Monday, September 29, 2008

The Death Parade of Giants

Wachovia's turn. Citigroup has just announced it will be cherry picking Wachovia's banking division. I doubt anybody is going to touch the rest of it. We see here again the FDIC's new business model: seize a bank, hand the assets over to a more solvent bank practically for free ($2.2 billion; a pitance considering the value of the retail outlets and deposits), and then declare bankruptcy on what is left. Previous regulatory efforts screwed shareholders but protected bond holders. These latest actions give both the shaft. Depositors are protected, even those with more than $100,000 in an account. WaMu held the record of being the largest bank failure in U.S. history for all of four days. Almost certainly Wachovia will dwarf that.

This marks the second collapse of a bank where I had deposits. My thinking was, the bigger they were, the more likely a bailout, and the earlier this happens in the process, the more systemic capacitance there will be to rescue deposits.

ADDENDUM [10/3/08]: It appears bond holders weren't left to rot, not totally, anyway. As part of the deal the FDIC had agreed to absorb up to $42 billion in bad loans. Today it is up in the air as to whether Citigroup will be acquiring Wachovia with is arrangement, or that Wells Fargo will arrange a private buyout, where bad debt would be shifted over instead to the congressional bailout plan that may be passed later today.

CORRECTION [10/15/08]: So, I guess the word is that Wachovia was not technically a bank failure; but rather was bought out by Wells Fargo (and the tax base who will be covering Wachovia's toxic debt). So, Washington Mutual retains the crown as the largest bank failure to date.

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