The fight for who would win Wachovia - Citigroup or Wells Fargo - heated up Sunday night.
New York State Supreme Court Justice Charles Ramos had issued an order late Saturday that temporarily blocked the merger of Wachovia with Wells Fargo.
Wachovia responded Sunday with lawsuits of its own. In a Sunday night ruling, the Appellate Division of State Supreme Court threw out the order by Ramos, the Associated Press reported. Citigroup said it would appeal the decision.
In a deal struck last Monday with the assistance of the Federal Deposit Insurance Corporation (FDIC), Citigroup had offered to take over Wachovia’s banking operations for $2.2 billion. The deal did not include Wachovia’s asset-management or retail-brokerage units.
Four days later, Wells Fargo said it was buying all of Wachovia for approximately $15.1 billion in stock.
"This deal enables us to keep Wachovia intact and preserve the value of an integrated company," Wachovia CEO Robert Steel said in a statement on Friday.
The battle also has implications for taxpayers.
The Citigroup offer had come with a backstop from the FDIC, which would cover any losses on Wachovia’s $300 billion loan portfolio beyond the first $42 billion. The Wells offer does not ask for FDIC assistance.
In a statement on Sunday, Wachovia said the company believes its agreement with Wells Fargo is "proper, valid and … in the best interest of shareholders, employees as well as the American taxpayers." Citigroup is free to make a better offer to Wachovia under that agreement, the statement said.
The fight was also waged in federal court, where Wachovia asked U.S. District Judge John Koeltl to declare invalid part of the Citigroup deal that would have restricted Wachovia from considering competing bids. Koeltl scheduled another hearing for Tuesday so Citigroup could respond.
It was clear from documents filed in federal court Sunday that Wachovia was in considerable trouble when it agreed to the deal, the AP reported. Wachovia disclosed that it agreed to the deal "with the understanding that a seizure of its banking assets later that day by the Federal Deposit Insurance Corp. would occur" unless it accepted Citigroup’s proposal.
As of Friday, Citigroup still had support of industry regulators. "The FDIC stands behind its previously announced agreement with Citigroup," Federal Deposit Insurance Corporation Chairman Sheila Bair said in a statement, adding that it would pursue a resolution with all three companies. An FDIC spokesman did not immediately return calls for comment on Sunday, the AP said.
Citigroup (C, Fortune 500) had been pressing Wachovia (WB, Fortune 500) and Wells Fargo (WFC, Fortune 500) to abandon their merger plans, arguing that it had entered into an exclusivity agreement with Wachovia (cash loans).
A copy of the exclusivity agreement between Citigroup and Wachovia obtained by CNNMoney.com reveals that Wachovia had agreed not to seek out another bidder, nor to provide information or enter talks that might facilitate a rival bid.
Wells Fargo, in a statement Sunday, said it has "a firm, binding merger agreement," the AP reported.
A Wells Fargo victory would transform the San Francisco-based bank, whose operations and branches are largely located in the Midwest and on the West Coast, into a dominant presence along the East Coast and in the Southeast. Wachovia is based in Charlotte, N.C.
That would put Wells Fargo squarely in competition with the likes of JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500).
Should Wells Fargo ultimately prevail, it will control about $800 billion in deposits and have nearly 11,000 banking locations.
"This would represent a major strategic win for Wells Fargo," said David Hendler, analyst with CreditSights, in a report.
If Citigroup wins, it would represent a huge step forward for the company’s retail banking aspirations, whose footprint has lagged many of its biggest rivals.
Investors cheered Citigroup’s decision last week to buy Wachovia’s banking assets. But some observers had wondered whether Citigroup could pull off the deal since it is in the process of a major restructuring after posting close to $18 billion in losses over the past three quarters.
The tie-up, however, comes at a cost for Wells Fargo. The company said it expected to incur about $10 billion in merger related costs. It said it would also record Wachovia’s impaired assets at fair value, which could bring further writedowns.
Howard Atkins, Wells Fargo’s chief financial officer, said that pre-tax losses and market adjustments from Wachovia’s loan portfolio would hit $74 billion and the bulk of that would be written off shortly after the transaction closes.
In the wake of Friday’s news, rating agencies Standard & Poor’s and Moody’s both placed Wells Fargo on watch for a potential ratings downgrade.
Still, the company said it expected the acquisition to add to earnings in the first year of operations, adding that it planned to raise $20 billion, primarily through a common stock sale to help prop up its capital position.
In the last month alone, the nation’s banking industry has undergone a dramatic facelift, including the failure of Washington Mutual and its subsequent purchase by JPMorgan Chase, as well as Bank of America’s acquisition of Merrill Lynch (MER, Fortune 500).
Citigroup Inc said it won a court order late on Saturday blocking Wells Fargo & Co. from buying hobbled U.S. bank Wachovia Corp until the court rules otherwise.
Citigroup, which planned to buy Wachovia’s banking assets for $2.2 billion, said New York State Supreme Court Justice Charles Ramos granted an injunction extending Wachovia’s agreement to negotiate exclusively with Citigroup.
Citigroup and Wells Fargo are battling for control of sixth-largest U.S. bank Wachovia, which has been hit hard by bad mortgages amid turmoil in global credit markets, but has a large network of branches.
Citigroup, the largest U.S. bank, announced on Monday it had agreed to buy Wachovia’s banking operations in a deal backed by the U.S. government. That deal did not include a signed merger agreement, but Wachovia did sign an agreement to only negotiate with Citigroup through Monday October 6 (quick payday loans).
On Friday, however, Wells Fargo said it had signed an agreement to buy the whole of Wachovia, including its asset management unit and retail brokerage, for about $15 billion, roughly seven times more.
Wachovia said early on Sunday morning that it believes its agreement with Wells Fargo is valid and proper, and is best for shareholders, employees and U.S. taxpayers.
“Citigroup is always free to make a superior offer to Wachovia,” spokeswoman Christy Phillips-Brown said.
Citigroup said in its statement that it is prepared to continue negotiating with Wachovia, but that Wachovia may not speak to others.
WASHINGTON–Orders to U.S. factories plunged by the largest amount in nearly two years in August as the credit strains began to hit manufacturing with full force.
The Commerce Department reported that orders for manufactured goods dropped by 4 per cent in August, compared to July. That’s a much worse performance than the 2.5 per cent decline that economists had expected. It was the biggest setback since a 4.8 per cent plunge in October 2006.
The weakness was led by big declines in orders for aircraft, down 38.1 percent, and autos, which fell by 10.6 per cent, the worst performance in nearly six years.
Orders for non-defense capital goods excluding aircraft, considered a good indication of business investment plans, fell by 2.4 per cent, the biggest setback in this category 19 months. It’s an indication that businesses are slashing their investment plans in the weak economy, and growing credit strains are making it hard for companies to get loans to expand and modernize.
The Senate on Wednesday approved an administration-backed bill to provide $700 billion to the Treasury Department to buy bad mortgage debt from the financial system as a way to get banks to resume more normal lending operations.
Analysts are concerned that the economy is so stretched, however, that the country is headed for a recession even with the largest government market intervention since the Great Depression.
An earlier report Thursday showed the number of newly laid off workers filing new claims for unemployment benefits rose to 497,000 last week, an increase of 1,000 from the previous week online payday advance. It was the highest level for jobless claims since just after the Sept. 11 terrorist attacks seven years ago.
The government is scheduled to release figures Friday on unemployment in September. The expectation is they will show layoffs rose by 100,000, the largest increase this year, with the unemployment rate holding at 6.1 percent.
The report on manufactured goods showed that durable goods, items expected to last three years, dropped by 4.8 per cent in August. Orders for nondurable goods, items such as petroleum products, food and clothing, fell by 3.3 per cent.
The dismal report on orders for August followed a report Wednesday from the Institute for Supply Management showing that manufacturing activity fell to the lowest level since the aftermath of the 2001 terrorist attacks.
It’s easy to understand why the proposal to spend $700 billion in taxpayer money to rescue banks would inspire impassioned debate in Washington.
But in a sign of just how complex and controversial the current credit crisis has become, a move to potentially change accounting rules on how banks and Wall Street firms value the securities they own is almost as heated.
Some argue that tight accounting rules are a major reason for the credit crisis in the first place. Others contend that changing the rules will just bury problems lurking beneath the surface and could further shake investor confidence in the already battered financial sector.
Roots of the problem
First a bit of background. The one fact everyone agrees on is that the current financial crisis centers on trillions of dollars worth of mortgage loans that were packaged together into financial instruments known as mortgage-backed securities, or MBS. Those securities were purchased by banks and Wall Street firms.
But as home prices started to fall and foreclosures rose, the value of these securities plunged. Today, there is almost no market for the securities.
This is why Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke proposed that the government buy the securities. The hope is that doing so could restart the MBS market at something well above the current fire sale valuations and that the government could hold the securities until the market improves.
Some advocates of the plan argue that taxpayers will be able to eventually make money if the government sells the securities at a higher price down the road. But the more immediate hope is that banks and Wall Street firms, freed from the toxic loans on their balance sheet, will start lending again.
What is fair value?
Still, others contend that it was not real financial losses from these securities that led to the credit crunch as much as it was an arcane accounting rule known as “mark-to-market.”
Mark-to-market means that companies have to report what the fair value of their investments were if they sold them at the current time.
In recent years, firms were required by the Securities and Exchange Commission and the Federal Accounting Standards Board to use mark-to-market valuations for all the MBS on their books.
As more subprime borrowers started to default on their loans, that quickly eroded the value of many MBS pools. Major banks and financial firms around the globe have taken writedowns topping $500 billion in the last year, as a result.
For this reason, some have argued that fixing the rule would solve the credit crisis.
“The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market,” said William Isaac, a former chairman of the FDIC.
“And because banks essentially lend $10 for every dollar of capital they have, they’ve essentially destroyed $5 trillion in lending capacity,” he added.
Isaac believes that since the overwhelming majority of loans packaged together in even the weakest MBS pools are not in foreclosure, it is proper to value these securities based on the flow of cash from all the loans instead of a non-existent market value.
A change of course
Tuesday afternoon, the SEC and FASB seemed to change course on the rule, as they published new guidance to firms cash advances. The two organizations said when the market for a security disappears, it is now allowable to arrive at a value using “estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.”
In plain English, banks may not be forced to take huge writedowns on investments that lost all their value. But the guidance is just that: guidance. The SEC and FASB suggested that more concrete rule changes could come later.
While the possible end of mark-to-market might please critics of the rule, it doesn’t satisfy everybody.
Some financial experts argue that even though banks and Wall Street firms may be able to make their balance sheets look better if the rule changes, these companies will be less attractive to investors because there isn’t as much information about their true financial condition.
“The garbage is on the books and no one wants to admit the original error of purchasing this class of assets,” said Barry Ritholtz, CEO of Fusion IQ, a research firm.
Ritholtz said mark-to-market accounting forces banks to honestly disclose what they own and how much those investments are worth. Changing the rule would make it tougher to come up with a bank’s real value.
“I would advise our clients and the investing public that owning any financials that failed to disclose their holdings accurately is no longer an investment. It is pure speculation, with more in common to spinning a roulette wheel,” he said.
Too little, too late
Accounting experts also think that determining the value of pools of loans based on expected payments isn’t any easier than figuring out their market value after demand has dried up. Rising default and foreclosure rates makes estimates about future value very suspect.
“People talk about ‘hold to maturity’, ‘economic value.’ I’m in the business and I don’t know what that means,” said David Larsen, managing director at financial advisory firm Duff & Phelps.
Larsen said that even with the new guidance from the SEC and FASB, it’s not clear if accountants and chief financial officers are going to be able to ignore the sharp drop in market value for MBS pools in the current environment.
“To try to put a genie back in the bottle and go backwards from a transparency point of view makes little sense,” said Larsen.
Others argue that the potential benefit to banks and Wall Street firms from a rule change is much less than is widely assumed since much of the writedowns have already occurred.
And it’s too late to save the large financial institutions that have collapsed because of exposure to soured mortgages.
“I think mark to market is seen as a panacea, but I don’t think it’s that simple,” said Brian Gardner, the Washington analyst for KBW, an investment firm that focuses on the financial services industry. “I don’t think it’s as big a deal for a lot of the banks.”
Lehman Brothers Holdings Inc. on Monday agreed to sell its investment management business to a pair of private-equity firms, fetching $2.15 billion as the bankrupt investment bank continues its liquidation.
Bain Capital Partners and Hellman & Friedman, two of the nation’s biggest buyout firms, will now control Lehman’s operations in fixed-income and alternative asset management.
Old Street name
The deal includes money management firm Neuberger Berman, a 69-year-old name on Wall Street that now manages more than $130 billion of investments.
Lehman (LEHMQ) has been scrambling to sell off healthy portions of the investment bank, whose bankruptcy filing on Sept. 15 was the biggest in U.S. history.
The investment house sold its key North American businesses, including investment banking, to Britain’s Barclays PLC for $1.7 billion in cash. Nomura, Japan’s largest brokerage, bought Lehman’s operations in Europe, the Middle East and Asia.
The purchase of Neuberger Berman and Lehman’s other investment management businesses marks the last major unit to be sold off.
Lehman bought Neuberger in 2003 for $3.2 billion to expand its reach in wealth management. The entire investment management unit was valued at as much as $10 billion before the bankruptcy.
Next chapter
“We are excited and energized about what this means for our clients and our employees,” said George Walker, the former head of investment management at Lehman, who will become CEO of the newly renamed Neuberger Investment Management http://easy-quick-payday-loans.com. “Our portfolio management and client teams are extremely enthusiastic about this next chapter in our history.”
Founded in 1939 by Roy Neuberger, the firm has specialized in managing money for wealthy clients. It is also considered to be a pioneer in making mutual funds more widely accessible.
Richard Fuld, Lehman’s longtime chief executive, had pitched a plan to raise cash and save the company by selling a controlling stake in Neuberger Berman to private equity firms.
Lehman filed for Chapter 11 after a deal to buy the unit could not be quickly put in place, and later efforts to sell the entire investment bank failed.
Breakdown of deal
The transaction also includes Lehman’s $35 billion private-equity business, which manages real estate and leveraged buyout funds. The sale doesn’t include Lehman’s stakes in hedge fund managers GLG Partners Inc. and Ospraie Management LLC.
The sale must be approved by a federal bankruptcy court.
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