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Wachovia Bank Under Watchful Eye of Prediction Markets

Written by:
Jagajeet Chiba
Published on:
Sep/27/2008
Wachovia

Wachovia Bank suitors are reportedly waiting for a US Government seizure so that they can buy up the best assets and let the government sort out the rest, Bloomberg reported on Saturday.

Citigroup Inc., Wells Fargo & Co. and Banco Santander SA are in talks with Wachovia, the Wall Street Journal reported yesterday. They're part of the same group that passed on a chance to buy Washington Mutual Inc., which the U.S. closed two days ago, leaving JPMorgan to buy WaMu for $1.9 billion, a fraction of its previous offer in March.

The bidders may try that tactic again at Charlotte, North Carolina-based Wachovia following its 27 percent plunge in New York trading yesterday, according to analysts at Goldman Sachs Group Inc. and Egan-Jones Ratings Co. They may get help from regulators, who said the U.S. benefited from seizing and selling WaMu because the Federal Deposit Insurance Corp. didn't have to tap its $45 billion insurance fund.

``WaMu's takeover has proven that there's an easy way, if the FDIC is involved,'' said Sean Egan, president of Egan-Jones in Haverford, Pennsylvania. ``You kick the hell out of the equity holders and bondholders. That may be the new model for bank takeovers.''

The online financial prediction market, intrade.com was now giving Wachovia a 75 percent chance of failing before year's end, a huge surge since the failure of Washington Mutual Thursday night. With WaMu now taken over, Wachovia suddenly finds itself the next big target for a takeover.

Wachovia has more resources to draw upon than WaMu did, including its market capitalization of $21.6 billion and assets that rank sixth among U.S. lenders, Bloomberg cited.

The Wall Street Journal reports that "Wachovia officials don't believe they need to rush into a deal, and the bank isn't feeling immediate pressure on its financial condition," but the mortgage crisis has put pressure on many banks. Shares have fallen 78% in the Charlotte, NC-based company over the past year, and the NY Times says Wachovia holds $120 billion of risky option adjustable-rate mortgages, which allow borrowers "the option of skipping part of their payments and adding that debt to the principal of the loan."

CEO Robert Steel, the former Treasury official hired this summer to replace Kennedy Thompson, told employees in an e-mail yesterday that Wachovia was ``strong and performing well.'' The bank is more diversified than WaMu, owning the third-biggest U.S. brokerage, plus units in wealth management and corporate and commercial banking, he wrote.

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Jagajeet Chiba, Gambling911.com

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