Sunday, October 05, 2008

Citi Blues

The FDIC brokered Citigroup a sweet deal for Wachovia last Monday, but on Friday Wells Fargo jumped in with an agreement some seven times bigger. It's a good lesson that values change day to day (in a few days $2.2 billion became $15.1 billion). But the lesson is much more complex.

This was the first time the FDIC (Federal Depositors Insurance Corporation) used official fiat power to demand such a sale. A thus-far unused 1991 law required the concurrence of the FDIC, the Federal Reserve, and the Secretary of the Treasury in consultation with the US President; the US government forced Wachovia's sale to Citigroup.

The plan provided government bailout money for Citigroup losses above a certain limit. It provided a foundation for Wachovia to survive the week, and subsequently to find a sweeter deal.

Wachovia is the 4th biggest financial group in the USA. Why should government be ordering their sale to a rival? Exactly who in the government was the driver for this plan? At this moment it's unclear, but they've egg on their face(s).

(CEO Bob Steel joined Wachovia from the US Treasury Department last July; he & Treasury Secretary Paulson earlier were colleagues at Goldman Sachs; now reportedly Secretary Paulson subsequently is recusing himself from further involvement).

Government interference at this level is worse than confiscation - they forced a transfer, perhaps to cronies, with no transparency and at a value far below what the market clearly could offer.

Perhaps Citigroup is victimized as well. Already Citigroup reportedly is claiming $60 billion in damages. What a week's work! (thus financiers are under criticism)...

This is a lesson that politicos shouldn't be allowed to mess with individual firms.