I was thinking recently about the failed Citigroup Wachovia deal. As a Wells Fargo stockholder, I was in favor of the Wachovia deal because of the large deposit base that Wells is picking up. The merger will give Wells Fargo a major presence on the East Coast and should increase earnings in the future. But I can’t help thinking, what would have happened if Citigroup had gotten Wachovia?
Citigroup’s merger with Wachovia would have given Citi a deposit base of 600 billion dollars. Citigroup would have only had to assume the first 42 billion dollars in losses with the government backstopping any additional losses. But I still am not sure if this would have been enough for Citi to stand alone without additional capital injections. Citigroup still has over 1 trillion dollars in off balance sheet assets that have not yet been written down. I think that the government would have had to pay substantially more to backstop the losses of a Cit Wachovia deal.
Wells probably has the strongest balance sheet of all of the major banks. Their balance sheet should be strong enough to absorb additional losses from Wachovia’s Golden West mortgage portfolio. I am not sure that Citigroup could have handled any losses related to Wachovia’s shaky mortgage portfolio. I think that this is only the beginning of Citi going to the government for fresh capital. This will only further dilute shareholders. I can only wonder if a merger with Wachovia would have kept Citi from its freefall or accelerated the process.
