Remember yesterday when I talked about Wachovia remembering my original post about them hunkering down?  Looks like they hunkered a bit too far.  To the template!

What Happened?
Amid the fallout of the WaMu failure and takeover, rumors about a Wachovia failure came to the front.  The funny thing about these failures is they’re self-fulfilling.  Over the weekend the rumors were too much for some people, who took their money out of Wachovia.  Had people continued this the bank would have failed.  Be clear, Wachovia did not fail.  Citibank, Wells Fargo, and a Spanish bank were the big contenders to buy Wachovia, Citi won.

Why Wachovia?
Wachovia bought Golden West in 2006 which included a large portfolio of the mortgages we would now call “bad”.  Despite Wachovia’s professed strength, it was not enough to get them by.  They tried everything to raise enough cash, but in the end the media and bad loans were too much.  Rumors started flying last week after failed attempts to merge with Morgan Stanley and WaMu failed that Wachovia would be forced to sell.  Selling price?  $2.19 billion.  A mere fraction of what it was worth even two weeks ago.  That is about a dollar per share.  Last year, the stock was trading around $55.

Why Did Wachovia Stock Stop Trading?
Sometimes, people that buy and sell stock get things wrong.  The rumors about a sale were huge Monday morning before the opening bell.  Premarket trading on the rumors sent the price from $10/share down to $0.80/share.  What they didn’t know was the details.  People were dumping the stock because they thought the FDIC took over the bank and forced a sale, which was not the case.  The government did step in after this false rumor and as of this writing (Monday) trading is not allowed of Wachovia stock.  This is rare, but does happen.  Expect trading to resume once more details are available on the transaction.

What Did Citi Get?
Customer service, which it was severely lacking.  On top of that they get Wachovia’s strong and loyal customer base in parts of the country they’ve never been in.  Normal banking operations are often called the retail bank.  Wachovia has a very strong retail presence in the southeast, and has positioned itself in many other markets where Citi was not previously in.

What is Left of Wachovia?
Wachovia did not sell the entire company to Citi.  Wachovia retains ownerships of their investment company, as well as their insurance company.  It will keep the name Wachovia, but for now it will not be a bank.  Given economic cycles, I’ll be you $1,000 that within 10 years the company will be banking again, making the whole prospect of a sale downright silly.  This means that Wachovia stock still has value, and shareholders (remember my parents are) will continue to own the new investment company.

The Weakonomist’s Take:
To be honest, this was a “Me Too” deal.  JP Morgan got some, Bank of America got some, its only natural and Wells Fargo and Citi wanted some action too.  Citi outbid Wells Fargo but it was still a bargain.  To put some perspective on the deal Wachovia paid $26 billion for Golden West, and another $7 billion on 2007 for AG Edwards, a brokerage house.  Wachovia (after buying these 2 companies) was bought for just over $2 billion.  Wachovia has embarrassed itself.

What is Different About WaMu and Wachovia?
Their situations sound similar, but there is a fundamental difference.  WaMu failed.  The government came in and said “you’re done.”  Wachovia was at risk of a failure, so the government suggest they sell.  The deal still needs to be approved by shareholders by a vote.  If Congress approves a bailout that really benefits Wachovia, you could see shareholders rejecting the buy and trying to make it on their own.  This is a long shot though.

Conspiracy Theories?
Of course!  But keep in mind I thought of this myself and don’t truly believe it.  Wachovia’s CEO is Bob Steel.  He left his post under Treasury Secretary Henry Paulson to fill the void left by the incompetent Ken Thompson that Wachovia fired.  Steel and Paulson are old buddies going back to the days of Goldman Sachs, where again Steel worked under Paulson.  Paulson has been pushing this huge $700 billion bailout of the banks.  Maybe Steel set up the sale meetings just in case the plan with Congress failed.  He got an early tip from Paulson that the negotiations fell through and made the final decision to sell.  It’s fun to make up these wild stories, but these are just wild stories.

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Related posts:

  1. Fighting Over Wachovia: Citi And Wells Fargo To Do Battle
  2. Citi On Life Support, Gets A Double Bypass
  3. Another Buy: JP Morgan Chase Becomes JP Morgan Chase WaMu
  4. Shh! Be Vewy Vewy Qwiet, Banks Getting More Than $700 Billion
  5. Trouble in Finance, Industry Shakedown Continues

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