Bid for Wachovia
After Change In Tax Law, Wells Fargo Swoops In
Saturday, October 4, 2008
Wells Fargo's deal for Wachovia could cost the federal government billions of dollars in lost revenue as the San Francisco company takes advantage of a new change in federal tax regulations designed to encourage bank mergers.
The change was made Tuesday by the Treasury Department, one day after Wachovia agreed to be rescued by Citigroup, and two days after Wells Fargo walked away from the table, leaving Citigroup as the only bidder.
With the change in place, Wells Fargo renewed its pursuit of Wachovia, and yesterday announced a surprise deal to buy the entire company for about $15.4 billion, topping Citigroup's $2.2 billion deal for most of it. Citigroup still could sue or make a counteroffer. The winner will become the largest bank in the Washington area.
In touting the deal, Wells Fargo executives said they did not need money from the Federal Deposit Insurance Corp., which had agreed to limit Citigroup's losses on a portfolio of Wachovia's most troubled loans.
"This agreement won't require even a penny from the FDIC," Wells Fargo chairman Richard Kovacevich said.
But experts in tax law said the Wells Fargo deal actually was likely to be more expensive for the government. Losses on Wachovia's portfolio of bad loans would have been absorbed by the FDIC, which is funded by the banking industry. Under the tax law change, those losses instead will allow Wells Fargo to reduce its taxable income.
"They said they're doing it without federal assistance, but in reality they are doing it with federal assistance. It's just tax assistance," said Robert Willens, an expert on tax accounting who runs a firm of the same name.
The amount of lost tax revenue would depend on the future profitability of Wells Fargo and the losses on Wachovia's loans, but based on Wells Fargo's financial disclosures, it could shelter $74 billion in profits from taxation.
The Treasury Department said the change in tax laws was not intended to benefit any particular company and had been under consideration for weeks. The change was announced with a handful of other measures designed to buttress the banking industry after the House of Representatives initially rejected the Treasury's bailout plan.
Wachovia said it had no involvement in the change. Wells Fargo declined to comment.
The Wells Fargo deal was greeted with joy by Wachovia shareholders, many of whom thought Citigroup had taken advantage of Wachovia's short-term financial problems to all but steal the company. Wachovia's stock rose 57 percent to $6.13 in trading yesterday. But that was still below the roughly $7 a share offered by Wells Fargo, reflecting continued uncertainty about which company will prevail.
Wachovia and Wells Fargo have signed a merger agreement and both boards have given their approval, although shareholders and regulators must still sign off. Of course, Wachovia's board also has approved a sale to Citigroup.