Citi never sleeps (?)

“Every time you sleep but your dreams are wide awake.  Because ambitions never sleep, aspirations neversleep, goals never sleep, hopes never sleep; opportunities never sleep; the world never sleeps. That’s why we work around the world. That’s why we work around the clock to turn dreams into realities. That’s why Citi never sleeps.”

 That’s the TV commercial CitiGroups has been airing for last many months. Citi, itself suffering financial crisis, last Monday announced buying commercial banking division of Wachovia, another mortgage security hit bank for $ 2.1 billion. The deal was backed by FDIC - Citi would have assumed $53 billion worth of debt and agreed to absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio. The FDIC agreed to cover any remaining losses in exchange for $12 billion in Citigroup preferred stock and warrants. The deal, referred as a forced acquisition, was almost done. But the dynamics changed since that – 

1. Liquidity crisis becomes severe even after central banks over the world poured liquidity. (LIBOR peaks to 5.3%). On the contrary, bank deposits provide easy stream of liquid cash.
2. On Tuesday, the Internal Revenue Service issued new guidance that would allow banks to take larger tax write-offs from the losses from loans and other bad debts held by other banks they acquire.
3. Hopes rise as the Congress come closer to the financial rescue plan

 And deposit rich banks like Wachovia become valuable assets. On Friday, in a surprise announcement Wachovia Corp. agreed to be acquired by San Francisco-based Wells Fargo & Co. in the all-stock deal for about $15 billion. The deal would not need assistance from government.

 These are not the everyday deals. JP Morgan Chase gets Bear Stearns and WAMU; Bank of America gets Countrywide and Merrill Lynch; Barclays gets Lehman Capital; Well Fargo would get Wachovia. As Warren Buffet says – “You buy a farm during drought”.

 

It is not the end of the world for Citi.  It has announced a legal action. It will try to get something from the deal. Or will buy a regional bank. But for now it looks like Citi did sleep for 48 hours. 

© Rohit Deshpande