Read a Pacific Northwest, liberal perspective on world, national, and local politics. From majestic Redmond, Washington - the Northwest Progressive Institute Advocate.

Saturday, October 11, 2008

What a week: Markets collapse, Wells Fargo to buy Wachovia instead of Citigroup

It's been a pretty crazy week on Wall Street - and across the globe.

Markets around the world have been sliding downwards all week, even after the House of Representatives finally caved last week and passed the Bush bailout bill.

It was the worst week ever for the Dow Jones Industrial Average, which fell below 9,000 for the first time in years. On top of that, the S&P 500 has been dropping for eight consecutive days. It's the worst drop since 1933 and the Great Depression. The Dow and the S&P 500 have each lost over 18% of their value in the last five days of trading as nervous investors continue to sell shares.

Here's a summary of some of the lowlights this week:

  • Midweek, the government of Iceland nationalized that nation's remaining big banks, which had been collapsing under a mountain of foreign debt, and closed trading on the Reykjavik stock exchange until October 13th. There are fears the government itself may ultimately have to declare bankruptcy soon if it does not receive financial assistance.
  • Standard & Poor's suggested that General Motors and Ford, the two biggest American carmakers, may be forced into bankruptcy. The report caused shares of both companies to lose almost fifty percent of their value.
  • Billionaire Sumner Redstone, whose family company National Amusements, Inc. is a majority owner of CBS and Viacom, was forced to sell a fifth of his family's stake in both companies to raise cash to pay off loans
  • On Tuesday, the Fed took the unprecedented step of offering to buy the short-term debt that finances many companies' day-to-day operations. The commercial paper market is falling apart, squeezing companies that need credit to grow and expand.
Meanwhile, the battle between Citigroup and Wells Fargo to take over part or all of Wachovia finally came to an end after Citigroup walked away, leaving Wells Fargo free to merge with the Charlotte, North Carolina-based financial services giant.

If you haven't been following along, here's a quick history of the tug of war between Citigroup and Wells Fargo from Wikipedia:
On September 29, 2008, Wachovia announced its intention to sell its banking operations to Citigroup for $2.2 billion in an open bank transaction facilitated by the Federal Deposit Insurance Corporation; according to the FDIC, Wachovia "did not fail." Wachovia would have continued to operate as a separate, publicly traded company as the owner of Wachovia Securities, AG Edwards and Evergreen Investments. The sale was agreed to be completed by December 31, 2008.
I blogged on this development when it was announced.

But then this happened:
However, on October 3, 2008, Wells Fargo and Wachovia announced they had agreed to merge in an all-stock transaction requiring no FDIC involvement, apparently nullifying the Citigroup deal. Wells Fargo announced it had agreed to acquire Wachovia for $15.1 billion in stock.

Wachovia prefers the Wells Fargo deal, as it is a much higher valuation than the Citigroup deal, it keeps the banking and brokerage businesses together, and has less of an overlapping territory between the banks, as Wells Fargo is dominant in the West and Midwest compared to the redundant footprint of Wachovia and Citibank along the Atlantic Seaboard and in the South.

Citigroup is exploring their legal options, demanding that Wachovia and Wells Fargo cease discussions, citing an exclusivity agreement between Citigroup and Wachovia. The deal still requires shareholder and regulatory approval.

On October 4, 2008 a New York judge issued a temporary injunction blocking the transaction from going forward while the situation is sorted out. However, this ruling was overturned.

On October 9, 2008, Citigroup abandoned their attempt to purchase Wachovia, allowing Wells Fargo to proceed with a transaction instead. However, Citigroup is still pursuing its $60 billion claims against Wachovia and Wells Fargo for alleged violations of the exclusivity agreement.
The combined company, which is expected to keep the Wells Fargo name, will hold $1.42 trillion in assets. The deal nearly doubles Wells Fargo's stores and ATM network, greatly strengthing its footprint across the eastern United States.

Citi, of course, was furious when Wells Fargo announced its intention to buy all of Wachovia, not just the company's banking operations:
Wachovia’s agreement to a transaction with Wells Fargo is in clear breach of an Exclusivity Agreement between Citi and Wachovia. In addition, Wells Fargo’s conduct constitutes tortious interference with the Exclusivity Agreement.

The Exclusivity Agreement provides, among other things, that Wachovia will not enter into any transaction with any party other than Citi, and will not participate in any discussions or negotiations with any third party. The Exclusivity Agreement also provides that the parties would be irreparably harmed by any breach of the agreement and that the remedy of specific performance of the agreement is appropriate.
Citigroup initially went to court to block the deal, but apparently also began rethinking the wisdom of acquiring Wachovia, which has a mountain of bad assets.

The Wells Fargo deal won't put taxpayers on the hook for anything, unlike Citigroup's proposed buyout of Wachovia's banking operations - a deal brokered by nervous federal regulators.

Citigroup will no longer try to block the Wells Fargo-Wachovia deal, but it will continue to seek some $60 billion in legal damages:
Citi said: "Without our willingness to engage in this transaction, hundreds of billions of dollars of value would have been seriously threatened. We stood by while others walked away. Now, our shareholders have been unjustly and illegally deprived of the opportunity the transaction created."

Citi believes that it has strong legal claims against Wachovia, Wells Fargo and their officers, directors, advisors and others for breach of contract and for tortious interference with contract. Citigroup plans to pursue these damage claims vigorously on behalf of its shareholders. However, Citigroup has decided not to ask that the Wells Fargo-Wachovia merger be enjoined.
Isn't it great that Citigroup gets to have its day in court?

Always remember, nine tenths of the cases heard by American courts deal with corporate law. Our government and our common wealth are what makes economic prosperity possible. We are seeing and feeling the consequences of greed, privatization, and deregulation at this very moment. We are witnessing the ramifications of eight years of Bush economics.

The right wing agenda is a failure. The time is ripe for a new Progressive Era to restore America's financial health and national security.

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