After a weekend of back and forth, one judge’s order to stop Wells and Wachovia from proceeding on Saturday, and appellate court overturning that order on Sunday, and a $60 Million CitiGroup (C) suit against both Wells Fargo (WFC) and Wachovia (WB), the three parties have agreed to a temporary halt to all litigation and discovery until Wednesday at noon.
Which just demonstrates the fallout that can be expected as the government (in this case, the FDIC) strong-arms companies to act, no matter how imprudently, to prevent the government from stepping in and (in this case) taking yet another bank into receivership.
One could argue that FDIC is just plain embarrassed that events ever got to this point. Or simply needs, for its own integrity, to stay solidly behind its commitments (and it should). But they’ve ended up looking a little like Keystone Cops on this one, and may need to rethink how they operate. For all we’ve heard about how the current business and banking rules are based on antiquated economic models, the government’s reaction seems no more sound.
The point here is that the rush of the prior weekend to get an agreement completed before anyone opened for business led to a less than spectacular deal, evidently foisted on perhaps both Citi and Wachovia. The word from Wachovia is that they were told to either accept the deal or be taken over by the government. Clearly something needed to be done, but there are ways, I think, that this could have been done so that customers could access their money and the negotiation process could proceed for a few more days, allowing all parties time to look carefully at their options before a solution was reached. Urgency would not have been an issue, as long as the Fed was thoughtful about providing workable time frames. Obviously, what was needed for a proper review was a few more days.
Clearly, Citi did not even have a detailed plan yet. They were forced to make a high-level proposal and ended up with little more than an agreement in principal that was sloppy, open to criticism, and left the FDIC on the hook for a large amount of losses. The image on the news on Monday was one of a company (Citi) who really didn’t care how badly they impacted the Federal Insurer’s reserves to make up for the bad debt they were acquiring.
Add a few days, and Citi did not appear any better off in where they were going with their final agreement. Wells, on the other had, had figured out how to manage this deal, take all of Wachovia (not leaving pieces like Citi was planning on), and financing the deal without government intervention.
Citi did not have a deal yet with Wachovia, just an idea and an agreement that was in no way complete or final, but specifically included language prohibiting Wachovia from seeking other suitors. Such an agreement makes perfect sense in a normal business deal, but this was no normal deal. The FDIC should have seen this for what it was: an opportunity to extend the artificial deadline, potentially leaving either company in a position to walk away from the deal. I will not speculate on the veracity of the commitments made by any party, as it only makes for interesting fiction, and not helpful to understanding the actual events.
Regardless of intent, you have to admit that once making that offer, Citi would be bound by their fiduciary responsibilities to pursue the case, so there is no criticizing them at this point. I’m satisfied that they are doing exactly what they should be doing. And will likely exhaust every reasonable legal opportunity to attain a beneficial solution.
There is some talk that Citi and Wells may end up just splitting Wachovia into geographical areas. I suppose the next two days will tell.
Regardless, I hope to see a solution that does not require Federal money to prop up any bad debt. If Citi continues down the path of seeking FDIC money to deal with bad debt, this is a bad deal. Frankly, the exclusivity clause that Citi has been resting on lacks credibility in my mind due to the exceptional circumstances of the agreement and the necessity for all parties to find the most benificial solution for customers and the public at large. It seems to me that the Wells offer is the only one that makes any sense, and that Citi is unlikely to formulate a better offer even at this point.
Stay tuned.
