WORLD> America
Wells Fargo agrees to buy Wachovia; Citi objects
(Agencies)
Updated: 2008-10-04 14:59

"At the time they made the decision, it looked a lot more likely that it would pass," he said. "You have the possibility of offloading these loans at a price that is higher than current values."

The failure of the US government's proposed $700 billion bailout for financial institutions Monday cast doubt on whether Citigroup would be able to rid itself of some of Wachovia's bad debt.

The proposal would have allowed Citigroup to sell Wachovia's distressed mortgage-related assets to the US government for a profit.

Congress approved a sweetened version of the bailout plan Friday and US President Bush quickly signed it.

The core of the plan remains little changed from its inception -- the US Treasury Department would have $700 billion at its disposal to purchase bad mortage-related securities that are weighing down the balance sheets of institutions that hold them.

But in analyzing the deal, Wells Fargo assumed it would not sell any of the loans to the government.

"We couldn't assume that they would necessarily give us prices equal to what we think the values are," said Chairman Dick Kovacevich in an interview with The Associated Press.

Wells Fargo said it expects to take a $74 billion hit on Wachovia's $498 billion loan portfolio. That values the portfolio at 85 cents on the dollar. But the most troubled real estate loans, known as pick-a-pay -- where borrowers got low introductory rates and were allowed to defer some interest payments until later years -- are worth only an estimated 74 cents on the dollar, according to a fact sheet released by Wells Fargo.

The bank said it expects to incur the majority of credit costs in the next two years, and for the transaction to add meaningfully to earnings after that.

One factor that did play in to the deal was the clarification of a tax rule issued this week by the Internal Revenue Service.

On Tuesday, the IRS issued guidance on a rule allowing companies to offset losses from companies they acquire with tax breaks applied to their profits after the takeover.

"It was an element that gave us clarity on an area of uncertainty," Kovacevich said.