Pigs At The Trough: Behind The Citigroup, Wachovia, Wells Fargo Circus

First a very quick summary of what has been going on.

Early last week, the FDIC forced the hand of Wachovia and pushed them to be taken over by Citigroup. It was a typical FDIC sweetheart deal. This time for Citi. Citi paid $1 a share, or about $2.2 billion.

The government agreed to provide Citigroup with a financial guarantee on Wachovia’s most risky assets. It is similar to the deal that the Federal Reserve established with JPMorgan Chase’s emergency takeover of Bear Stearns.

Then later in the week, Wells Fargo recognizing that Wachovia was worth a lot more than $2.2 billion, especially because of some tax law changes made by Paulson's Treasury, bid, get this, $15.4 billion WITHOUT any government protection against risky assets.

Now,the courts will decide who gets Whacovia

So what is going on with all this aggressiveness to buy a bank in trouble?

Paulson's Treasury is writing regulations that will benefit firms like his old firm Goldman Sachs. It just so happened that this rule change was made last week Tuesday and Wells Fargo decided to try and steal Wachovia from the grips of Citigroup and its sweetheart deal. A signed agreement between Citi and Wachovia be damned.

What's the Treasury rule change that caused all this commotion? Specifically, companies are allowed to shelter profits from taxation based on their past losses. When a profitable company buys a company with losses, however, the government historically has limited the profitable company's ability to shelter its income based on the acquired company's losses. In the case of Wells Fargo, the company could only have sheltered about $1 billion in income each year --for a total of $20 million over the 20 year life span of tax loss carry forwards..

But the Treasury last week Tuesday changed the rules and removed the limits on the income banks can shelter based on the losses of acquired companies. In announcing its deal for Wachovia, Wells Fargo estimates it could write down $74 billion in losses on Wachovia's loan portfolio. Absorb that: Instead of $1 billion in tax sheltered income per year under the old rules, the new rules will allow $74 billion in sheltered income in any time period.

So basically, you have the government throwing so many goodies at the elite players that are left standing, like Citi and Wells Fargo, that they are fighting over who gets the goodies. Will it be Citi with its FDIC sanctioned low ball bid of $2.2 billion and the financial guarantee by the government against losses on Wachovia’s most risky assets, or will it be Wells Fargo and the super sized increase in value of Wachovia's tax loss carry forwards of $74 billion.

Either way, it is a heist.

Citi and Wells Fargo are pigs at the trough of multi-billion dollar gifts from the government under the cover of the overall financial crisis.

You can be certain there are all sorts of these hidden deals tucked inside the 400 plus page Paulson Plan and other rules being changed by government agencies because of the crisis. Most of them are hidden and unknown to the general public. The story was broken by WaPo on the tax benefit change only because of Wells Fargo's aggressive bid for Wachovia, and thus focus on the deal.

But, keep in mind that Goldman Sachs (Paulson's old firm) just became a bank holding company that is expected to be making very aggressive acquistions in the banking industry. Thus, Paulson's change in banking tax law will likely benefit Goldman to the tune of billions upon billions in tax benefits--especially since Paulson's phony bailout will require mortgage securities to be sold at depressed market values, which will producee greater tax loss carry forwards for Goldman from the banks they acquire.

So it doesn't matter how the court rules, whether in favor of Citi or Wells Fargo. The fix is in, with major benefits handed out by the government to whichever pig wins.

Given the billions involved, let's hope they at least pay for their own lipstick.

UPDATE: Forgot to mention, the new CEO at Wachova is Robert Steel, a former Treasury AND Goldman man. Cozy.