Wachovia Was Acquired Twice in One Week
In late September 2008 Wachovia agreed to be acquired by Citigroup with government assistance, then days later accepted a higher offer from Wells Fargo without assistance.
The Sequence
Wachovia had acquired a large mortgage lender specialising in option adjustable rate mortgages, loans permitting payments below accruing interest. Those exposures deteriorated severely.
In late September 2008, amid the most acute phase of the crisis, Wachovia faced funding pressure. It agreed to sell its banking operations to Citigroup in a transaction involving government loss sharing.
Days later, Wells Fargo made a higher offer for the entire company requiring no government assistance. Wachovia accepted it. Litigation between the parties followed and was eventually resolved with Wells Fargo completing the acquisition.
The Tax Ruling
The element that changed the economics was a tax notice issued that week, which altered the treatment of losses at acquired banks in a way that made absorbing a loss making institution substantially more attractive.
That ruling improved the value of acquiring Wachovia enough to support a bid without government support.
A change in tax treatment, published midweek, converted a transaction requiring public assistance into one the private market would fund.
Why It Mattered
The episode is a useful illustration of how acquisition value depends on factors entirely outside the target's operations.
Wachovia's loans were the same on Friday as on Monday. What changed was how much of the resulting losses an acquirer could use to reduce its own taxes, which altered what the franchise was worth to a buyer.
The same principle appears in ordinary transactions. Tax attributes, including loss carryforwards, are frequently a meaningful component of value in acquisitions of struggling companies, and rules limiting their transfer exist precisely because they would otherwise drive acquisitions with no operating logic.
The Option ARM Problem
The underlying credit issue deserves noting because it recurs in this series. Loans permitting negative amortisation, where the balance grows when payments are insufficient, embed an assumption of rising collateral values.
A borrower whose balance increases while the property declines has no path other than default. These products concentrated in exactly the regions where prices fell furthest, which is not coincidental, since they were used to make expensive markets appear affordable.
The Outcome
The acquisition made Wells Fargo a genuinely national bank, adding an eastern branch network to a franchise that had been concentrated in the west.
The crisis produced substantial consolidation of this kind, with several large institutions acquiring failing competitors at prices that would have been unavailable in normal conditions. That is a recurring feature of financial crises: they transfer assets to whoever remains capitalised.
The Bottom Line
Wachovia was worth more to a buyer after a tax notice than before it, without anything changing in its loan book. Value in an acquisition depends on who the buyer is and what they can do with the losses.