Monday, September 29, 2008

Bye Bye Wachovia!

Happy Monday Everyone!

What a way to start off "National Bailout Day" as Congress prepares to cast their historic on the mother of all stick saves. Wachovia was taken over by Citigroup this morning. Wachovia's stock was trading under $1 on the news. The FDIC takes no immediate hit from the deal.

I bet the death of Wachovia has Wall St. shaking in their boots as the house gets ready to vote on the bailout . Will the Wachovia news change any ones vote in the house? Who knows! Lets see what happens.

Here is the Wachovia news from Bloomberg:

"Sept. 29 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, agreed to buy the banking operations of Wachovia Corp., the Charlotte, North Carolina-based lender best by mortgage losses and a 74 percent drop in market value this year.

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."

My Take:

Meredith Whitney was on CNBC this morning as they discussed the Wachovia news and made some interesting points . Her assumption here is that Citi jumped on this deal and agreed to take Wachovia's stunning $42 billion in losses only after getting a wink and a nod from the Treasury that these loans will be taken off their books after the bailout passes at ABOVE market prices.

Folks, this bailout stinks to high heaven. The Treasury is going to rape the taxpayer by over paying for these loans. The bailout hasn't even been passed yet and its already being used as a giant mop that is going to be used to suck up bad assets at above market prices.

Meredith was also asked if she thought the bailout would make money. She flat out said "No" because the Treasury is buying the bad loans now as housing prices continue to fall. This almost guarantees that they will over pay because the cleansing of home prices is not done.. The Treasury said last night that this bailout will help stabilize prices. I say bull****.

How does this stop home prices from dropping? No one can buy the homes at these bloated prices because the lending products are not there to allow them to do so.

It appears to me that the banks that survive this mess will be so bloated from taking on bad banks like Wachovia that they will have no desire to lend. The bailout will help lighten the load by taking bad loans off the books, but it doesn't guarantee that banks will lend. We are heading into a serious slowdown, and banks are going to need more capital in order to survive the global slowdown. As a result, the bailout cash will be hoarded by the banks to ensure their survival.

Another quick story from Meredith this morning. She had a friend with excellent credit that went to get a jumbo loan from Citi last Friday. Her friend was approved for the loan but at an 11% interest rate! Not exactly a vote of confidence that they want to lend right now.

Bottom Line:

Hold onto your horses today. The DOW is down 160 points on the open. Not exactly a ringing endorsement for the bailout! Wall St. is slowly realizing that the bailout isn't going to be enough to solve this problem.

The house vote on the bailout is going to be very very close. Keep an eye on this today as well.

The Titanic continues to take on massive amounts of water. Stay nimble. The market is very shaky and confidence continues to detiorate.


Jeff said...

DOW now down almost 300. Yikes!

Gold up over $20. Busy morning today. I will have more later. What a morning!

Anonymous said...

Is it me or doesn't it seem strange that even though the banks are supposedly failing, another bank is so eager to scoop the failed one up. Do they just take the good part of the bank and write the toxic stuff off?

Jeff said...


I am going to talk about that tonight. The banks are being broken up into the "haves" and the "have nots".

I think the Fed has a plan setup that will merge the weak banks into the strong ones. CITI was more than happy to piskup assets if the Treasury and the Fed were going to help them navigate this mess.

The problem is they were counting on the bailout money to help them lighten up the "haves" balance sheets.

It will be interesting to see what the Treasury does now that they don't have that $800 billion to throw at the problem.