Banking Law

Barely Bair-able Backstabbing

Via the San Antonio Business Journal come excerpts from an affidavit filed in the litigation between Wachovia and Citigroup over the failed attempt by Citi to take Wachovia off the outstretched hands of the FDIC, excerpts that show what we previously speculated: the FDIC was double-dealing Citi behind its back while publicly affirming its deal with Citi.

While waiting for his airline flight to take off on Thursday, Oct. 2, Wachovia Corp. President and CEO Robert K. Steel received an unexpected call from Federal Deposit Insurance Corp. Chairman Sheila Bair indicating that Wells Fargo & Co. was prepared to make a buy-out offer for Wachovia.

Bair encouraged Steel to ?give serious consideration to (the) offer,? despite the fact that Wachovia had only days earlier entered into a nonbinding agreement in principle to sell its banking operations to Citigroup for $2.2 billion. That deal also called for the FDIC to use taxpayer money, if required, to limit Citigroup?s exposure to losses on Wachovia?s $312 billion loan portfolio to no more than $42 billion.

Wachovia?s board voted on Sept. 29 to pursue the FDIC-assisted Citigroup offer ? shortly after the FDIC?s Bair had informed Steel that Wachovia?s dire financial condition ?posed a systemic risk to the banking system.? As part of the pact inked with Citigroup, Wachovia also entered into a binding ?exclusivity agreement? that barred Wachovia from negotiating with any other parties while the Citigroup offer was still on the table.

The above facts are laid out in an affidavit sworn by Wachovia President and CEO Steel. That affidavit is part of a federal lawsuit filed earlier this month by Wachovia against Citigroup. The litigation, which is currently pending in U.S. District Court in New York, asks the court to declare the Wells Fargo offer for Wachovia ?valid? and to find that it is ?not prohibited by the letter agreement? Wachovia had entered into with Citigroup.

[...]

The FDIC is now onboard with the Wells Fargo offer as well, after its chairman, according to Steel?s affidavit, played a role in the unraveling of the Citigroup offer that the agency had initially helped to orchestrate.

In a press release issued on Sept. 29, a few days before Wells Fargo made its official bid for Wachovia, FDIC Chairman Bair stated that the FDIC-assisted Citigroup offer ?was necessary to maintain confidence in the banking industry given current financial market conditions.?

A few days later, though, on Oct. 2, according to Steel?s affidavit, Bair had apparently changed her mind about the Citigroup bid and told Wachovia General Counsel Jane Sherburne that the Wells Fargo offer ?sounded superior? ? in part, it seems, because it put her agency in a more advantageous position.

?When my plane landed in North Carolina later that evening (on Oct. 2), I returned Chairman Bair?s call to further understand (Wells Fargo Chairman) Kovacevich?s proposal,? Wachovia?s Steel states in his affidavit filed in federal court in New York. ?She (Bair) described it to me as requiring no government support with no risk to the FDIC fund.?

Read the whole article for more detail on how Ms. Bair played matchmaker for a Wells-Wachovia marriage after playing the same role with Citigroup and Wachovia. It gives you an idea of what you're dealing with when you think you have a deal that involves government assistance. Sometimes, you've actually got a one and sometimes you're used and abused, then thrown away with next morning's trash.

Citigroup sounds an alarm, of course.

?There would be little incentive for potential acquirers to remain at the table if, as Wells Fargo did here, a party could step in and undercut the very deal the FDIC had orchestrated and determined to be in the public interest,? Citigroup?s court pleadings argue.

As fictional Texas Ranger Gus McCrae in the television miniseries "Lonesome Dove" told his old friend and former Ranger Jake Spoon, just before he hung him for cattle rustling and sod-buster killing, "You know how it works Jake, you ride with an outlaw, you die with an outlaw." Citigroup was playing in the big leagues with people with a different sense of the word "honor" than, say, that sense of honor possessed by Mother Teresa, people who would just as soon give you a Chuck Norris style roundhouse kick to the face as they would even look at you. Everybody brings their hired guns to the closing table and tries to pick everyone else's pocket. I believe it's an ancient Chinese proverb that states, "He who swims in the cesspool should not complain when he finds a turd in his trunks." Or was that a Moldavian proverb? But I digress.

No, the public won't weep over the fact that Ctitgroup never saw it coming. It's a giant, impersonal "thing" to most readers, and the only "thing" most people care about is their own much, much smaller "thing." Yet, the bankers who run Citigroup obviously will "take a lesson," as will others who might be tempted to play the same game. The next time around, everyone will be better prepared.

Right...

Full post as published by Bank Lawyers Blog on October 21, 2008 (boomark / email).