Wells-Wachovia: good for everyone but Citi

Maybe Warren Buffett changed his mind?

Wells Fargo has now snatched Wachovia out of the jaws of Citigroup. This deal is good for the US taxpayer, which no longer has to backstop the acquirer's losses on the deal, and bad for Citigroup, which is no longer acquiring the retail-banking expertise it so desired.

If it's bad for Citi, does that mean it's good for Wells? I would say that in the short term the answer is yes, in the medium term it's no, and in the long term it's yes.

When funding is tight, nothing beats a large deposit base -- and Wells Fargo will now have a monstrous $787 billion in deposits, which are pretty much the lowest-cost and most reliable source of funds that any financial institution can have.

In the medium term, there are huge questions over the combined bank's California real-estate exposure. Wells Fargo generally managed to avoid writing the most toxic mortgages in that state, but at a certain point any mortgage becomes toxic if house-price declines are big enough. I've always been a little surprised at the way that California-based Wells Fargo managed to weather this crisis -- its market capitalization has been higher than Citigroup's for some time now -- and now that its own mortgage portfolio is going to be mixed up with Wachovia's, investors might be hesitant to continue to give it the benefit of the doubt.

In the long term, however, this catapults Wells Fargo into the megabank leagues: there are now four, rather than three. In an age of uncertainty and consolidation, being big is an enormous advantage.

So on net most people should like this deal, unless they're Citigroup shareholders. (Citi's stock is down 13% this morning.) I can see why Vikram Pandit didn't feel he could afford to get into a bidding war with Wells Fargo, but this is a big loss for him.

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