News from the Wire

Wells Fargo deal secures 'golden parachutes' for Wachovia execs

Tuesday, October 14, 2008 — 15:01:56 (EDT)

New York, Oct. 14, 2008 -- Wells Fargo's acquisition of Wachovia, promoted as being better than a competing Citigroup bid because it would not require federal assistance, will cost taxpayers plenty.

Moreover, departing Wachovia Corp. executives will receive up to $225 million in "golden parachutes" from the Wells Fargo deal. They would have received none from the Citigroup Inc. merger.

Among the Wachovia branches that Wells Fargo will swallow are two in Decatur and one in Hartselle. The Federal Reserve on Sunday approved the Wells Fargo & Co. acquisition.

The importance of federal incentives to Wells Fargo's purchase of Wachovia is apparent in its timing.

On Sept. 26, after reviewing Wachovia's books, Wells Fargo walked away from negotiations. Citigroup continued its efforts to make a deal, and announced it had one on Sept. 29.

Also on Sept. 29, the IRS made a rule change that had enormous implications for Wells Fargo, effectively permitting it to pay for Wachovia out of tax savings from Wachovia losses.

Wells Fargo entered a merger agreement with Wachovia on Oct. 3, the same day Congress passed the bailout bill.

'No cost to taxpayers'

In announcing its acquisition, Wells Fargo on Oct. 3 issued a press release, which stressed that -- unlike the Citigroup offer -- its acquisition "requires no financial assistance from the Federal Deposit Insurance Corporation or any other government agency."

In a conference call with Wells Fargo investors the same day, Wachovia Chief Executive Robert Steel said the takeover "poses no cost to the United States taxpayers."

Two days later, Wells Fargo issued another press release saying that its merger, "in stark contrast to Citigroup's proposal ... does not demand financial support from our government."

The combined effect of the Sept. 30 IRS change, designed to promote the takeover of ailing banks, and the Oct. 3 passage of the bailout law suggest the consequence to taxpayers will be substantial.

Wachovia officials did not return calls Monday. Wells Fargo officials declined comment.

IRS change

Wells Fargo Chief Financial Officer Howard Atkins estimated Wachovia had $74 billion in losses in its asset portfolios.

Previous IRS regulations restricted Wells Fargo's ability to enjoy a tax deduction for those "built in" Wachovia losses to $1 billion a year.

"Congress has always been very sensitive about companies trafficking in losses," said Robert Willens, a corporate tax expert in New York City. "They don't want you to buy a company primarily to be able to use its losses."

Willens spent 20 years as an internal tax and accounting specialist at Lehman Brothers before opening his own tax and accounting firm in January.

IRS revised the rule for banks Sept. 30 in response to multiple bank failures, and the perceived need to have healthy banks acquire the sick ones.

"That means the (Wachovia) losses can offset unlimited amounts of taxable (Wells Fargo) income," Willens explained.

The rule change was huge for Wells Fargo. Willens said the present-value benefit for the bank is about $20 billion.

"It basically offsets the entire purchase price," Willens said. "They're basically getting Wachovia for nothing."

In other words, Wells Fargo is using money it would have paid in taxes, to buy Wachovia.

As Atkins said in the conference with investors, "We'll be refining that $74 billion but we do expect that the bulk of that will be tax sheltered, tax deductible."

Buying Wachovia would not have created the same tax benefit for Citigroup, because it was not buying the whole company.

"You can only (use the new IRS rule) if you are buying the whole company, not just select assets, which is what Citigroup was going to do," Willens said.

Unlike Wells Fargo, Citigroup would not have been able to pay for the Wachovia purchase with tax savings.

Bailout bonanza

Not only did Wells Fargo benefit from the IRS change, it stands to benefit from the bailout package Congress passed the same day the bank agreed to acquire Wachovia.

The bailout package authorized the Treasury Department to purchase $700 billion in bad mortgage loans from banks.

In the conference with investors, Wells Fargo's Atkins said the bank planned to use the bailout package to help it dump bad Wachovia debt.

Citigroup's deal with Wachovia only required the FDIC to cover losses from Wachovia's bad debt after Citigroup absorbed the first $42 billion in losses.

In exchange for its backing of a Citigroup-Wachovia merger, FDIC was to receive $12 billion in Citigroup warrants. It receives nothing from the Wells Fargo deal.

Willens said the bailout package would not have helped Citigroup with the first $42 billion in Wachovia losses.

Wells Fargo, though, can sell its bad Wachovia loans to the federal government and then, using the new IRS rule, write off any losses.

At least in the short term, the Wells Fargo deal could be worse for taxpayers.

Golden parachutes

While the burden on taxpayers from the Wells Fargo deal may end up being greater, Wachovia executives will benefit.

The Citigroup deal, because of FDIC's involvement and because it involved only a portion of Wachovia, canceled any "golden parachutes" for Wachovia executives.

A golden parachute, a type of severance agreement, is a payment promised to an executive if another company takes over his employer.

Wachovia executives have golden parachutes worth a total of $225 million, according to Citigroup court filings.

Wachovia President Ben Jenkins could receive a golden parachute worth $17 million, according to Wachovia's 2008 proxy.

David Carroll, head of the capital management group, could receive $18.1 million. Steve Cummings, head of corporate and investment banking, could get $18.6 million.

"That's just the way they negotiated the deal," said Willens. "In deals that involve conventional federal assistance, the executives have to give up their golden parachutes as a condition of the deal. This one (with Wells Fargo) involves federal assistance, but it's not conventional. There's nothing in the merger agreement that says anything about the golden parachutes."

It should be no surprise, Willens said, that Wachovia executives pushed the company to walk away from the Citigroup deal and embrace a merger with Wells Fargo.

"There was no doubt," Willens said. "Everybody in the Wachovia camp wants the Wells Fargo deal to succeed, and clearly it will succeed."

Wachovia timeline

An Internal Revenue change and passage of the bailout package gave Wells Fargo a renewed interest in Wachovia. The timeline:

• July 22: Wachovia Corp. reported quarterly loss of $8.86 billion, most from bad mortgage loans.

• Before Sept. 26: Citigroup and Wells Fargo analyzed Wachovia's books as they considered buying the crippled banking giant.

• Sept. 26: Wells Fargo walked away from Wachovia negotiations.

• Sept. 26: Depositors withdrew $5 billion from Wachovia in one day.

• Sept. 29: House rejected bailout plan, 228-205.

• Sept. 29: Wachovia announced it would sell its retail banks and several other business groups to Citigroup for $2.1 billion. The FDIC provided partial loss protection to Citigroup for Wachovia mortgages and other at-risk assets.

• Sept. 30: IRS issued Notice 2008-83, allowing banks to enjoy much larger tax benefits when they buy another bank with lots of bad debt.

• Oct. 1: Senate passed bailout bill, with numerous perks to attract House votes.

• Oct. 3: House passed bailout bill, and President Bush signed it.

• Oct. 3: Wells Fargo bought Wachovia for $7 per share, about $15 billion. The merger began a legal battle with Citigroup.

• Thursday: Citigroup dropped fight to block merger, but said it would sue Wells Fargo for its losses.

• Sunday: Federal Reserve, the final regulator with authority to block it, approved Wells Fargo-Wachovia merger.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information: bankcardlife.com?orid=33533&opid=1 .

Source: Company press release.