A sword was brought, and Solomon ordered,"Cut the baby in half! That way each of you can have part of him." 2 Chronicles 1.1-1.3
If Vikram Pandit at Citigroup (C) had not screwed up the purchase of Wachovia, the Fed would not have to be involved. Wells Fargo (WFC) came in with a competing offer. The whole fiasco has ended up in court. Citi had successfully argued for a stay of the WFC buyout. Then a appeals court said the decision was not valid.
Now, the New York Fed has been pulled into the action and hopes to fashion some compromise among the three banks.
The first and most logical solution being proposed is that Citigroup and Wells Fargo each take a portion of the Wachovia branches. That leaves the junk on Wachovia’s balance sheet, mostly bad mortgages and mortgage-backed paper. According to The Wall Street Journal, "the plans being discussed Sunday night don’t entail either buyer receiving financial assistance from the U.S. government." That may be a problem. As the collapse of the credit markets accelerates and mortgage defaults rise, the Wachovia balance sheet will become a cancer that no one wants.
It may ultimately be left to the boards of directors at the banks and perhaps to the courts to decide which of the proposed marriages goes through. It is hard to see where the Fed has leverage, if it is unwilling to guarantee any floor on the value of the Wachovia paper.
That means the Fed may be bluffing, at least for now. The most likely solution is that it will offer to back some of Wachovia’s worst assets for WFC or Citi. Alternatively, it could agree to a safety net which would allow a private equity firm or vulture fund to take on the paper. A fund may be able to hold the toxic bonds until they mature. If it can buy the paper for cents on a dollar, it could be an immensely profitable transaction.
At least someone will make money off of the credit crisis
Douglas A. McIntyre