Wells Fargo in Lead For Wachovia, "Bailout" Necessary?

• Posted by ToddSullivan
• on September 29th, 2008

At the rate this is going, the “bailout” may not be necessary.

Last week JP Morgan (JPM) swallowed Washington Mutual (WM) and now it appears Wells Fargo (WFC) has the inside track to acquire Wachovia (WB).

The WSJ Reports:

The troubles at Wachovia, based in Charlotte, N.C., and of Fortis, based in Utrecht and Brussels, signal the first time that major commercial banks are now at risk of being forced into sales or breakups since the onset of the credit crisis a little more than a year ago. Wachovia is a big lender to midsize U.S. companies, and at the end of last year, it oversaw a commercial-loan portfolio totaling $190 billion. In the real-estate industry, Wachovia had signed off on $35 billion in loans.

Federal officials are involved in the Wachovia talks and were believed to be pushing the bank to seal a deal fast to avoid further pressure to its deposit base. While Wachovia is much larger than Washington Mutual in terms of assets, Wachovia’s business mix is broader, including a strong commercial bank and solid securities brokerage.

What is happening is that we are on a path to fewer, much larger banks that face more regulation. The next on the list is National City (NCC). Both Wachovia and WaMu could have survived until a gov’t plan was enacted, but depositor panic, rushing to withdraw insured funds lead to a massive deterioration of the capital bases of both, forcing a sale. Short sellers it should be noted, had nothing to do with it.

So, if WaMu is gone, and Wachovia will be soon and not a single deposit has been lost, do we really need the bailout plan? Do we? I’m not sure.

If we simply better funded the FDIC and raised the deposit insurance to $250,000 per account, then we would stop the rush to withdraw we are seeing. Had we stopped the bank run last week, WaMu might have survived. Wachovia would most likely also. Now, that does not mean that either banks shareholders would have seen appreciation in shares anytime in the near future. But, do we really need to money now that the market is seemingly taking care of it?

We also have word that the recent investment in Goldman Sachs (GS) by Berkshire’s (BRK.A) is going to be used to buy????? Anyone??? Troubled mortgage assets from banks, up to $50 billion worth. These are some of the same assets, buy the way, that the gov’t is looking at buying.

We have also hear that hedge funds have been raising billion to do the very same thing. It would seem that the specter of gov’t intervention has spurned those “waiting for rock bottom pricing” to now act before those assets were scoop buy Washington.

We may still need a gov’t package but my feeling it that is may just need to be a fraction of what was talked about last week. Perhaps just the threat of losing a bargain will be enough to shake the buyers out of the trees. It really does not matter who does the buying, it is the action of it that will solve the problem.

Disclosure (“none” means no position):Long WFC,GS, None
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