Citi Gets Judge to Suspend Wachovia Deal

This interim success by Citigroup, of getting a judge to step into Wells Fargo’s effort to break up a deal that Citi had struck to acquire Wachovia, is surprising, to say the least. Most observers thought that the bank had slim grounds for recourse (the FDIC has broad authority regarding the disposition of failed and about-to-fail institutions; the language in the agreement with Wachovia forbidding them to shop Citi’s offer was not as iron-clad as it might have been).

From the New York Times:

Citigroup fired the first shot in what could be a prolonged legal battle, persuading a New York judge to temporarily block Wells Fargo from acquiring Wachovia…

Citigroup has accused Wells Fargo of wrecking its plan to acquire Wachovia’s banking operations for $2.2 billion, or $1 a share, in a deal arranged by the Federal Deposit Insurance Corporation. Four days after that deal was struck, it fell apart when Wachovia agreed to Wells Fargo’s offer to pay seven times as much for the entire company…

A person briefed on the situation said that Citigroup was seeking a total of $60 billion in damages.

Citigroup contends that the deal with Wells Fargo violates an agreement that prohibited Wachovia from having any sale or merger discussions with anyone other than Citigroup until Oct. 6. The order issued by a judge on Saturday extends the term of that agreement until further court action, according to Citigroup’s press release.

The litigation could be a blockbuster, pitting some of the nation’s largest surviving financial institutions against one another and giving work to the most expensive legal talent money can buy. Citigroup is represented by the New York lawyer Gregory P. Joseph; Wachovia by David Boies of Boies, Schiller & Flexner; and Wells Fargo by Wachtell, Lipton, Rosen & Katz, according to people briefed on the matter.

Until late Thursday, Citigroup believed that it had reached a deal with Wachovia after marathon talks last weekend under intense pressure from federal regulators worried about Wachovia’s financial condition. Regulators agreed to absorb any losses above $42 billion.

Wells Fargo, which had walked away from a deal with Wachovia, returned late Thursday with a shocking bid. Wells Fargo offered to buy all of Wachovia, not just its banking operations, for about $15 billion in stock, far more than Citigroup offered. And its deal, which takes advantage of a lucrative tax loophole, would be structured without any government support…

Federal regulators — including the Treasury Department, the Office of the Comptroller of the Currency and the F.D.I.C. — have been reviewing the situation, according to a person briefed on the matter. Officials from the Federal Reserve have reached out to both parties to encourage a swift resolution, this person added.

Citigroup raised the stakes on Saturday afternoon, asking Justice Charles E. Ramos of New York Supreme Court to issue an emergency order blocking the deal between Wachovia and Wells Fargo. Late Saturday, Justice Ramos issued an injunction effectively blocking the Wells Fargo deal, pending a hearing scheduled for later in the week.

The agreement with Wachovia that Citigroup has cited and that contains the ban on negotiating with any other potential bidders was not a final merger contract, but a letter agreement to “continue to proceed to negotiate definitive agreements.”

The letter agreement does not state that a deal must be completed. It also specifically rules out the collection of money damages if the agreement to negotiate were breached.

Lawyers not involved in the battle said that Wachovia could defend the Wells Fargo deal by arguing that it is better for its shareholders. Wachovia is likely to claim that its fiduciary obligations — its responsibility to protect the interests of its investors — required it to consider the Wells Fargo bid and, given its higher price, to accept that bid.

The litigation could put regulators in a difficult spot. The Wells Fargo deal may be better for taxpayers, but if it succeeds, in the future other financial institutions may not be willing to help the government, as Citigroup did, because of the risk that they might not reap the anticipated benefit.

If Wells succeeds, I suspect Wachovia will turn out to be a poisoned chalice. I cannot imagine, even with tax bennies included, it can make an offer that much richer than the Citi bid (admittedly, not know the details of the tax breaks, they could be very rich and largely explain the difference, which in turn would suggest that the Wells deal is really not all that much better for taxpayers, but merely serves better to obscure the real cost). Of course, Wells could have had another aim: to become too big to fail.

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  1. fred55


    As a tax lawyer and corporations litigator I must be very careful about commenting without all the facts, however:

    Apparently Paulson/Treasury issued a Temporary Regulation rewriting Section 382 to exclude banks.

    Section 382 prohibits purchasing Net Operating Losses (oversimiplified, but accurate enough). The language is absolutely clear.

    The “regulation” says that Section 382 does not apply in the case where the acquired corporation with NOLs is a bank.

    I presume you understand this is outrageous and ultra vires; the executive branch does not have the authority to rewrite a statute.

    It LITERALLY is no different than Treasury rewriting the code section specifying tax rates to say, “the following rates shall however apply to XYZ.”

    Frankly, as disgusted as I am by the bailout bill, at least that had the patina of Congressional approval and normal legislative process and separation of powers.

    Don’t you think it’s heinous and criminal for the executive branch to purport to be able to legislate?

    Incidentally, if you check the NOLs of Wachovia you can estimate the value of the tax breaks. I presume Wells has earnings to offset that Citi does not.

    Also, there are sure to be state taxing authorities whose income taxes track the federal income tax system and will be deprived of revenue as a result.

    Is this truly so esoteric that no one expresses outrage?

    Again, do you realize this is literally no different than Treasury by fiat simply telling favored entities that they don’t have to pay this tax or that?

  2. Yves Smith


    I had not idea this change in tax treatment was by fiat. That is shocking. I was aware of it in the BoA/Countrywide deal (I recall being puzzled that they could use the NOLs, but figured something must have been tacked onto the many bills that wend their way through Congress) but didn’t focus on it then.

    The US is looking more like a Mussoliini-style corpocracy than I had realized….

    As for Citi, I suspect you are directionally correct, that they may only be able to use them in part now (don’t they carry back five years? Of course, financial firms often have very low effective tax rates) and they couldn’t be sure of when in the future they’d be able to use them, hence couldn’t assign them a high value.

    Thanks for that tidbit, regardless.

  3. Anonymous

    It is not clear whether this is a Temporary Restraining Order (TRO) or a Preliminary Injunction (PI). Either way, it is not surprising in this stage of the proceedings.

  4. fred55

    Notice 2008-83, dated 8/30/08 I believe, provides that

    For purposes of Code Sec. 382(h), any deduction properly allowed after an ownership change of a corporation that is a bank with respect to losses on loans or bad debts, including any deduction for a reasonable addition to a reserve for bad debts, shall not be treated as a built-in loss or a deduction attributable to periods before the change date. This guidance does not affect the application of any provision of the IRC except
    Code Sec. 382. Banks may rely on this guidance until further guidance is issued.

    I am not aware of any recent legislation that would permit this regulation.

    Although I don’t do constitutional litigation, I believe a private citizen would lack standing to sue.

    I merely make this point because I don’t understand why people throw around the term “socialism.”

    This is fascism (kleptocratic corporatism).

    If some legislation slipped through Congress that allowed this, let me know. I can’t imagine why that would have happened rather than just chaning the code.

  5. Anonymous

    Don’t the shareholders have to hold a vote on this? The Citi bid in total costs 14.4 Billion, not too far from the Wells Fargo deal, but most of that goes to the government. If they don’t match the Wells Fargo deal, can’t the shareholders just tell Citi to go pound sand?

    Also, won’t this be a PR nightmare for Citi anyways? Why not just hope to get a settlement of sorts (I am not at all a lawyer)?

  6. fred55

    I believe that under Delaware corporation law and NYSE regs (assuming they apply here) there is an exception where the corporation claims that emergency exigencies require it to approve a change of control to preserve shareholder assets where there will be no time to hold a shareholder vote.

  7. Yves Smith

    Anon of 12:53 AM,

    I am just going on the initial press reports (and who knows if they interviewed the right legal experts) that Citi was deemed unlikely to prevail. But one of my good buddies said that litigation is a crap shoot, and any attorney who tried to give odds was kidding himself and the client. That said, as we both know, they have to get past summary judgement, If you think they have a good shot, this is an entirely different matter.

    I’m used to deals with clear break-up fees, so the lack of one threw me.

    Perhaps more important, it may be the regulators who were of the now-looking-not-so-correct view that Citi did not have a case for keeping the first deal alive. They may have presumed that Citi dare not cross/embarrass them. It is very bad for them to have Wachovia twisting in the breeze, both for practical reasons and what it does to their image.

  8. spare some change?

    Warren Buffet tossed our grandchildren under the bus so he could preserve his investments in insurance and finance. So I hope the lawyers involved in this get stinking filthy rich feeding off Wells Fargo and ultimately derail the sweetheart deal Mr. Buffett brokered.

    I hope Berkshire Hathaway goes under. I want Mr. Buffett to be exposed as the fraud he is. He made a fortune on a multigenerational bull market (K-spring, K-summer, and K-fall) and now wants to bribe the government to protect himself against the inevitable downturn in K-winter. He is absolutely no different from the highly levered banks who make one-directional bets on an asset class and then expect government bail outs when the riptide comes.

  9. Yves Smith

    As alluded to in the post, it isn’t clear if the difference in effective cost to the government is as great as it appears. Citi wants an explicit backstop. Wells instead reduces its tax bill. That is an actual, hard cost that one could probably calculate. The total cost of the Citi deal is ess certain.

    But the cost of the Wells deal is hidden, so it make it more attractive to the regulators. Lower tax receipts are a cost to taxpayers too….

  10. Anonymous

    I suspect that Paulson had intended his rule to change to only benefit FNMA and FHLMC.

    I’m not sure that he intended to benefit his buddy Bobby Steel.

    Another one of the those ‘unintended consequences’ (ironically, one of Und Sec Ryan’s favorite phrases!) for which the we will pay for generations.

  11. Richard B


    Do you think Citi can object to the Temporary Regulation? That would slow things down and make things uncomfortable for both WF and the FDIC. That assumes, of course, that Wachovia is effectively insolvent and needs immediate relief.

  12. Anonymous

    Just a speed bump for Wells and not unexpected. Regardless of the tax consequences, Well’s bid doesn’t involve the government in upfront sharing of risk. That’s a positive. Try selling a deal to the public right now that requires the government to pony up money when a better bid is on the table that is totally private.

    Politics and appearances now rule the playing field. Don’t spend too much time trying to over analyze the economics. Citi went venue shopping and knew where to find the right initial verdict. Don’t count on any court down the line willing to kick this one very far down the road. No way this is going to spend months wending its way through the legal system.

    Wells prevails before the end of the week if not sooner.

  13. fred55

    Technically, it’s a notice that there will be a regulation. It provides that “it may be relied on” but, while that would almost surely be grounds to avoid penalty, it cannot allow executive change to legislation.

    To be precise, we have an executive branch giving notice to the world that they intend to ignore Section 382 in the case of a bank. I am afraid other than congressional impeachment of the Treasury Secretary, which even if it exists as a concept would almost surely require “high crimes and misdemeanors” (felonies), you’re really asking, “What can anyone do if the executive branch refuses to enforce the law?”

    Actually, nothing. The judiciary can order them to, but I really don’t think anyone has standing to pursue that. The legislative branch can cut off funding in retailiation. That’ll happen.

    There may be confusion here. A month earlier Section 382 was “rewritten” for the Fannie/Freddie takeover to preserve the status quo of their NOLs.

    This is similarly ultra vires and dictatorial, but is a second, separate, action.

  14. Raver

    spare some change?

    I too, am digusted by the lack of censure, for those who profited from the mess. (Never will the bonuses be paid back). But condemn those who deserve it rather than those who have been 'trying to do the right thing' all their lives.

    But please present facts for a diatribe?

    He made a fortune in the 'multigenerational bull market' but what is he doing with it?

    Warren's giving away the vast majority of his fortune to the Bill & Melinda Gates foundation at the rate of 5% per annum. His motivation, unlike many others, is not primarily based on greed or money.

    As an indication to his simple lifestyle, his house is (probably) worth more than yours! (Current value around $700k – and that's in USD$).

    If I were to 'trust' (isn't this the core of many things) someone with my personal finances and the welfare of my family, I would find no better person. Trust him (with a little skepticism), based on his reputation over many decades, to have the right motivation for your (not my) country.


  15. EvilHenryPaulson

    I checked the text of the bill just in case, the recording losses on preferred stock of FNMA/FRE/FHLC can be treated as against regular income, for a certain time period, and for certain financial institutions.

    There is nothing about the Wells Fargo tax holiday for buying losses. It’s also too big of a loophole for Paulson to pressure anyone at the IRS to creatively interpret an existing statute — people would be setting up money losing businesses left and right to turn a profit when a profitable company buys their tax credits

    Good info, thanks

  16. EvilHenryPaulson

    Wells Fargo wins the court case if it’s a hostile takeover without the participation or help from Wachovia by my reading of the 2 page exclusivity agreement

  17. fred55

    The notice is online. Seriously. See 2008-83. CCH has commentary. This is entirely separate from the FNMA thingie, which basically said that a “change date” is not a “change date.” ARGUABLY, thats conceviably defensible as a GSE is a strange bird and sui generis, as is the takeover. Realistically, what’s happening there is that Treasury is saying that “We don’t want to shoot ourselves in the foot, so even though we’re taking control, we don’t want the GSEs themselves to lose their NOLs”

    This is NOT the case with Wells, because there its saying, “We’re rewriting a code section to exclude an entire industy”


  18. Anonymous

    Wasn’t it our decorated world leader on environment, Al Gore, that said, “There is no controlling legal authority that says this was in violation of law.”

    (When accused of using phone calls from the White House soliciting Democratic campaign contributions. If so he would have been pardoned.}

  19. Anonymous

    One more thing for all of you to chew on. You are all focusing on the tax code. Did anyone notice this in the WSJ article today? It’s cryptic and unexplained but quite germane. Here is the quote.

    Later on Friday, Congress, too, appeared to weigh in on the fate of Wachovia. The $700 billion federal bailout bill passed by the House of Representatives on Friday and signed into law immediately by President George W. Bush appeared to give Wachovia wiggle room in its takeover bid. A provision of that new law suggests that contracts relating to pending acquisitions in which the FDIC is involved might not “be enforceable.”

    Wachovia signed an agreement with Wells Fargo in part because it knew of the language in the bill, according to a person close to Wachovia. Citigroup, on the other hand, could argue that the bill’s language could be used to invalidate a Wachovia-Wells Fargo deal. Lawyers not involved in the matter believe the language could be used to support either Citigroup’s or Wells Fargo’s position and the matter would likely need to be decided in court.

    Parse that one and I will check back in the morning to see if you all figured it out.

  20. Richard Kline

    Sooo ‘we are in an imminent crisis’ which requires the Congress to ram through catastrophe legislation, but that crisis is _not_ so severe that mega-banks can’t begin protracted litigation regarding who gets the assets left lying around?

    And fred55, ‘preciate the close reading of the regs; we will need to keep track of these details as things barrel along if we are to follow the money in any real sense—but that will be for the Reformist 112th Congress of 2010 to sift through. My fundamental reaction to Paulson’s proposal was that it was not three pages but three words: “I Say So.” —And Congress bought it. The nominal structure of his ‘plan’ is meaningless because the blanket powers are the real goal, together with funding muscle to back up that “I Say So.” And much of the goal was for retroactive cover, just like in the FISA redo, because increasingly since March 08 Fed and Treasury actions have lifted off vertically from the existing statutory map like, why just like Helicopter 1! Between now and 20 Jan 09 we will see more than a few ‘Favored Few’ extra-statutory actions and provisions, if we read the fine print, behind the more public ‘buy this’ or ‘guarantee that’ actions. What Congress really did was to abdicate any responsibility whatsoever for the sweeping actions to follow. I don’t use the term ‘fascism’ lightly, but I do so advisedly: we’ve left the rule of law behind. That doesn’t mean ‘police state,’ there’s no need. Kleptocracies are ruled by pens and account numbers, not guns and direct orders.

    —And none of that will save the financial system. But as in post-USSR Russia we may wake up with many hard assets in the hands of those favored few, with no legal recourse against them after the fact. I’m not saying that this is ‘Paulson’s plan,’ but it stands to be a direct, probable result of his willful disregard. We have, in effect, ‘financial martial law’ without any obvious declaration. There’s nothing like panicked plutocrats to provoke throwing contract law into the woodchipper.

  21. Anonymous

    This should probably go under The Lehman story, hope you don't mind, but these global structured derivatives are unwinding for all these crooks caught in this web IMHO:

    Structured product investors hurt by Lehman

    The amounts from private banks will dwarf investments by advisers and direct investors, noted structured product provider Blue Sky Asset Management. Blue Sky product development director Mark Dickson (pictured) estimated £10 billion from retail and £25 billion from private banks had been invested in the structured product sector this year.
    ‘There will be a lot more Lehman paper out there in the private banking sector,’ said Dickson. ‘Lehman Brothers will have been a significant issuer into that market.’
    Investors put money into structured products because they wanted the performance of equities but also a guarantee they would not lose capital. The role of structured product providers was to collect client money and place it with a counterparty, in this case Lehman Brothers. The bank invested the cash in options and zero coupon bonds, which provided the returns and capital protection.

  22. doc holiday

    FYI: GLobaL Tax UPdaTe
    IRS Issues Guidance to address Transactions
    in distressed Market Conditions
    October 3, 2008

    Loss Corporations in which the
    United States Takes a Greater than
    50 Percent Interest
    The Service issued Notice 2008-84 on
    September 26, 2008, announcing plans to
    write regulations under Section 382(m)
    of the Internal Revenue Code of 1986, as
    amended (the “Code”) relating to the acqui-
    sition by the United States of a greater than
    50 percent interest in a corporation with
    net operating losses (a “Loss Corporation”).
    Such regulations will clarify the impact of a
    change of ownership on a Loss Corporation
    and the applicability of the loss limitation
    rules of Code Section 382…

    The regulation to be issued will be effec-
    tive for any tax year ending on or after
    September 26, 2008.

    See Also: Anti-Stuffing Regulations to be
    Issued for Loss Corporations

    See: Certain Loss assets of banks
    Not Treated as Built-In Losses for
    Purposes of Code Section 382(h)

    Further: Nonrecognition Treatment
    to Securities Lenders
    on Deals that Default

  23. doc holiday

    As usual, I often wonder why FTC is missing in action during this financial terrorism event/circus?

    > The antitrust chief at the Federal Trade Commission is leaving after a 2-1/2 year period that saw the agency open a formal investigation into Intel and try to stop the merger of two organic grocery chains.

    Jeffrey Schmidt, the director of the FTC’s Bureau of Competition, is joining law firm Linklaters in New York as an antitrust partner, the firm announced on Thursday.

    David Wales has been named acting director of the bureau, said a statement by the F.T.C., which shares antitrust enforcement with the Justice Department. Mr. Wales has been serving as a deputy director.

    Mr. Schmidt, in a statement issued by Linklaters, said it was “the right time for me to return to private practice.”

    Also see: On Monday, the Federal Trade Commission's reaction to a Justice Department policy statement on antitrust law proved that neither federal agency has a monopoly on antitrust enforcement, even though they held extensive joint hearings on the topic with the goal of issuing a joint report.
    To make matters more convoluted, the FTC itself didn't speak with a sole voice, but issued two distinct responses.

    DOJ's antitrust chief, Assistant Attorney General Tom Barnett (pictured far right) issued a policy statement on federal enforcement in monopolization cases: cases where dominant companies use unfair methods to increase or exploit their market power.

    Barnett's view is that consumers, companies and lawyers at the agencies "are best served if section 2 standards are sound, clear, objective, effective and administrable." However, the report notes, a century after the Sherman Act became law, those standards "have not entirely achieved these goals." The report is intended to bridge the gap.

    >> Totally corrupt fascist Bush coup; every department of governmnet, every agency, senate, congress, DOJ, SEC, FBI, DOL, EPA … well shit, list me one agency not corrupted!

  24. Anonymous

    Its kind of like a country, why buy a bank when they will just give it to you if you make them scared enough

  25. Anonymous

    FYI: Wachovia spokeswoman Christy Phillips-Brown said in a statement the company believes its agreement with Wells Fargo is "proper, valid and … in the best interest of shareholders, employees and the American taxpayers."

    >> If that doesn't sound like a crooked fascist deal, where someone has to bring up The American Taxpayers — then I'm sure as hell blind! A deal that is obviously an antitrust violation, just like bear and the string of deals connected to all the fraud …….. it just makes me sick and pisses me off to see this, day in, day out, none-stop chaos from The Bushies, and then no one in site to save us from this mess — and that sure as hell includes Obama IMHO!

    FYI: Candidates switching parties
    Former ambassador Alan Keyes, former Congressman Bob Barr, and businessman Wayne Allyn Root left the Republican Party to join or seek the nomination of a third party. Keyes was defeated at the Constitution Party National Convention in a bid for the party's presidential nomination and is currently running as the nominee of the newly formed America's Independent Party. Bob Barr became the Libertarian Party nominee, and Root became Barr's running mate.
    Former Congresswoman Cynthia McKinney and former Senator Mike Gravel left the Democratic Party to join or seek the nomination of a third party. McKinney won the nomination of the Green Party, and Gravel lost his bid for the Libertarian nomination after being eliminated in the fourth round of voting.

    >> Great, we have no choice!

  26. Anonymous

    So very, very confused.

    If the FDIC did not actually seize the bank, who is asking them anything? Why are they involved? Why are they all of the sudden able to “absorb” losses? What gives them the authority to do that, especially if they did not seize the bank?

    This is like going to war without actually having to declare war.

    If you are “in talks” with the fdic, your institution has failed, it should be seized.

    If there is any quesiton if your bank has failed, your bank has failed, and should be seized.

    The only thing worse than a bank that failed is a bank that might have failed. There need to be clear lines drawn.

    The whole point behind deposit insurance is to head off bank runs, you do that by moving quickly, and in a manner that is prescribed under the law.

  27. Anonymous


    They should not be in the news. We should not what the head of this institution looks like.

    They should not broker deals, or backstop bad loans.

    They should stay in the shadows until they are needed, then dive back into them just as quickly.

    A friend of mine used to be a bank examiner, and specialized in assessing damage and valuing bad banks. He always traveled at night, and never anounced his presence. He could not say where he was going for fear of starting a run. He knew this taking the job. It was all part of it.

  28. Anonymous

    Here is the text of the section in the Bailout Bill which the attorneys will be fighting over. It is on Pages 82-83 (out of 451 pages) of the Senate Bill (cite-Division A, SEC. 126. FDIC AUTHORITY. subsection (c):

    (c) UNENFORCEABILITY OF CERTAIN AGREEMENTS.— Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)) is amended by adding at the end the following new paragraph:

    ‘‘(11) UNENFORCEABILITY OF CERTAIN AGREEMENTS.—No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly —

    ‘‘(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,
    ‘‘(B) prohibits any person from offering to acquire or acquiring, or
    ‘‘(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of, all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the Corporation exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.’’.

    My Comment: New Section 12 U.S.C. 1823(c)(11)(A)- (C) supports Citibank's argument because the Wachovia-Wells Fargo merger agreement "affects" Citibank's ability to complete the FDIC approved transaction (I am assuming the FDIC's involvment in last weekend's (Sept 27-29) sale to Citibank was under its authority under Section 11 and/or 13). Assuming the FDIC was not involved in the October 3 Wells Fargo-Wachovia merger agreement, the merger agreement would appear to be invalid.

    New Section 12 U.S.C. 1823(c)(11)(A)-(C) supports Wells Fargo's interpretation that Citibank's exclusivity agreement is void because it "interferes" with Wells Fargo's ability to acquire Wachovia.

    The problem for Wells Fargo is that the statute appears to only operate upon transactions where the FDIC has exercised its authority under Section 11 and/or 13. Thus the alleged politically positive aspect of the Wells Fargo deal, no FDIC involvement or backstop, works against it legally. That is, the FDIC backstop is evidence that the FDIC was exercising its emergency authority in the Citibank transaction and therefore the Wells Fargo transaction is outside the protection of the statute.

    Furthermore, the issue of shareholder approval may be moot because of the FDIC involvement no matter what the Citibank "exclusivity" agreement says because once the FDIC is involved in saving a regulated institution it is doubtful that courts are going to find that shareholders have rights to block FDIC approved transactions. That is, just because the FDIC did not technically take possession of Wachovia as with Washington Mutual, the net effect is the same. For a court to hold otherwise would mean that shareholders could block an FDIC seizure and sale and I know of no case that so holds.

    Of course, judges and lawyers may differ but the new statute on balance would appear to strengthen Citibank's position more than Wells Fargo. In any event, there is a lot of litigation ahead because Citibank's case and the injuction was brought/obtained in New York State Court and more than likely Wells Fargo will try to have it transferred to Federal Court. Wells Fargo and/or Wachovia may also try to bring their own cases in Washington DC (involving the FDIC), North Carolina (Wachovia), California (Wells Fargo), maybe Delaware (other subsidiaries?). In short, it could be a mess. If, however, the FDIC were to support the Citibank deal, it would be hard for Wells Fargo to prevail because of the likelihood of Wachovia being taken over by the FDIC if a transaction is not completed within the next week following all of the uncertainty.

    Contrary to what many legal commentators are saying, the threshold issue is not corporate fiduciary duty or M&A law. The most important issue is whether the FDIC was officially involved in either transaction. If the FDIC was involved, then the nature of its involvement on behalf of the public in a regulated entity (Wachovia) trumps all of the private interests. If the FDIC is not invovled, only then does the issue of the parties' conduct become important because it is a private matter.

    Thus the FDIC's official position in this matter is hugely important and technically the FDIC is independent of the Treasury.

  29. EvilHenryPaulson

    fred55, I understand it is separate (I assume you were responding to me) and I just wanted to provide confirmation that it was not sneaked into the recent legisltion

  30. Anonymous

    Once again, did they or did they not seize the bank?

    And where did the investment management and retail brokerage operations end up? Seems like they should have all been part of the same transaction.

    Did the FDIC end up with them? Can the FDIC acquire a brokerage or investment management business?

    I knew they didn’t want any exposure to that, they wanted the cash…so did city.

    Another line of thought- this would be a great time to be in the money laundering business…

  31. Anonymous

    There used to be a severe limitation on the ability of a bank to buy another one and deduct its embedded, unrealized losses. Tax deductions were limited to the purchase price, typically amortized over a period of 20 years at a rate of 4.5%. On September 29th, the IRS issued a ruling (“Application of Section 382(h) to Banks, Notice 2008-83”) that allows the entire amount of embedded losses of an acquired bank to be deducted for tax purposes, without limitation on timing or magnitude, other than the availability of taxable income against which to apply them.

  32. Matt Dubuque

    Matt Dubuque

    I think Citi has a strong chance of prevailing here in the very short term. Two weeks from now, I think Wells comes out way ahead. Here is my view as to why:

    As to Citi prevailing in the INITIAL phases of this process, irrespective of whether it it a TRO or a preliminary injunction, the judge has concluded with its ruling to day that it is more likely than not that Citi will prevail on the merits.

    That ‘s just a function of BOTH types of injunctive relief, TROs and preliminary injunctions. Neither is EVER granted without a clear statement that the moving party is LIKELY (not certain) to prevail on the merits.

    In terms of prevailing in this INITIAL phase, it looks to me that Citi did an outstanding job drafting the signed agreement. It specifically states on page one that damages would be impossible to calculate and that SPECIFIC PERFORMANCE (i.e. a return to the status quo ante) is required in the event of any breach. The handwritten interlineation that has received so much attention in the blogosphere does NOT carry much weight here because it deals with a secondary (not a primary) term. I can explore this line of analysis further, if asked.

    HOWEVER, what may well transpire for the SECOND phase is the following:

    1. Wachovia is ordered to return to the negotiating table with Citi. That will last no more than 10 days.

    2. Citi and Wachovia cannot come to a deal because Citi is unable to obtain the financing.

    3. Wells then comes in at a much LOWER price.

    Therefore, Wells wins. Wachovia and Citi lose.

    I think the lawyers at Wells, some of the very best in the world, knew they were playing a very low-risk game here. Here is my view of their thinking:

    1. Wells knew they would very likely not have to pay damages because the terms of the agreement between Wachovia and Citi specifically forbade such relief, instead choosing the injunctive route of specific performance in the event of a breach.

    1a. Wells would argue Citi was collaterally estopped from making any damages claim against Wells. As evidence supporting this view, keep in mind that Citi did NOT go to court seeking DAMAGES here, but INSTEAD specific performance of the original deal.

    2. If Citi DID manage to prevail in their request to a return to the status quo ante, Wells could come in later at a much lower price, because Wells knows that Citi’s ability to finance the deal diminishes every day.

    Advantage Wells.

    Matt Dubuque

  33. Anonymous

    “Although I don’t do constitutional litigation, I believe a private citizen would lack standing to sue.”

    There are at least a couple ways to challenge the validity of regulations.

    First, administrative law requires Treasury/IRS and other agencies to submit public comments in order to issue final regulations, whether initially issued as proposed regulations or as temporary regulations. Treasury/IRS has discretion to disregard comments; however, they often bend to political pressure.

    Second, if Treasury/IRS attempts to enforce a regulation against a taxpayer, a taxpayer can sue in tax court or for a refund elsewhere to have the regulation invalidated as illegal. Since this regulation is pro-taxpayer, it is hard to imagine a fact pattern where a taxpayer would have an incentive to sue to invalidate the regulation. Nevertheless, perhaps there could be a situation where a bank or other financial institution would want to sue in order to help itself by hurting its competitors.

    Third, citizens could try to persuade Congress to exert pressure on Treasury/IRS not to provide tax relief to banks. There are situations in the past where Congress has pressured Treasury/IRS to withdraw taxpayer guidance, although usually Congress has pressured Treasury/IRS to help industry groups.

    Fourth, citizens could lobby the the General Office of Accounting to use its authority to investigate actions by agencies to protect against fraud, waste, and abuse in order to investigate Paulson, Bernanke, Cox and anyone else that helping corporate interests.

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