But a closer look shows Wells Fargo is poised to reap billions in new tax breaks from its planned Wachovia deal, thanks to federal government actions after Citi's Sept. 29 bid.
On Sept. 30, according to Mark Russell, a corporate-tax expert at the investment bank Griffin Financial Group L.L.C., of King of Prussia, the Internal Revenue Service changed its interpretation of its Code 382 to let acquirers write off their entire tax bill, year after year, from reported losses at companies they buy.
On Oct. 2, Congress passed the $700 billion bad-loan bailout bill. That meant Wells Fargo would be able to unload Wachovia's bad loans and other assets and write off its losses - then use those losses to write down its tax bill for years to come.
Announcing his bid to investors the next morning, Wells Fargo chairman Richard Kovacevich said he would have to write off $74 billion in Wachovia losses. Pressed by analysts, Wells Fargo chief financial officer Howard I. Atkins agreed that "the bulk of that will be tax-sheltered, tax-deductible."
They didn't cite a number. But at the corporate tax rate of 35 percent, that's about $25 billion in tax relief for Wells Fargo, Russell said.
"It is a federal subsidy. It's no different from the government writing a check," said Griffin's president, Joseph Harenza.
And that's not counting the billions Wells might shave from future taxes by writing off its own commercial real estate and second-mortgage portfolios - when it figures out how much that'll be.
The tax breaks made the Wells-Wachovia deal "a lot more doable," Harenza said. "There was no question in my mind this was why Wells Fargo was able to bid [that day], and not the week before."
Citi was willing to buy Wachovia's bank assets, with or without the federal bailout. It was willing to invest $12 billion in the FDIC, in return for FDIC funding if losses grew too large. But the FDIC is funded by banks, not taxpayers.
For the public, which offer really "posed no cost"?
Banking on WellsBattered bank investors see Wells Fargo's Kovacevich as a hero. His bank, like JPMorgan Chase & Co. and PNC Financial Services Group, has so far avoided the worst losses of the credit crisis.
Wells Fargo is the biggest holder - 15 percent - in Ardmore-based Logan Capital Management Inc.'s $140 million Large Concentrated Value investment fund, which was up 3.5 percent from Jan. 1 through Sept. 30, before last week's market wipeout.
"Warren Buffett bought this stock for his personal account," Logan partner Marvin Klein reminded me. "He said on CNBC it's almost the only stock he owns."
With Washington Mutual Inc. and other Wells Fargo rivals going out of business, "they'll be able to charge higher fees and higher margins," said partner Richard Buchwald. "They're a big beneficiary of the Federal Reserve's rate cuts."
Kovacevich for Treasury?Bill Isaac was chairman of the FDIC in the early 1980s when he met Kovacevich, a rising executive at one of Citigroup's predecessors, Citibank.
At the time, Isaac was trying to interest the big New York banks in buying troubled Midwestern lenders to keep them from failing and needing FDIC bailouts. Citi, a complex institution, sometimes took more persuading than others. Kovacevich left in 1986 for Minneapolis-based Norwest Corp., which he renamed Wells Fargo and moved to San Francisco 12 years later, amid a long string of mostly successful mergers.
Isaac, now a bank consultant, is a Kovacevich believer.
"Dick is a strong and independent-minded guy, which is one of his great strengths in my judgment," Isaac told me. "He does not pander to anyone," Isaac said, including the affordable-housing activists who complained about Wells Fargo's consumer-lending record.
Kovacevich has turned day-to-day operations over to chief executive David Stumpf. With his knowledge of banking - and, apparently, federal regulation - "I hope we can persuade him to become secretary of the Treasury," Isaac said of the Wells Fargo boss, "no matter who wins this election."
Wachovia nostalgiaMain Line resident Henry Shaffner is sad to see the Wachovia name fade. His grandfather, Henry Fries Shaffner, was a founder of the bank and used to carry "All the deposits home with him at night/And slept with the money-box wrapped up tight," Shaffner and his wife, Roberta, wrote in a lyric, "Wachovia (W)rap."
I'm not printing the whole lyric, which ends with a verse on the Citi-Wells Fargo fight, but Shaffner insists it'll be current for a while: "Do you really believe this fight is over?"Related Links
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