Citi Buys Wachovia: It's 'Not A Failure'
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.Thats it folks, I'm OUT OF FAILURES! They all happened. Now what the hell am I going to do?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.
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!
Comments (12)
my question becomes:
WITH THE BIG 3 DOING MAJOR TAKEOVERS TO HELP STEM THIS CRISIS (JPM, BAC, and now C), HOW IN THE WORLD ARE THEIR BALANCE SHEETS IN A POSITION TO ACCELERATE LENDING?
I MEAN, LOOK AT WHAT THESE GUYS ARE TAKING ON!
Posted by Noah | September 29, 2008 9:19 AM
Isn't that what the 700 Bil bailout is for?
Posted by Nobi | September 29, 2008 10:27 AM
yes but its only 250Bln at first and even with the full 700 bln, it is not enough
Posted by office-noah | September 29, 2008 10:45 AM
Interview representatives of Wachovia.
Such details of the transaction are unlikely to have waited!
http://tubedirect.net/index.php?q=Wachovia-interview-CNN
all this... Personally, I do not like it
Posted by mikevanera | September 29, 2008 10:53 AM
I have stated for more than 2 years that we are in the midst of a structural change in lending and consumption behavior.
Credit will be very scare for a very long time.
Consumers need to change their expectations of life.
Where is it written, that they are entitiled to a home, a new car, designer clothing, and on and on...
Since the 1960's we changed from a society where you worked, then saved, and finally spent your money very prudently, to you work, spend everything you make, and then spend more by borrowing.
The circle is moving back to the old days, and it will be a very painful experience for many.
What our citizens need to do is lower their expectations, awake is morning and be grateful for what they have.
Let's all hope that our next President has the leadership skills to tell it like it is, and inspire our nation work and save.
Posted by Mike | September 29, 2008 12:16 PM
The list just grows, and it will continue to do so until the real estate across America stabilizes and starts to at least stop falling in value. I also wrote on my blog about the bailout and how the U.S. got into this situation.
Posted by Michael Oliver | September 29, 2008 1:15 PM
HOUSE BILL DOES NOT PASS, first round of votes. Now they try to convince 12 NO voters to switch.
Posted by Noah | September 29, 2008 1:54 PM
errm... National City hasn't failed... yet. just saying.
Posted by Nick | September 29, 2008 3:21 PM
oops, thanks Nick...my bad
Posted by Noah | September 29, 2008 3:37 PM
I have CDs at Wachovia. Now that they have/will be taken over by Citibank am I able to withdraw without penalty if I don't want to bank with Citi?
Would you know the answer to this?
Posted by dw | September 29, 2008 11:23 PM
sorry dw, I just dont know
Posted by Noah | September 30, 2008 9:08 AM
Folks: the bail-out...just some banks who made some "bad choices" are we are bailing them out?
NOPE....read on....
A) they seem to be trying hard to shove this thing down the public's (world) throat...."hurry"..."catastrophe"..."sky is falling"...loose jobs...loose homes...
B) the pure math....Bear Stearns, AIG, Fannie Mae, Freddie Mac, Lehman Bros, Merril Lynch.....they are all LARGE losses....but no where NEAR $700 Billion.
'C) what we are fed is: banks made silly choices, smoke and mirrors, cards now fell....we need to bail them out. Simple issue: banks failing / economic fundamentals in shambles. No choice. Bail-out. How much? $700 billion.
D) start to use the word "billion" and "trillion" and you succesfully loose everybody.
Sooo.....let's look a but further and peek behind the curtain
Well...lookie here...what the so-called "bail-out"...ALSO INCLUDES !!!!!
Sec. 101: Extension of alternative minimum tax relief for nonrefundable personal credits.
Sec. 102: Extension of increased alternative minimum tax exemption amount.
Sec. 201: Deduction for state and local sales taxes.
Sec. 202: Deduction of qualified tuition and related expenses.
Sec. 203: Deduction for certain expenses of elementary and secondary school teachers.
Sec. 204: Additional standard deduction for real property taxes for nonitemizers.
Sec. 205: Tax-free distributions from individual retirement plans for charitable purposes.
Sec. 304: Extension of look-thru rule for related controlled foreign corporations.
Sec. 305: Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space.
Sec. 307: Basis adjustment to stock of S corporations making charitable con tributions of property.
Sec. 308: Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands.
Sec. 309: Extension of economic development credit for American Samoa.
Sec. 310: Extension of mine rescue team training credit.
Sec. 311: Extension of election to expense advanced mine safety equipment.
Sec. 312: Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
Sec. 314: Indian employment credit.
Sec. 315: Accelerated depreciation for business property on Indian reservations.
Sec. 316: Railroad track maintenance.
Sec. 317: Seven-year cost recovery period for motorsports racing track facility.
Sec. 318: Expensing of environmental remediation costs.
Sec. 319: Extension of work opportunity tax credit for Hurricane Katrina employees.
Sec. 320: Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone.
Sec. 3 21: Enhanced deduction for qualified computer contributions.
Sec. 322: Tax incentives for investment in the District of Columbia.
Sec. 323: Enhanced charitable deductions for contributions of food inventory.
Sec. 324: Extension of enhanced charitable deduction for contributions of book inventory.
Sec. 325: Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.
Sec. 401: Permanent authority for undercover operations [as related to tax provisions].
Sec. 402: Permanent authority for disclosure of information relating to terrorist activities [as related to tax provisions].
Sec. 501: $8,500 income threshold used to calculate refundable portion of child tax credit.
Sec. 502: Provisions related to film and television productions.
Sec. 503: Exemption from excise tax for certain wooden arrows designed for use by children.
Sec. 504: Income averaging for amounts received in connection with the Exxon Valdez litigation.
Sec. 505: Certain farming business machinery and equipment treated as five-year property.
Sec. 506: Modification of penalty on understatement of taxpayer’s liability by tax return preparer.
Sec. 601: Secure rural schools and community self-determination program.
Sec. 602: Transfer to abandoned mine reclamation fund.
Sec. 702: Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados and flooding.
Sec. 704: Temporary tax-exempt bond financing and low-income housing tax relief for areas.
Sec. 709: Waiver of certain mortgage revenue bond requirements following federally declared disasters.
Sec. 710: Special depreciation allowance for qualified disaster property.
Sec. 711: Increased expensing for qualified disaster assistance property.
Seriously, did they think no one was going to read this thing? “Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands”? “Seven-year cost recovery period for motorsports racing track facility”? “Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds”?
What pray tell is Sct #322 tax incentives if you invest in D.c. ????
Hope you enjoyed the ride. :)::)::)::)
Posted by Anonymous | October 7, 2008 7:13 PM