Tag Archives: Wachovia

Wachovia Says Court Order Doesn’t Invalidate Wells Fargo Bid

By Rick Green

Oct. 5 (Bloomberg) — Wachovia Corp., the North Carolina bank that’s received bids from two suitors, said a court order preserving Citigroup Inc.’s exclusive right to negotiate hasn’t derailed a higher offer from Wells Fargo & Co.

The order by New York State Supreme Court Judge Charles Ramos yesterday doesn’t have “any effect on the validity of the Wells Fargo agreement,” Charlotte-based Wachovia said today in a statement distributed by PR Newswire, adding that the latter deal requires no government assistance. “The agreement is in the best interests of shareholders, employees, creditors and retirees as well as the American taxpayers.”

Citigroup, the biggest U.S. bank by assets, is bidding for Wachovia while trying to rebuild after losses tied to the collapse of mortgage markets. The New York-based bank wants to buy parts of Wachovia for about $2.16 billion, and San Francisco-based Wells Fargo is offering about $15 billion for the whole company.

Last Updated: October 5, 2008 13:44 EDT

Citigroup Girds for Wachovia Takeover Battle With Wells Fargo

By David Mildenberg and Josh Fineman

Oct. 4 (Bloomberg) — Citigroup Inc., hobbled by $61 billion of subprime-related losses, now faces its biggest takeover battle in a fight with Wells Fargo & Co. for control of Wachovia Corp.

Citigroup fell as much as 21 percent yesterday in New York trading after Wells Fargo, the biggest U.S. bank on the West Coast, agreed to acquire all of Charlotte, North Carolina-based Wachovia for $15.1 billion. The bid trumped Citigroup’s government-backed offer of $2.16 billion for Wachovia’s banking operations.

“The taxpayer doesn’t pay a penny” for the Wells Fargo deal, Wells Chairman Richard Kovacevich, 64, said yesterday in an interview. His company’s bid is superior to Citigroup’s also because it’s a higher price and the combining banks “share similar cultures and values.”

Vikram Pandit, Citigroup’s chief executive officer, is counting on the Wachovia purchase to help rebuild after three quarters of losses totaling more than $17 billion. The bank’s market value has dropped 38 percent this year to about $100 billion, leaving it below Wells Fargo. If Wells Fargo winds up with Wachovia, it would creep up on its New York rival with deposits of $787 billion, compared with Citigroup’s $826 billion.

Pandit insisted Citigroup will prevail, citing an exclusive agreement signed by Wachovia. Kovacevich told investors during a conference call the deal with Wachovia is “solid.”

Citigroup dropped 18 percent to $18.35 yesterday in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21. Wells Fargo declined 1.7 percent to $34.56.

Citi’s Claim

Citigroup demanded Wells Fargo abandon the takeover. Buying Wachovia would give Citigroup the third-biggest U.S. bank network and cement its status as the nation’s largest lender by assets.

“Any such agreement between Wachovia and Wells Fargo is illegal,” Pandit, 51, said in the e-mail yesterday. “We continue to vigorously pursue Citigroup’s interest and rights in completing this transaction.”

Citigroup may take legal action to block the deal, or may increase its offer, said a person with knowledge of the deliberations.

“I’m still not convinced that Citigroup can force this sale to happen,” said Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans and a former M&A lawyer at Sullivan & Cromwell. “Citigroup may be facing the chance to get themselves a small settlement, and that’s a nice shot in the arm for a company that’s struggling.”

A court challenge and a bidding war aren’t the only possible roadblocks for Wells Fargo: Its offer may lead to a face-off with federal regulators.

Regulators

The Federal Deposit Insurance Corp., helped broker Citigroup’s purchase when Wachovia’s health faltered. Chairman Sheila Bair said until a review of Wells Fargo’s offer is completed, the agency will stand behind the Citigroup deal.

“We wanted to make clear that until things are settled with what’s going on with this Wells bid, that the Citi deal was still there,” Bair said yesterday in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be broadcast over the weekend. Bair said the FDIC is reviewing the offer, and she told Hunt: “You shouldn’t” assume the U.S. opposes Wells’s offer.

Other bank regulators said they haven’t evaluated Wells Fargo’s offer.

“We have not yet reviewed the new Wells Fargo proposal and the issues that it raises,” the Federal Reserve and Office of the Comptroller of the Currency said today in a statement. “The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.”

Wells Fargo’s Plan

Wells Fargo, run by Chief Executive Officer John Stumpf, had avoided bets on the subprime-mortgage market that contributed to $588 billion in writedowns and credit losses for financial firms worldwide. Wachovia in 2006 purchased Oakland, California-based Golden West Financial Corp. for $24 billion, acquiring a portfolio of option-adjustable rate mortgages that helped lead to $9.6 billion in losses this year.

Wells Fargo, in bidding for Wachovia, deviates from a strategy of seeking smaller acquisitions with less risk to fill gaps in its branch network. After the combination, the bank would have $1.42 trillion in assets, which may rank third in the U.S. depending on what other bank mergers are completed. It would have 10,761 branches in 39 states.

“Citi’s purchase was too cheap for the assets and operations involved,” said Jason Pride, research director at Haverford Trust Co. in Haverford, Pennsylvania. “It’s an excellent strategic deal for Wells Fargo given the geography of the branch network.”

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: October 4, 2008 00:00 EDT

Wells Fargo to buy Wachovia

Wachovia’s chief executive Robert Steel believes that the deal would enable the bank to remain intact and preserve the value of an integrated company without government support. (Paul Sakuma/The Associated Press) [

Troubled Wachovia Seeks Out a Merger

Wachovia Corp. has entered into preliminary talks with a handful of possible buyers — the latest in a parade of banks to look for safety in the arms of a suitor amid concerns that the weak economy is pushing them deeper into peril.

The talks came as Washington Mutual Inc.’s late-Thursday failure rattled the shares of other troubled banks. Shares in Wachovia fell 27% on Friday as investors fretted about its massive mortgage portfolio.

[Wachovia image] Getty Images

People walk by a Wachovia branch in New York City.

Investors are growing concerned that a host of banks nationwide, both large and small, could come under fresh pressure to either raise more capital or else find someone willing to buy them. The trouble stems in part from the fact that a broad range of borrowers, not just mortgage holders, are now starting to default on their debt. For instance, about 2.4% of payments on credit cards are more than 90 days overdue, according to the Federal Deposit Insurance Corp., the highest level since 1991.

Wachovia is talking to potential buyers including Wells Fargo & Co., Banco Santander SA of Spain and Citigroup Inc., according to people familiar with the situation. Wachovia officials don’t believe they need to rush into a deal, and the bank isn’t feeling immediate pressure on its financial condition, people familiar with the company said.

Wachovia declined to comment on the discussions. Earlier Friday, a spokeswoman said the bank is “aggressively addressing our challenges.” Since June, Wachovia has opened 745,000 new checking accounts, she added, indicating confidence among its customers.

Banco Santander, Citigroup and Wells Fargo declined to comment.

In a sign of the depth of tension among financial institutions broadly, banks on Friday remained very skittish about making short-term loans to each other — a crucial ingredient in the banking business. The rate on three-month loans between banks eased slightly, to 3.7%, on Friday. Still, that’s almost double the level that would be expected if the market were more stable.

This reluctance to lend has implications for a broad swath of the business community: Interest rates on short-term loans that corporations routinely use to fund day-to-day expenses also remain extremely elevated.

For financial institutions, “the clock is ticking a heck of a lot faster today,” said Matthew Kelley, a bank analyst at investment-banking firm Sterne, Agee & Leach Inc. The federal government’s seizure of WaMu in the largest bank failure in U.S. history shows that regulators are “not going to mess around” with shaky banks and thrifts, especially given the chaos gripping financial markets.

The structure of J.P. Morgan Chase & Co.’s purchase of WaMu’s banking operations also sent shudders through the market for investment-grade bonds. In the deal, bondholders — who typically have a priority claim over common-stock shareholders — are likely to recover only between zero and 50 cents on the dollar, according to an analysis by independent research firm CreditSights. That could sour investors’ appetite for a wide range of financial-industry bonds.

Washington Mutual’s seizure by the government late Thursday helped push financial stocks lower on Friday. Some of the hardest hit stocks included BankUnited Financial Corp., of Coral Gables, Fla., which fell 21% to 79 cents on Nasdaq and Downey Financial Corp., Newport Beach, Calif., down 48% on the New York Stock Exchange.

Tom Richlovsky, chief financial officer at National City, said the Cleveland-based bank’s 44% stock-price drop Friday is “a temporary, irrational phenomenon.” The decline “ignores the fact that the difference between [National City and WaMu] is like night and day,” he said. National City’s woes relate to its abandoned push into mortgages in places like Florida, far from its home turf.

[Stress on the System chart]

Overall, stocks jumped in Friday trading, largely on renewed hopes that a proposed $700 billion government bailout of the financial sector might be back on track.

U.S. leaders and bank executives hope that the federal bailout package being hammered out in Washington will help steady the industry by giving banks a way to shed some of their most toxic mortgage assets. The vast majority of U.S. banks also remain well-capitalized, giving them a cushion against the sluggish economy and further declines in housing prices.

Across the country, WaMu’s branches opened as usual Friday morning, albeit under new owner J.P. Morgan Chase & Co., which bought WaMu’s banking operations for $1.9 billion.

At a Chicago WaMu branch on Friday, Catriona Johnson, 27 years old, said she had come intending to take out all her money. “I wanted to close my account and hold it in my bra or something,” she said. However, after being told that her account balance is federally insured, Ms. Johnson, the administrative coordinator at a Chicago company that tests homes for the presence of toxins, decided to leave the money alone for now.

WaMu’s seizure by the government eliminated one of the shakiest institutions. But the fact that no one was willing to buy its vast consumer-banking business until the institution actually failed shows how deep the industry’s woes are. In recent years, its prized network of more than 2,200 branches would likely have triggered a bidding war among suitors.

In recent weeks, Wachovia had been talks about a potential merger with Morgan Stanley. But that scenario was apparently put on hold by Morgan’s move Sunday night to convert into a bank holding company instead of an investment bank.

In addition to the problem of widening defaults on credit-card debt, delinquent loans on non-residential real estate rose 20% in the second quarter from a year earlier. Late payments on bread-and-butter business loans, which account for the bulk of the loan portfolios at many banks, jumped 15%. All those percentages are expected to keep rising.

“The housing thing is kind of behind us” in terms of the write-downs, said Ted Salter, chief financial officer of Gateway Financial Holdings Inc., a bank-holding company in Virginia Beach, Va. Now it has “moved into commercial loans, construction loans, development loans,” he said. “Next week, it’ll be something else.”

The 13 bank failures so far this year don’t come close to the savings-and-loan crisis of the late 1980s, when hundreds of shaky institutions failed, costing taxpayers about $130 billion. By other measures, though, some bank executives say the current turmoil is worse, since it is more geographically widespread and involves a broader mix of loans.

Alan Worrell, chief executive of Sterling Bank, a Montgomery, Ala.-based unit of Synovus Financial Corp., says the industry’s problems now are “far worse” because the real-estate market is so backlogged with unfinished homes and other construction projects that it will haunt lenders and borrowers for years.

After generating record profits during the housing boom, it has taken only a year for the banking industry’s profitability to evaporate. Second-quarter profit fell to just $5 billion from $36.8 billion a year earlier, its second-lowest level since 1991.

About 18% of federally insured lenders lost money in the second quarter. Dividends paid to bank-stock investors plunged by $35 billion in first six months of 2008.

Third-quarter results could show the industry’s first overall loss since the fourth quarter of 1990. One big reason: Banks need to set aside more money to cover loans that have gone sour, a move that cuts deeply into profitability.

Forced to conserve capital in order to cover ballooning losses, commercial banks are far more reluctant to lend money than they were just even a few months ago. Of 3,000 companies surveyed by RBC Capital Markets, 25% said it is harder to borrow money than 90 days ago.

There isn’t a clear way out of trouble. There aren’t many investors willing to take a bet on banks right now, particularly given WaMu’s example: In April, it received a $1.35 billion investment from the giant investment firm TPG — which lost the entire amount this week when WaMu failed.

Aside from J.P. Morgan’s purchase of WaMu, few weak banks have been snapped up by stronger ones, partly because would-be buyers have their own headaches.

Some banks are paying unusually high interest rates on deposits to replenish their capital levels. That strategy raises red flags with many bankers because it is often viewed as a sign of desperation.

It can also be a double-edged sword: Banks that don’t want to compete on rates can’t attract deposits that are critical to making loans. In any case, that strategy didn’t work for WaMu, which paid some of the highest rates in the country.

Saddled with a mountain of troubled adjustable-rate mortgages inherited through its 2006 takeover of Golden West Financial Corp., Wachovia has seen its financial condition weaken. The bank’s CEO, Robert Steel, has said the bank has ample capital, noting that it added $20 billion to its certificate-of-deposit balances last summer due in part to a high-interest-rate promotion that began in June.

“I spend a lot of time trying to lay out the fact that we believe we’re liquid,” he said earlier this month. “We believe we have the ability with our current financial position to respond to issues, and we also have some other levers to pull” to improve its financial position, he said.

—Carrick Mollencamp, Ilan Brat and Liz Rappaport contributed to this article.

Write to Robin Sidel at robin.sidel@wsj.com, David Enrich at david.enrich@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com

Wachovia, Looking for Help, Turns to Citigroup

 

Published: September 26, 2008

As concern spread Friday that more banks might run into trouble even with a $700 billion rescue for the financial system, Wachovia, one of those hardest hit by the housing crisis, became the latest to reach for a lifeline.

Weighed down by a huge portfolio of troubled mortgage loans, the nation’s fourth-largest bank by assets entered into preliminary deal talks with Citigroup, and extended feelers to Wells Fargo and Banco Santander of Spain, people briefed on the matter said. The talks are early, and no deal may emerge from them. But it appeared Wachovia was seeking potential alternatives should the bailout plan being debated in Washington not pass quickly, or fail to provide enough help.

Wachovia has a $120 billion portfolio of mortgages loaded with adjustable interest-rate loans that allow borrowers to skip part of their monthly payments, much of which it inherited from its ill-timed acquisition of Golden West, the big California lender, at the end of the housing boom in 2006.

In July, the bank hired Robert K. Steel, 56, a former vice chairman at Goldman Sachs, from the Treasury Department, where he worked with Treasury Secretary Henry M. Paulson Jr., trying to resolve the mortgage market crisis. Mr. Steel vowed to keep Wachovia independent and sought to raise $5 billion in capital over the next year by selling noncore assets.

But the bank’s shares, which are down nearly 80 percent in the last year, plunged 27 percent Friday, to $10, as investors wondered about its health after the government’s seizure of Washington Mutual on Thursday.

“Wachovia has a real problem,” said Len Blum of the investment bank Westwood Capital. “Option ARMs are probably the worst mortgage products out there and Wachovia has a lot more of them than it has in tangible equity.”

A spokeswoman for Wachovia, Christie Phillips-Brown, said: “We are aggressively addressing our challenges and are working to strategically strengthen and manage capital and liquidity in this challenging environment.” The bank, she added, expects “that the Treasury plan under consideration by Congress is a constructive and important step toward restoring confidence and stability in our financial system.”

The discussions involving Wachovia and other banks came as Congress sought to break an impasse over the rescue plan proposed by Mr. Paulson, which would buy soured assets from troubled banks to prevent further failures. But no matter what a final package contains, analysts say it is unclear how much it would help a number of regional and community banks stretched by falling home prices.

“The Treasury Department plan will not prevent more bank failures,” said Chip MacDonald, a lawyer who advises banks at the law firm Jones Day. “The plan proposes to make purchases based on market prices, which are likely to be at a loss to the sellers. Such losses will deplete the sellers’ capital, which only strongly capitalized institutions can absorb without raising additional capital or a merging with a stronger bank.”

The Federal Deposit Insurance Corporation deemed 117 banks “troubled” at the end of June, up from 90 in the first quarter. Sheila C. Bair, the F.D.I.C. chairwoman, said Thursday that more failures are likely, although they would constitute only a handful of the nation’s 8,400 banks.

Many small and midsize banks do not have much exposure to the assets that are hardest to sell. “The sludge is primarily in the structured products, exotic residential mortgages and commercial mortgage-backed securities,” said Gerard Cassidy, a banking analyst at RBC Capital Markets.

Those securities have tended to be held by big banks and Wall Street firms. Small and midsize banks, by contrast, have built up big positions of corporate and commercial real estate loans for which there is a market, albeit a depressed one. Unless the government offers higher prices, it is unclear how many of them would use the fund.

What the bailout might do, however, is relieve pressure on the government’s insurance fund, which guarantees deposits of up to $100,000 per account holder if a bank fails. As of the end of June, the F.D.I.C. fund stood at about $45.2 billion after suffering a nearly $9 billion loss from IndyMac Bank’s sudden collapse.

“It’s not exactly a panacea,” said Mr. MacDonald. “For stronger banks, the plan will help them reduce risk, attract new capital or merger partners. For failing banks, it will help the F.D.I.C. resolve them at a lower cost to its deposit fund.” Instead, the Treasury Department coffers would directly absorb more of the losses.

Those concerns were reflected in the stock market Friday, where investors pushed down financial shares as conditions for banks continued to worsen. In addition to mortgage defaults, losses tied to auto loans, credit cards and commercial real estate are increasing along with unemployment. Analysts now project that several hundred banks could fail over the next three years, far more than the roughly 150 or so that they estimated this summer.

Smaller regional banks with troubled loan portfolios came under particular assault. Shares in National City, based in Cleveland, sank 25.7 percent to $3.71 even as the bank sought to assure investors that it remained well-capitalized and had not had an outflow of customer deposits, as Washington Mutual did.

Thomas A. Richlovsky, National City’s chief financial officer, said in an interview that investors had the impression his bank was a savings and loan institution regulated by the Office of Thrift Supervision, as Washington Mutual was. “That is like saying Tina Fey is Sarah Palin,” he said. “We are not a thrift, we are not a mortgage company, we are a bank. National City has no option-ARM mortgages on its books but is selling off a portfolio of troubled home equity, subprime mortgage and other bad loans.”

Downey Financial Corporation, a $13 billion savings and loan saddled with option-ARM mortgages, slid 48 percent to $2.03 Friday. Earlier this month, the Office of Thrift Supervision told Downey to provide a detailed plan to reduce its assets and strengthen management.

Shares in Morgan Stanley, which suspended merger talks with Wachovia last week after the investment bank changed into a bank holding company, also dropped 8.7 percent to $24.75, after investors began to doubt that the Mitsubishi UFJ Financial group of Japan would follow through on a commitment to pump around $8 billion in fresh capital into the bank.

In a memo to employees Friday, John J. Mack, Morgan Stanley’s chief executive, said that the Mitsubishi deal was moving ahead “as anticipated” and that the two banks were exploring different ways in which they could collaborate.

Michael J. de la Merced contributed reporting.

Wachovia Credit-Default Swaps Soar to Record After WaMu Failure

By Shannon D. Harrington and Abigail Moses

Sept. 26 (Bloomberg) — The cost to protect against a default by Wachovia Corp., the fourth-largest U.S. bank, soared to distressed levels after Washington Mutual Inc. was seized by regulators and its deposits sold off to JPMorgan Chase & Co.

Credit-default swaps protecting $10 million of Wachovia bonds from default for five years traded for as much as the equivalent of $3.5 million initially and $500,000 a year, according to broker Phoenix Partners Group. That compares with $670,000 a year and no upfront payment yesterday.

Wachovia’s 2006 purchase of Golden West Financial Corp. saddled the company with option adjustable-rate home loans that allow borrowers to make minimum payments less than what they owe, which is then added to their total debt balance. With JPMorgan saying they expect 20 percent losses on WaMu’s option ARM portfolio, Wachovia may need to raise $11 billion in capital to protect against losses from its loans, Deutsche Bank AG equity analyst Mike Mayo said in a note to clients today.

Wachovia is an “attractive target,” though “it’s not clear who wants to take them on at this time,” Bert Ely, president of consulting firm Ely & Co. in Alexandria, Virginia, said today in a Bloomberg Television interview.

Seattle-based Washington Mutual was taken over by the government yesterday after customers had withdrawn $16.7 billion from accounts since Sept. 16. New York-based JPMorgan acquired WaMu’s branch network for $1.9 billion.

Potential Suitors

The initial cost for credit-default swaps on Wachovia bonds dropped back to 25 percentage points, or $2.5 million, after the New York Times reported the Charlotte, North Carolina-based bank is in preliminary talks to merge with Citigroup Inc.

Wachovia has entered into preliminary discussions with banks including Spain’s Banco Santander SA, San Francisco-based Wells Fargo & Co. and New York-based Citigroup, the Wall Street Journal reported, citing a person familiar with the situation.

Morgan Stanley broke off merger talks with Wachovia to focus on a partnership with Japan’s Mitsubishi UFJ Financial Group Inc., CNBC reported earlier this week.

“We may yet see that type of deal,” Ely said. Morgan Stanley, along with Goldman Sachs Group Inc., “at some point in time need to acquire a large banking franchise, and Wachovia certainly becomes a very attractive target.”

Wachovia Bonds

Wachovia’s credit-default swaps are trading at levels that imply a 63 percent chance the company will fail within five years, according to a JPMorgan valuation model. That assumes bondholders would receive 30 cents on the dollar in the case of a default.

Wachovia’s $750 million of 4.375 percent bonds due in 2010 plunged 29 cents to 51 cents on the dollar, as of 1:03 p.m. in New York, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service. The yield increased to 51.6 percent, or 49.6 percentage points more than Treasuries with similar maturities.

“We are focused on managing our company and serving our customers with excellence,” Wachovia spokeswoman Christy Phillips-Brown said. “Our core franchises — retail banking, the nation’s third largest brokerage firm, wealth management and our commercial and corporate banking activities — are extremely valuable and continue to operate well relative to our competition.”

Chief Executive Officer Robert Steel, a former Treasury official who was hired to replace Kennedy Thompson in July, has said he’s firing workers and cutting more than $1.5 billion in annual costs to cope with losses from the loan portfolio.

Morgan Stanley

Credit-default swaps on Morgan Stanley also rose to distressed levels today, coming close to a record high reached last week after Lehman Brothers Holdings Inc. filed for bankruptcy protection. Morgan Stanley and Goldman both won approval from the Federal Reserve to become bank holding companies, moving away from a business model that investors have deemed too dependent on borrowed money, or leverage.

Morgan Stanley contracts traded at 17.5 percentage points upfront in addition to 5 percentage points a year, according to Phoenix Partners. That compares with 783 basis points a year and no upfront payment yesterday, CMA data show. They earlier traded at a record 22 percentage points upfront, Phoenix prices show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.

Goldman, Citigroup

Credit-default swaps on other banks also rose today. Contracts on Merrill Lynch & Co., which agreed to sell itself to Bank of America Corp. last week as Lehman collapsed, rose 94 basis points to 415, according to CMA. Goldman contracts rose 86 to 449.

Contracts on Citigroup jumped 115 basis points to 325 basis points, CMA data show. Bank of America rose 13 basis points to 161 basis points, Wells Fargo increased 38 to 159 and JPMorgan climbed 34 basis points to 156 basis points.

Contracts on the Markit CDX North America Investment Grade Index, a benchmark gauge of credit risk linked to 125 companies in the U.S. and Canada increased 2.5 basis points to 163.5 basis points, Phoenix prices show.

Contracts on WaMu traded at 61 percentage points upfront today, Phoenix prices show, down from 74 percentage points earlier.

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Abigail Moses in London Amoses5@bloomberg.net

Last Updated: September 26, 2008 18:13 EDT