Tuesday, October 07, 2008

re: Wachovia/Citi -- Cui Bono?

What could explain the sudden change of heart Mr. Steel had after agreeing to sell his company to Citi last week?

Referring to the $700 bn rescue package recently signed into law, Gary S. Becker opines in the Wall Street Journal (emphasis added):

Partly because many consumers are repelled by the intention to bail out companies and their executives who made decisions that got the companies into trouble, the new law includes income and severance pay limits for executives whose firms seek government help.

It was widely (and ambiguously) reported that the deal Wachovia signed with Citi invoked "government help." (One report made it crystal clear that Citi granted the FDIC warrants for upside participation; and one reported correctly that the Wells Fargo deal is a far greater burden on the taxpayer owing to the tax benefits of buying Wachovia's losses that Wells would enjoy. Citi would not, because the deal was signed before the tax benefits were enacted as law).

The premise offered for consideration, then, is thus: Robert Steel, Wachovia's CEO, exposed his company to substantial liability by wantonly breaching an exclusive contract executed with Citi. What reason could possibly be given for such bizarre and irresponsible behavior? Maybe he was just trying avoid those "income and severance pay limits" in the new bill. Maybe he was trying to save his bonus.


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