Under the agreement, Citigroup will absorb up to $42B of losses on a $312B pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12B in preferred stock and warrants to compensate the FDIC for bearing this risk. In consultation with the President, the Secretary of the Treasury on the recommendation of the Federal Reserve and FDIC determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability.
This is so typical of this nightmarish crisis we are in. Wachovia closed Friday at 10, and now it is pricing near 2. Because of the mess of what is really on these financial institutions balance sheets, no one knows what they are actually worth. Why would banks want to lend other banks when a bank like Wachovia can have this occur so quickly? How do they know that the bank they are lending to is not another Wachovia–KSH?
Update: A NY Times article is now here.
This is very bad news for Charlotte, one of the great boom towns of the last 10-15 years….
here’s a link:
http://biz.yahoo.com/ap/080929/wachovia_citigroup.html?.v=1
and just like that, I am now a Citibank customer. Citibank is now a huge player in the south east, maybe the biggest?
Kendall, Charlotte does still have B of A, however. And I’m sure Citibank will retain a substantial presence there.
Wachovia was at 18 a week ago, just incredible.
a better link:
http://www.nytimes.com/2008/09/30/business/30bank.html?ref=business
Kendall,
This is how the free market operates. Malinvestments are spotted and liquidated, and capital flows to more productive uses. People have been saying for years that selling townhomes for $400K to cash rich idiots with no equity doesn’t make sense. This is no less a bubble than Dutch tulip bulbs, South Seas colonies, 1970’s merger mania, dot-coms, and on and on. We have been papering over economic reality with “liquidity” for a long time, so the correction will be all that much harder.
“This is how the free market operates”
Letting firms fail is essential to a healthy market. But the tragedy here is at least two-fold.
First, Wachovia had a profitable retail banking franchise; it had no need to take unsound risks. (Had it operated like the old Wachovia run by John Medlin—the Wachovia that predated the merger with First Union—it would be alive and healthy today.)
Second, financial analysts, market participants, and regulators were late in recognizing the gravity of Wachovia’s problems. Both regulators and investors failed to impose adequate discipline on Wachovia.
Is the change in the price of Wachovia shares so much a case of not being able to determine the value of a stock or the company it buys or that we’re in a panic and can’t think straight?
I’ve often wondered whether much of what passes for business in America isn’t just the tail of Wall Street profiteering wagging the dog actual productivity. In many cases it appears we (us, from government policy to what the price of bread is) are reacting to investor psychology and not reality.
[blockquote](Had it operated like the old Wachovia run by John Medlin—the Wachovia that predated the merger with First Union—it would be alive and healthy today.)[/blockquote]
Today’s “Wachovia” is in fact First Union. First Union was the much larger bank when it purchased Wachovia. They chose to take the Wachovia name because the First Union name was associated with much ill will because of the way the bank had handled earlier mergers.
Wachovia picked the wrong time to get into the California mortgage market, and then offered subprime loans to those unable to pay a mortgage, including illegal immigrants that were able to get loans because the government let banks look the other way and accept non-U.S. identification papers. Wachovia hoped to make a quick buck and got nailed.
And as a Wachovia shareholder, I voted *against* the merger with First Union. What a bad decision.
Don’t take our eye off the ball: it’s the unregulated derivatives market that caused this mess. Once Sen. Gramm led the charge to allow investment houses to ‘slice and dice’ mortgages, then make ‘credit swaps’ on them….the little guy was DOOMED. The fat cats encouraged EVERYBODY to get a mortgage (and a commission, yum-yum!). Regulation of the US financial markets were FIRST enacted because greedy jerks cheated investors. This mess demonstrates the need for solid, carefully-thought out regulations — and the ENFORCEMENT thereof.
Oh, and guess who is first in line to be McCain’s Treas. Sec.? You guessed it, the old arch-Deregulator himself, Phil Gramm of Texas.