"At the urging of my financial advisor, I'm diversifying where I put my money. The key is diversification. I've got some in the back yard, some in the crawl space, some in the mattress. You don't want to put it all in one place."
— Jay Leno
Last Thursday, Wachovia sponsored "Winner's Circle," a performance by three winners of the "Last Comic Standing" at the Strand Capitol in York. Wachovia's representative thanked everyone for coming, even though a funnier show might be on their TIVOs after the vice-presidential debate. He assured the audience they would be sponsoring opening night at the Strand again next year, although the sponsor's name projected in lights on the curtains might say "Citi" instead of Wachovia.
The first performer, John Heffron, took a walk around town and said, "you sure have a lot of banks. What do you do for fun at night?" He could have said that in almost any medium sized town, and probably does.
But like breweries, the number may dwindle to a handful nationally in a few years.
Mergers and consolidations abound. The names change; the value of shares swing wildly; and all this goes on with absolutely no tax effect to the shareholder. How is this possible? All of these mergers, spin-offs and deals are qualified under the Internal Revenue Service Code as "tax free reorganizations." When you and I buy and sell stock or other assets, we recognize gain or loss and pay income taxes; not so for these corporate giants. They buy and sell with no taxes for them or for their owners.
The theory of all these reorganizations being tax free is that they are "merely" a continuation of the same business. Whenever the tax law uses the word "merely," there is always something big going on.
Meanwhile, back at the ranch on Friday morning, we found that Citi's bid to buy just the banking portion of Wachovia (not the investment side) for $2.1 billion with the help of government subsidy was trumped by Wells Fargo's offer to buy the entire company for $15 billion with no federal assistance. Wells Fargo, with headquarters in San Francisco and roots in financing the gold rush and the western end of the pony express, usually stays out of large acquisitions, preferring to buy smaller banks that fill in their territory. They considered this too tempting an opportunity to expand into the east, especially the southeast.
Wachovia holds $122 billion in option Adjustable Rate Mortgages or ARMs, the largest such holding of any company in the country, due mainly to its 2006 purchase of Golden West Financial. Half of those ARMs are in California. ARMs allow the borrower to defer part of their interest payments, shifting those parts to principal. When the real estate bubble burst, borrowers were left with loan principal larger than the value of the house, and the lenders with insufficient collateral to secure the loan. These borrowers were "upside down."
The risk in the Wachovia purchase is significant, but the purchase price was bargain basement last week. Wachovia shareholders will get 0.1991 shares of Wells Fargo stock if the deal is transacted. Details aren't out yet, but this will be a tax-free reorganization — no losses will be recognized and Wachovia shareholders will carry over their basis.
The merger would leave Wells Fargo with $1.42 trillion in assets, good for third place among U.S. banks behind Bank of America and JP Morgan Chase. Of that, $787 would be in deposits, and their footprint would cover 39 states.
Wachovia's stock has declined 90 percent this year, while Wells Fargo's has increased 16 percent in the same period. Observers worry that Wells Fargo has gone too far in trying to expand east of the Mississippi, that they won't be able to recover from Wachovia's huge California ARM exposure. On the other hand, Warren Buffet's Berkshire Hathaway, Inc., is Wells Fargo's biggest stakeholder, and Buffet's judgment is widely respected.
Other suitors that Wachovia tried to woo included Lehman Brothers (oops), Goldman Sachs, Morgan Stanley and Spain's Banco Santander.
Keep an eye on that local Wachovia branch. That new sign under the canvas might change shapes several times before the dust settles.
Right now, it looks like the stagecoach is pulling into town.
E-mail: Patti@spencerlawfirm.com