Friday, October 03, 2008

The Shortlist: Wells Fargo On The Move

Two weeks ago I offered a shortlist of five individuals or corporations whose wealth and power made them ideally suited to play roles in turning around the US banking system. On my list were Wells Fargo, JP Morgan, Warren Buffett, WalMart, and General Electric. I identified each participant because, in my judgment, their presence would be a vote of confidence to an increasingly fragile banking system that was having trouble raising capital. I have now updated this list three times as first Warren Buffett stepped up and took a big position in Goldman Sachs. JP Morgan joined in by buying the assets of troubled West Coast thrift, Washington Mutual. Today in the biggest news of all, Wells Fargo has offered to buy Wachovia in a deal that will not require FDIC involvement. Of all the deals announced so far, the Wells Fargo - Wachovia deal is the most important because it is the biggest and is directly involved at the heart of the mortgage crisis. Wachovia, which was formerly one of the most respected banking institutions in the world, fell from grace after its ill-timed purchase of Golden West Financial, a California based thrift. Golden West was one of the leading sellers of an exotic home mortgage called "Pick a Pay", which as its name implies, allowed mortgagees to pay varying amounts on their monthly mortgage payments, even amounts less than enough to cover interest. Pick-a-Pay losses mounted sharply after Wachovia took over Golden West, casting a pall over Wachovia and causing worries that the bank would not survive. What makes the Wells Fargo takeover bid even more interesting is that it tops a deal that the FDIC engineered last week in which Wachovia's banking operations were sold to Citigroup for $2 billion. The Citigroup deal did not include Wachovia's large brokerage and mutual funds operations. Wells Fargo was apparently involved in the bidding for Wachovia all along, but did not have the winning bid in the end. They have clearly rethought their bid and upped the ante considerably. Their bid today is for the entirety of Wachovia, including the brokerage and mutual funds operations, and totals $15 billion. This has created a dicey situation between Citigroup and Wells Fargo and threats of lawsuits are already in the air. It will be very difficult, however, for Citigroup to stay in the battle for Wachovia with such a wide gulf between their bid and that of Wells Fargo's. At the very least, Citigroup is going to have to raise their price and that probably still won't be enough because Wells Fargo's offer takes the FDIC off the hook, while Citigroups keeps them on. Here's the bottom line. This battle for Wachovia could mean we are nearing the bottom of the credit crisis. When two large healthy banks go toe to toe over a bank that only weeks ago was rumored to be close to bankruptcy, it means that big, smart money believes the worst is about over and good values are present. Today the House of Representatives passed the bank rescue plan. The outcome was in doubt until just hours before the vote. The bank rescue plan will free up critical liquidity and allow banking in this country to slowly return to normal over the coming year. It won't happen overnight and there will still be plenty of bad news coming on the economy and banking. Nonetheless, a fight breaking out for Wachovia, the passage of the bank rescue plan, and the courageous actions of JP Morgan and Warren Buffett will undoubtedly improve America's confidence in the US economy and its banking system.