October 2, 2008 – 2:12 pm

After aving raised $36B as of July 15, a $2.2B hich-up should be easy for Citigroup, especially if the Wachovia purchase is such a jem as advertised. Witness:

Citigroup will acquire the banking operations of Wachovia for $2.2 billion in an all-stock deal announced Monday, following much speculation over the weekend about the fate of the nation’s fourth-largest bank.To help finance the transaction, Citigroup said it would raise $10 billion through a sale of common stock and announced it would slash its quarterly dividend yet again, cutting it in half to 16 cents a share to preserve capital.

As part of the deal, Citigroup will acquire Wachovia’s massive deposit network, giving it more than $600 billion in deposits in the U.S., about a 9.8% market share, and broadening its presence in such key regions as the Southeast and the West.

The $600B deposit base and market presence are nice to have, but it was this portfolio of loans that brought Wachovia down. Citi is now the proud owner of that putrid crap:

At the same time, Citi will assume about $53 billion in the Wachovia’s debt and take hold of the same loan portfolio that ultimately sank Wachovia in the end.

Of the more than $300 billion in loans it absorbs, Citigroup said it would cover up to $42 billion of losses on those loans, while the Federal Deposit Insurance Corporation will be on the hook for anything beyond that.

In exchange, the FDIC will get preferred stocks and warrants worth about $12 billion.

It will be interesting to see if the losses exceed $42B. Our initial guess is that they will go far beyond that. Wachovia is cash starved, just like Wa Mu, and the bank is debt ridden. With hardly a buyer in sight, Wachovia was going down in flames and soon there would have been nothing left. The losses in that portfolio would possibly have brought Wachovia down hard and dragged the insiders into the red sea, but now they are saved of course.

That’s not the case for the retail investor, however. Those shares sold for $1. You might ask why Citi raised $10B and cut their well worn dividend for a stock purchase worth only $2.2B. Could it be that the case is much worse than it looks? Sounds a lot like WaMu…

The rapidly evaporating market value of WaMu’s assets is indicative of the biggest problem the nation faces in deciding how best to deal with the mortgage backed securities (MBS) and other toxic instruments that are pulling world markets into recession: How much is this stuff worth?

Well, let’s see. If there is no, and we mean zero, market for it, then that means you can’t sell it. In other words, that means it’s worthless
and the $10B can more accurately be classified as a loan loss reserve. Witness:

First of all, WaMu’s assets could be worth less than originally disclosed in the terms of the deal with JPMorgan, as “negotiated” by the FDIC in what has been purported to be an illegal action by the government in favor of JPMorgan, as we enter this new age of “preemptive” bank failures.
Are we just setting ourselves up for another taxpayer funded bailout of the financial industry and Wall Street a year or two down the road if the market determines that these assets are not even worth the supposed “firesale” prices?

This is where the new well-connected CEO Robert Steal comes in with his insider influence. He’s prompted the FDIC to aggressively search out a savior for Wachovia. So, Blair leaned on Pandit who pushed back and granted the savior a small concession:

The FDIC has basically gift-wrapped Wachovia’s national deposit base and handed it over for free. Citi gets Wachovia’s retail bank, its commercial and investment bank, and its private banking unit, including assumption of debt. In all, that adds up to $700 billion in assets and related liabilities, including $448 million in deposits.

For this, Citi hands over $2.2 billion in stock, and will issue $12 billion in warrants to the FDIC to backstop losses on $312 billion in troubled Wachovia assets. Citi’s loss on those assets will stop out at $42 billion.

But Citigroup’s interests weren’t served; rather, it was Wachovia’s. The proof is that they got bought.

This isn’t a bank failure. Wachovia’s banking operation has been acquired by Citigroup, but it will continue to operate as an “open bank.” If all goes as planned, there will be no changes for Wachovia customers. The Wachovia name will stay on the branches. In fact, the headquarters for the retail bank will remain in Charlotte, N.C.; the investment bank will move to Citigroup headquarters in New York.

Actually, it’s more like force feeding. You can bet Citi wanted no part of that rancid bank or it’s regurgitated Golden West debacle:

the deal for Wachovia comes as a bit of a surprise since Citigroup has been no picture of health lately. Citigroup has posted close to $18 billion in losses over the past three quarters, while taking nearly $50 billion in writedowns on its diverse loan portfolio.

At the same time, Citi leadership has been working to shrink the company.

Citigroup’s Pandit, who was installed as the company’s chief executive last December, unveiled plans in May to unload more than $400 billion in assets over the next few years in the hopes of turning the company around.

It’s a sharp U-turn to go from unloading $400B to gobbling up Wachovia over the weekend. But there’s one little benefit to having massive amounts of toxic loans you can’t get off your books. It’s that the SEC continues making up the rules as it goes along. Now the SEC is saying that you can value them in any way you please. In other words just ignore FAS 157!

But what, oh what, is the rush to do of all of this? Let’s ask Mr. Paulson, the former Goldman Sachs CEO who now masquerades as a public guardian.

“A failure of Wachovia would have posed a systemic risk,” Paulson said in a statement.

Really! And what has Citigroup now become other than a systemic threat? But this is the tortured reasoning it takes to bail out your thugs when the cost is placed squarely on the taxpayer.


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