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Fractional reserve banking is a confidence game built on the foundation of a Ponzi scheme. So long as the rollover of Ponzi finance flows, depositors remain confident that their money is safe. For Wachovia, that foundation eroded rapidly and depositors began to run as soon as the con game began to teeter.
Wachovia Corp., the bank that came within hours of collapse last month, reported a $24 billion loss today and said business customers drained a quarter of their deposits as the lender sought a rescuer.
It was here that the incestuous insider influence which Wachovia bought began to pay dividends. By hiring Robert Steel to be its CEO, those dividends went to Wells Fargo as well.
Wachovia Chief Executive Officer Robert Steel spurned an offer by Citigroup Inc., accepting a $14 billion bid by Wells Fargo that formed the largest U.S. branch network. The loss confirmed analysts’ contentions that Charlotte, North Carolina- based Wachovia overpaid for takeovers such as Golden West, the California lender at the forefront of the option-adjustable-rate mortgages that punctured profit throughout the industry.
“Wachovia management always looked at the glass half- full,” said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine. “Wells Fargo has come in and is saying, `We want to take the worst-case view.”’
Well actually, Mr. Cassidy, Wells Fargo wants the best tax write-off possible. And even at half-full, the cup runneth over.
The Wachovia Corporation announced a $23.9 billion third-quarter loss on Wednesday as it prepared to be taken over by Wells Fargo.
The bank took an $18.7 billion charge to write down the value of good will and wrote off $6.6 billion in credit losses tied largely to its disastrous purchase of Golden West Financial in 2006. And the red ink is unlikely to end soon.
Wachovia’s quarterly loss appears to be one of the largest in banking history. It is bigger than the market values of 422 companies in the Standard & Poor’s 500-stock index, and slightly more than the gross domestic product of Panama.
The third quarter loss was more than sensational. It was record-setting and self-serving. With investors begging Wachovia to give up the kitchen sink since the beginning of the credit crisis, why did management suddenly do so in such a spectacular fashion? Answer that question and you’ve answered why Wells Fargo shot like a bolt to snatch Wachovia away from Citigroup’s dirty pocket. You will also expose another government lie: that there would be no cost to the taxpayer in the deal. The reason was:
Taxes. It was all about the taxes.
The day after Citigroup made its bid, the Treasury changed a tax rule that lets banks accelerate the losses and writedowns on banks they acquire against their own net income, offsetting the charges as tax write-offs.
That’s right, the day after Citigroup made its bid, the Treasury changed a tax rule.
Under the old ruling, companies could only write off a small portion of the losses of the company they were acquiring, but this ruling removes any limitations on how much a company can offset its income with the losses of an acquired company. This, of course, is neatly packaged for Wells Fargo, which has said it expects to write down Wachovia's loan portfolio by about $74B:.
Wells plans on writing off some $74 billion of Wachovia’s $498 billion loan portfolio — an insanely large amount that reflects just how poisoned Wachovia’s books really were. With the new tax rules, it gets to use all of that $74 billion as a charge against its own net income, which means one thing: Wells Fargo’s going to be a tax-write-off machine for years to come.
What it really means is that well Wells Fargo just extended its lifespan, but the new ruling was probably more for the benefit of Wachovia and Bob Steele. Bob Steel, the long-time right hand man of US Treasury Secretary Henry Paulson, was stuck dealing with a stingy Citigroup willing to give up just $2.1B. Then just four days later, Wells Fargo dropped a $15B bombshell on Citigroup. The deal pays off handsomely for Wachovia and Wells Fargo, and finance comes on the backs of the US working stiffs.
just how much will it save? The Wall Street Journal, citing an independent tax analyst, estimates Wells Fargo could reap a tax savings of about $19.4 billion. To put that in perspective, the 0.1991 shares of its own stock Wells Fargo is offering Wachovia comes out to around $6.24 per share, or roughly $13.8 billion. Yes, Wells Fargo gets a $19.4 billion tax break for a company it’ll pay just under $14 billion for (if the deal closed today).
In other words, Wells Fargo didn’t pay anything for Wachovia: The IRS paid it more than $5 billion to take it. Who ever said you have to fear the taxman?
Well, former Treasury Undersecretary Robert Steel certainly has nothing to fear. It's a seemingly strange coincidence that the IRS ruling that saved the day came the very day before Wells Fargo rode in on its $15B horse. It's kinda strange how things just happen to work out for the well-connected insider types. More »
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