Weeding Out The Weak Banks

In a mood reminiscent of WaMu-JP Morgan, the FDIC says Citi is buying Wachovia's banking operations, and assume the senior and subordinated debt.

Wachovia is trading below $1.00, down 90 percent. Wachovia's preferred stock is also down heavily.

Citi will take $42 b in losses on a $312 b pool of loans, the FDC will absorb losses beyond that. Wachovia will continue to own AG Edwards and Evergreen.

Citi is trading down about 7 percent, no doubt on concern it will have to raise capital.

As painful as all this is, this activity is good: we are weeding out the weak banks.


1) Now it's Europe's turn: Fortis is getting help with a big capital injection from the Netherlands, Belgium, and Luxembourg. U.K. mortgage company Bradford and Bingley is being nationalized but Banco Santander will buy its deposits and branches.

European banks like Lloyds,UBS,Barclays,Deutsche Bankand Credit Suisseare down 11 to 15 percent pre-open in the U.S.

    • Citigroup to Buy Wachovia's Banking Operations
    • Benelux Governments Rescue Fortis to Halt US Contagion

2) While the TARP plan appears to be going through the House and the Senate, the warrants that the government will get are a major issue for the Street and may limit participation. How much dilution will this mean?

Fortunately, the Treasury Secretary has sole discretion here, including the exercise price and when they will be exercised.

Regardless, the inability to quantify the dilution is an issue. If the level of warrants is tied to how many transactions the institution has with the TARP, then every interaction dilutes existing shareholders, so the more often a firm "goes to the well" by selling to the TARP, the more difficult the position of shareholders become.

Important to clarify this quickly.

Also, the SEC now has the option to suspend mark-to-market

3) Lost in the TARP debate is big news for the auto industry: the Senate has passed loan guarantees for auto industry; GM up 4 percent -pre-open.

We are ending the quarter with the Dow down 1.8 percent for the last three months. The Dow and the S&P 500 are now down four consecutive quarters. For the Dow, this is the first time this has happened since 1977-78.

    • US Bailout Vote Nears as Crisis Hits Europe Banks

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