wont see more failures, but the big ones happened already. To date, here is a list of the MAJOR failures OR bailouts OR buyouts due to this credit crisis:

1) Lehman Brothers
2) Bear Stearns
3) AIG
4) Merrill Lynch
5) Countrywide Financial
6) Wachovia
7) Washington Mutual
8) Indymac Bancorp

Did I miss any? There are 12 more smaller ones on the FDIC Failed Bank List for 2008 already. Expect many more smaller ones in the next 12-18 months. Its now time for the next sector to show its ugly face (maybe home builders, maybe airlines, credit card companies, auto industry), hedge funds and global banks to show who is swimming naked.

Just another downward credit cycle? I think not! The landscape is changing, and after this nuclear credit war is over and the smoke clears, we will be back to simple banking with heavy regulation on all the complex derivatives and securitization methods that assisted in getting us into this mess in the first place. The credit boom is over and we likely have already reached PEAK CREDIT. This means years of deleveraging, and credit contraction until we hit equilibrium.

No more craziness, and as I said in the last Inman conference, the reason we will not see a 'V' shaped recovery, is that the system of credit that is needed to fund that type of recovery, simply will not be there. This will be an 'L' shaped process with prices reverting closer to their historic means. The likely BIG 4 surviving banks that will shape our future, as MH23 points out in a comment on the previous post, are JP Morgan Chase, Bank of America, Wells Fargo & Citibank. These Big 4 officially classify as too big to fail at this point and will be the main lending institutions that shape the next decade!

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