Was $2.16 billion the best deal for Wachovia?

Did Wachovia chief executive Bob Steel get the best deal? Did he have a choice?

With the Charlotte bank set to sell most of its operations to Citigroup for $2.16 billion, some employees and shareholders are wondering why the once vaunted institution is selling for a relatively paltry sum, even amid a global credit crisis.

For what it's paying, New York-based Citi gets $700 billion in assets and more than $400 billion in deposits, but it's also on the hook for $42 billion in potential loan losses. The Federal Deposit Insurance Corp. will cover any losses beyond that. Left behind will be a company called Wachovia that houses brokerage and asset management businesses.

For Steel's part, he may have been forced into a marriage by regulators in a bid to avoid “serious adverse effects” on the economy and the financial system, as the Federal Deposit Insurance Corp. said Monday. The FDIC took over the sale process Sunday after San Francisco-based Wells Fargo passed, the Wall Street Journal reported Tuesday.

“It almost looked like they got stuffed into something,” said one bank analyst, who didn't want his name used because he didn't know the details of the negotiations.

The general consensus among analysts is that Citigroup got a much sought-after retail banking operations for a good price and not too much risk. How Wachovia fared is trickier to determine, because neither the bank nor regulators have released details on how dire the bank's situation was over the weekend. The Journal said the bank didn't face a run on its deposits, but instead credit rating downgrades that could have caused a further loss of confidence among the company's investors and customers.

Neither the FDIC nor Wachovia would comment on the bank's deposits. On Tuesday, Wachovia said in a statement that it remains “well capitalized” and that it can support the standalone brokerage and asset management company that will remain after the deal. New York-based Citi also issued a statement saying it remains committed to the deal and that it continues to conduct normal business with Wachovia in the meantime.

By almost any measure, the deal is worth much less than most could have ever imagined. The company had a market value of $33 billion at the end of June and nearly $100 billion a year earlier. With the stock rising 90 percent to $3.50 on Tuesday, the company's market value was about $7.5 billion.

Steel's role in the drama started July 9 when he was named to replace the ousted Ken Thompson, who lost his job amid rising loan losses from the 2006 Golden West Financial acquisition and a series of missteps. On his first day on the job, Steel told employees: “We're going to make Wachovia great, and that's the plan.”

About two weeks later, the former U.S. Treasury official began sketching out a way for Wachovia to recover from its heavy load of bad loans. The bank would cut jobs, reduce its dividend and assign a top executive to manage $122 billion in souring mortgages.

The effort appeared to be gaining traction. On a Sept. 15 appearance on CNBC, Steel said the company had “very exciting prospects when we get things right going forward.”

The situation apparently changed quickly. By the end of that week, as Wall Street began to founder, Steel was taking to Morgan Stanley about a deal that later fizzled. Then last Thursday, Washington Mutual failed, spurring more worries about Wachovia's mortgage loans and sending its stock down 27 percent on Friday. One point of optimism, at the time, was that Congress was crafting a possible bailout plan for the banking industry.

“We are aggressively addressing our challenges and are working to strategically strengthen and manage capital and liquidity in this challenging environment,” Steel said Friday in a memo to employees, emphasizing the company's strong core businesses.

According to the Journal, Steel had contacted Citi counterpart Vikram Pandit hours before Washington Mutual failed and asked to talk. His stock was slumping that day and headed for another fall Friday.

Over the weekend, Steel and his team flew to New York for talks with various suitors. The favorite emerged as Wells Fargo, a large West Coast retail bank long seen as an ideal partner for Wachovia.

Wells Fargo was poised to buy Wachovia for a deal in the “teens per share” until it got cold feet about Wachovia's loan book Sunday afternoon, the Journal said. Citi's deal is essentially worth $1 per share, although it will pay the $2.16 billion in Citi stock to Wachovia, the company, not individual shareholders.

By Sunday evening, the FDIC had taken over the sale process. Shortly after 4 a.m. Monday, the agency informed Steel about the deal arranged with Citi, and he concurred, the Journal said.

In a news release Monday, the FDIC said Treasury Secretary Henry Paulson, on the recommendation of the Fed and the FDIC and in consultation with President Bush, determined “open bank assistance” was needed for Wachovia.

“During recent weeks, the financial landscape changed significantly and presented us with unprecedented challenges,” Steel said in a memo sent to employees Monday. “Today's announcement was the best alternative for the company, enabling a resolution of issues related to the Golden West portfolio.”

Some still question whether Wachovia faced a potential run on deposits because of the role played by the FDIC, the agency that insures customer deposits. “That tells me something was wrong other than the loan portfolio,” said Gary Austin, a former Wachovia bond trader and now chief investment officer at PDR Advisors, a Charlotte investment firm.

Under the agreement, the FDIC gets $12 billion in securities from Citi for taking on most of the risk associated with Wachovia's bad loans. Rob Bliss, a business and accountancy professor at Wake Forest University, said it was another example of a creative and unusual effort by regulators to aid an ailing financial institution.

“Now the FDIC has an equity stake in a major bank,” he said. “It's mind boggling.”

Asked whether Wachovia could have crafted a deal with the FDIC that would have allowed it to unload troubled loans and stay independent, Bliss said that probably would have been less “politically palatable.” Citi also was in better financial shape than Wachovia, he added.

Before Monday's announcement, even longtime bank analysts weren't expecting such a dire result for Wachovia. Sandler O'Neill analyst Kevin Fitzsimmons issued a report suggesting Wachovia might be able to use a proposed government bailout plan – yet to be passed – to shed troubled loans, although he noted that could cause the bank to raise more capital and further dilute the holdings of existing shareholders.

“Bob Steel walked in to the cards the way they were laying on the table, you can't in the end blame him,” said Morgan Keegan analyst Robert Patten.

Compared to Washington Mutual's demise, Wachovia's investors fared better. In that arrangement, JPMorgan made a $1.9 billion payment to the FDIC, not WaMu, in return for its deposits and most assets.

Some employees and investors, however, accuse Steel of overselling Wachovia's prospects in his appearance on Jim Cramer's CNBC show and in his memo Friday. “We had a plan. I really believed him,” said a Wachovia employee in Winston-Salem who did not want his name used. “A lot of employees had a really good feeling.”

Now the employee says he has lost $30,000 on his Wachovia stock holdings, and he's worried about losing his job in the Citi deal. Steel was not available for an interview Tuesday.

In the end, shareholders will have a say in the deal. They need to approve the transaction for it to go through. No shareholder meeting date has been set, but Citi said it expects the deal to close by the end of the year. Some employees say they plan to vote against the sale, hoping for a Wells Fargo offer. But large institutions, not individuals, hold the majority of the bank's shares.

Bliss, the Wake Forest professor, noted that when investment bank Bear Stearns was sold to JPMorgan this spring for a fire sale price of $2 per share, investors balked and got a little better price of $10 per share. “It's not over with,” he said.

Staff Writer Christina Rexrode contributed.
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