Wells Fargo was interested in buying Wachovia, but couldn’t beat Citi’s offer of $1. Wells Fargo walked away. But, two days later they came out of the blue and offered 7x as much as Citi. Why? Did they notice something on the books of Wachovia that NO ONE else had previously? Unlikely. No the only explanation is the situation for the deal changed, and Wells Fargo now saw an incentive to buy Wachovia that wasn’t there before.
October 3rd, 2008 is a very important day. George Bush signed into law the $700 billion bailout. Coincidentally, Wells Fargo announced that they would acquire Wachovia the very same day. Hmmmm.
Wells Fargo was one of the first banks to receive financing from TARP, which is the Treasury’s bank of fun. However that is a loan, what they were really after is the free money that came with the bill.
If you don’t know, a tax break is essentially free money. This is especially true for corporations because their taxes are much more complicated. We people look our bank accounts, but corporations look at profits on paper. A tax break is profit on paper. There was a little change in the tax code with the bailout bill that allows for big tax breaks for banks that merge. 22 years ago, Congress successfully closed this loophole, however the Treasury was able to slip this one in. The law is so little known that corporate tax experts have either never heard of it or know exactly what it can do.
It is estimated that Wells Fargo could net a $25 billion tax break by merging with Wachovia. That is larger than the total value of toxic mortgages on Wachovia’s books. Couple that with the cheap loan Wells Fargo gets with the bailout and you’ve basically paid to save Wachovia and bolster Wells Fargo’s already hefty dividend. Wells Fargo knew about this tax change, which is why they came back with an offer 7x as much as Citi’s. Citi didn’t know. They learned about it later and that is when the two banks started fighting over who legally had bought Wachovia. Citi lost, and as a result has to sell off units and lay of folks to the tune of 50,000.
Normally I don’t have any problems with a corporation taking advantage of a tax break. But this is one of those instances where Wells Fargo may have been directly involved with changing the tax code to their advantage. This really sours the deal for Wachovia. As I’ve said in the past, my parents actually own some stock in Wachovia that was inherited from a relative. They’ve followed the news and see the Wells Fargo CEO pimp this “merger of equals thing” and talk about how this merger was always meant to be. What John Stumpf, the Wells CEO, failed to mention to everyone is that this buyout was only meant to be because they arranged a change in tax code.
Again I’m all for mergers and tax breaks, but all this bullhonky corporate philosophy is a lie. It’s saddening to see the propaganda company executives use in order to save face. The same is going on at Bank of America with Merrill Lynch, and will likely continue has other banks merge for this tax break. The total estimated value of this tax break is $140 billion. 140 + 700 is a $840 billion bailout.
Perhaps this could be the reason Goldman Sachs, Morgan Stanley, and American Express have become “banks” and GMAC (as in GM financing) is pulling the same stunt. You’re going to see many more mergers and many more companies “becoming banks” in order to get access to the TARP and the tax break.
 By The Weakonomist |
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