In what already seems like ancient history, just weeks ago investors fretted over Wachovia's fate in the wake of Washington Mutual's dramatic collapse into the waiting arms of JPMorgan Chase (JPM).
Weighed down by a toxic balance sheet of souring mortgages, Wachovia was in trouble. A stealth bank run had begun, as firms and consumers alike hoarded cash.
Then, to the surprise of many, Citigroup (C) teamed up with the FDIC to save Wachovia from the abyss. Toting a federal backstop for its quickly eroding loan portfolio, Citi snatched up Wachovia's retail branches and various other operations for a mere $2.1 billion.
The move was surprising: Citi has plenty of troubles of its own. Once the largest financial company in the world, Citi has become a poster child for mortgage and credit troubles - it didn't need to go out and buy any more.
At the time, many puzzled over Wells Fargo's (WFC) reluctance to step into the fray, as Wachovia's footprint out East seemed a perfect fit with Wells' strong presence in the West.
But then last Friday, in a stunning development, Wells stepped in with what appeared to be a far superior offer. Rather than dumping a chunk of Wachovia's risky loan portfolio on taxpayers via the FDIC, Wells not only upped the purchase price to $15 billion, but shunned government money to complete the transaction.
You could almost hear the lawyers licking their chops for high drama in the New York courts.
Citi claimed Wells had unfairly infringed on its right to buy Wachovia, that their agreement prevented other suitors from upping the ante.
Wells, for its part, found a loophole, asserting that the newly minted bailout package -- just hours old -- contained a clause allowing it to make a legal counteroffer.
Accusations flew, motions were filed, and judges, courts, attorneys and bankers dug in for a bloody fight.
Washington, in an attempt to save face after a botched bank bailout at the very time it couldn't afford to slip up, urged cooler heads to prevail. Given the vast, systemic dislocations in the financial system, a protracted takeover battle would benefit no one.
Just hours after filing its lawsuit, Citi repented. The 3 banks signed a truce of sorts, agreeing to stay out of the courts for at least the next 48 hours. There's now talk Wells and Citi will divvy up the spoils, carving up Wachovia's branch network along geographic lines.
As I write this morning, Wachovia's fate is unknown. Whether that will be the case by lunchtime is anyone's guess.
By all accounts, Wells' bid makes more sense, it being the far stronger firm and eschewing the FDIC's involvement in the transaction. Citi, however, has yet to capitalize on the bank firesale its competitors are taking advantage of, and it doesn't want to miss the party.
JPMorgan has already snatched up Bear Stearns and WaMu for a song apiece. Meanwhile, Bank of America (BAC) grabbed Merrill Lynch (MER) during the turmoil following the implosion of AIG (AIG) and Lehman Brothers. B of A also managed to complete its Countrywide takeover - in which it arguably acquired nothing more than a truckload of pending lawsuits and a broken business model.
However the drama ends in addition to lawyers raking in millions in fees, the net result will be the removal of another wounded player from the financial field. This is a positive development, and a step in the direction of remaking the banking landscape with a more solid foundation.
Losses on Wachovia's mortgage portfolio, jammed full of option arms from its ill-timed purchase of Golden West, will likely result in higher losses than expected. Home prices in California's more affluent areas, to which Golden West was highly levered, are poised for dramatic whoosh down.
Washington would be well advised to decide Wachovia's fate such that months from now, the winner won't come knocking for a bailout of its own.
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