Lost in the strange but not surprising boosterism emanating from Uptown over Bank of America nabbing Merrill Lynch at a fire sale price is the fact that the same fire may consume Wachovia.
I thought about this long and hard yesterday as the Dow shed 500 points and the entire financial sector was knocked to its knees. Time to unlearn what you thought you knew, back up, and look at the big picture.
BofA CEO Ken Lewis had a chance to buy Lehman Bros. instead of ML but couldn’t get enough backstop from the Fed and Treasury to ice the deal. As a result Lehman is history, its assets and contracts swamping Wall Street. Then there is the insurance giant AIG, also caught with debt contracts it cannot make, Merrill still with its capital needs and credit exposure, and Washington Mutual ailing as well.
Ignoring the complexity of instruments involved, what this all means is tremendous downward pressure on asset values for the forseeable future. Everyone’s assets, including Wachovia and Citibank, BofA’s major rivals at the top of the shrinking banking foodchain. Moreover, Wachovia even under new CEO Bob Steel still seems to be in denial about its exposure in housing market. The company seems to think the worst is past, especially in California and Florida. Yet there is plenty of reason to think that values will fall another 10 to 20 percent in those markets. Can Wachovia handle that? I wonder.
And I especially wonder in light of yesterday’s meltdown and what is to come this week. America’s financial system is brittle and illiquid. The condition is spreading as credit continues to contract. This simply cannot be fixed without billions in new dollars, perhaps 500 billion of them. There remains denial on this front. I submit only the failure of major money center bank will punch through this fog. Looking at their exposure, Wachovia and Citi are the most likely candidates. I doubt Ken Lewis wants a failure of this size to happen, but I guarantee he sees the possibility coming.
In sum, this will be a week long remembered in Charlotte. But not for the reasons the clueless Uptown crowd thinks. Lewis didn’t buy another podunk bank, although you wouldn’t know that from reading the cut-and-paste quotes from the Charlotte Chamber and Pat McCrory.
Lewis may have just signed Wachovia’s death warrant.
Bonus Observation: The 9/11 connection to the current meltdown? A Clinton insider.
Update: Cheeky of me to question the likes of Henry Blodget, but he should understand that Ken Lewis by striking a deal with ML before ML got even softer bought himself tons of goodwill from the Fed and Treasury. In short, BofA went from too-big-fail to we-can’t-let-fail. And the good graces of those with access to the public purse and the US Mint is a real bankable asset, as AIG is finding out today. Still, Blodget makes an important point about price. If both BAC and MER continue to slide, this deal will have to be re-worked.
