You probably know it pays to shrink your credit card debt. Banks are feeling the same way. The name of the game for banks is reducing their cost of borrowing.
The cheapest way banks can get capital is from the deposits of their customers. That was at the core of Citi’s strategy of buying out Wachovia. It would have substantially expanded Citi’s deposit base. Plus it would have put them into more neighborhoods and upgraded their bank infrastructure. The FDIC had also agreed to provide loss protection. The kicker? Citi was only paying $1 per share for Wachovia.
Sweet deal.
But Wells swooped in and offered Wachovia $7 a share. How could Wachovia say no? Citi claims that Wachovia had no right to say yes … that it had an exclusive agreement with Wachovia. Can anybody say litigation?
In the meantime Citi is slashing jobs and selling off assets. Latest to be put up for sale is a Japanese call center valued at $2 billion.
Citi is suffering from failing home and consumer loans. Of course, it’s not the only bank in this quandary and its losses this year should turn into profits next year. But the loss of Wachovia is a major blow. It dropped almost 20 percent on the news last Friday.
Its price-to-book is under one – the only major U.S. bank with a below-one ratio. So its assets are now worth more than what you pay for it.
The bailout should assure that nothing disastrous will happen to Citi. But if the bailout provides a floor under bank prices, it will also assure that Citi won’t be able to find another bank as cheap as Wachovia was to buy.
But right now Citi is dirt-cheap. Instead of going up five percent on Friday, it fell by 20 percent. That’s a 25-percent differential. At that discount, the company is hard to resist.
INTERNAL ENDORSEMENT
Wall Street Lies EXPOSED!
They've led you to believe that investors who want outsized gains must take on ridiculous risks.
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