Is Wells Fargo regretting its Wachovia acquisition?

By Felix Salmon
September 2, 2009
Wells Fargo. How come? I Wells has a reputation as being the best and most solid bank in America, a favorite of Warren Buffett, and a bank which managed to sidestep most of the worst excesses of the credit boom.

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Putting aside the all-but-irredeemable basket-cases BofA and Citigroup, there’s only one major bank which has yet to repay its TARP money: Wells Fargo. How come? I Wells has a reputation as being the best and most solid bank in America, a favorite of Warren Buffett, and a bank which managed to sidestep most of the worst excesses of the credit boom.

The answer, I think, is that Wells was ultimately undone by exactly the same thing which doomed BofA: a panicked and unwise acquisition. In this case, of Wachovia. Because the demise of Wachovia was structured with a different acquirer (Citigroup) already in place, Wells had to essentially outbid Citi for Wachovia, and is now suffering from the winner’s curse.

The other problem with the Wachovia acquisition is that Wells Fargo is now far too big — it has an astonishing $711 billion in US deposits, 11% of the total US deposit base — and as a result it will be under intense regulatory scrutiny for the foreseeable future.

Only one of America’s four megabanks seems particularly healthy: JP Morgan. Wells Fargo, which should by rights be the big boring safe one, is instead struggling with all the extra leverage it brought upon itself with the Wachovia acquisition; its sheer enormity also leaves it vulnerable to calls from people like myself who think that all banks of its size should be broken up into less systemically-dangerous chunks. One can’t help but think that with hindsight, Wells might rather have simply left Wachovia to Vikram Pandit’s tender mercies.

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Comments
7 comments so far

A friend of mine who used to work for Wachovia and now works for Wells says that when the final chapter of this saga is written, Wachovia will have saved Wells as opposed to the other way around.

How Wachovia can pull down or harm any balance sheet is mystifying. Wachovia is the absolute king of screwing the public. These guys have a method of hammering the small depositor which is the envy of rip off artists everywhere.
When an overdraft occurs, Wachovia will size up the situation and manipulate the sequence of events so as to inflict the most economic harm on the bank customer. Regardless of the chronological order in which the transactions occur, Wachovia will order the transactions to maximmize their penalty profits. All the while they make their victim feel like an idiot. Hell, these guys love a bounced check,, it’s free money! So hip hip hooray for the new heroes of this century,,, the greedy immoral theives whose mothers threw them a party when they screwed their friends while mine was wailing my ass for being of such low character!

Posted by RH Pyle | Report as abusive

Wells Fargo bought Wachovia with stock only at a huge discount to historical valuations and book value at the time of acquisition. They were able to write down assets using purchase accounting. Unless those assets are badly cash-flow negative, the acquisition can’t hurt Wells Fargo. They didn’t pay a bunch of cash for goodwill in the way that banks did with top-of-the-market acquisitions – they bought loans and deposits with stock and assumed that there would be a high rate of losses on the loans in the purchase accounting. What kind of loss rates are you assuming to make these loans/deposits cash flow negative?

Even if Wachovia’s legacy portfolio is a money-loser (unlikely), you also have to figure that people are much more interested in opening accounts and taking out loans at Wachovia now that it’s part of Wells Fargo, which is still percieved as a healthier bank/better customer server than Wachovia was or BAC/C are. This kind of banking is fundamentally boring and safe – if Wells can collect a lot of new deposits at 2% and originate a lot of conventional mortgages with good documentation/LTV at 5%, they’re going to make money. Sure they’re not going to successfully compete with Chase in NYC, but there are lots of parts of the country where the WFC/WB network is stronger than the Chase network (more branches, community ties, reputation).

Bottom-line, there’s a reason that in the thick of a crisis Citi and Wells Fargo were competing to acquire Wachovia, in a way that no one competed for some of the more dubious acquisitions – the assets are valuable and the price required was cheap. WFC won more by moving quickly and assertively than by significantly out-bidding Citi. When you read articles from the time you have to remember that the original deal price quoted was based on a WFC share price up around 40, which was a bit silly given the climate, WFC’s exposure to California, and how cheaply all other banks were selling. WFC under 10 earlier this year was the deal of a lifetime and I bet Buffett was furious that he had lost all that money on COP and AIB and couldn’t put it into WFC at those prices.

Posted by najdorf | Report as abusive

“Wachovia will have saved Wells as opposed to the other way around.”

I find this comment just hilarious…Wachovia sits upon a mountain of shit, labeled as Option Arm loans. WFC was not in that business (to my knowledge), although they were quite large in the non-prime lending and obviously weighted in the West Coast regions.

A bigger play into regional exposure to the Southeastern states, and the expanded deposit base that goes with it, might be the only thing Wachovia has offered. That and a retail brokerage business (AG Edwards, etc).

Just look at all those wonderful acquisitions by First Union in the late 1990s…the leopard never did change his spots after all, not in Charlotte.

Posted by Griff | Report as abusive

“WFC won more by moving quickly and assertively than by significantly out-bidding Citi”

Wells first reaction was to walk away, and let Citigroup steal the thing at midnight. Only after a more thorough (as it appeared, anywho) scrubbing of the proposed exposures did WFC return and become the ultimate winner in the “WB sweepstakes”. Nice prize indeed.

And just what is Ken Thompson up to these days, i wonder…

Posted by Griff | Report as abusive

My understanding is that WFC is not paying the TARP money because it wants to make sure the company is in a strong position. Most of the banks have rushed trying to repay the TARP and in most cases have diluted shareholders’ equity by reissuing stocks. WFC is still the safe boring investment and what we’re seeing is just that: a safe boring bank that takes the steps on at a time.

It will obviously take some time to fully integrate Wachovia, but in the long run, WFC can only be better, stronger, safer and more boring.

Posted by Matt | Report as abusive

See also: Lloyds TSB.

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