Clash of The Titans

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In some ways, the clash between mortgage and banking giants Wells Fargo and Citibank for Wachovia is a hopeful sign. Both companies are eagerly vying to buy Wachovia and merge the company with their own to increase the size and scope of both companies.

But it appears that, once the dust settles, the big financial companies will only have grown bigger while many small and medium sized banks will have disappeared, either having closed their doors for good or been absorbed by the larger players. The only exception to this possible trend may be with the numerous small credit unions that exist throughout the country. Their limited missions and roles may have actually shielded them from most of the damage experienced by mainstream institutions.

What will the landscape look like in a year? It is very hard to say. Much also depends on what happens with Freddie Mac and Fannie Mae.

Meanwhile, Wachovia Corp is vowing to press ahead with an agreement it made recently to merge with Wells Fargo, despite a recent ruling by New York State Supreme Court Justice Charles Ramos blocking the sale because of a previous agreement, brokered by the FDIC, of the Wachovia’s banking operations for $2.1 billion. The offer on the table from Wells Fargo, however, is the purchase of Wachovia in it’s entirety for $14.8 billion, which is certainly better for Wachovia employees and shareholders than a piecemeal sale of the company.

In response to Judge Ramos’ ruling, Wachovia responded with a suit of its own asking U.S. District Judge John Koetl to allow the deal to go forward. Christy Phillips-Brown, a Wachovia spokeswoman, released a statement to the effect that Wachovia would be happy to entertain a counteroffer from Citibank but would otherwise press forward with the sale to Wells Fargo.

It will be interesting to watch this situation develop as it may be an early signal of the market’s impending recovery that two large companies are now heatedly competing for a third. The NY Times is reporting today that the federal government has been actively pressuring banks and mortgage companies to modify loans rather than foreclose and that “the extraordinary government intervention in Fannie Mae, Freddie Mac and a growing number of banks puts federal agencies in the powerful, and awkward, position of deciding which borrowers will receive help and who will lose their home.”

Now, as one who believes the federal government’s pressure on Fannie and Freddie to support the sub-prime market was what touched off our current crisis, I don’t take this as a positive sign. Both the secondary mortgage market (i.e., Fannie and Freddie) as well as the banking industry had very carefully crafted strategies for working with homeowners with their first goal always being to keep people in their homes.

It’s generally more expensive for a lender to have to foreclose on a home than it is to restructure a loan to keep it in the hands of the buyers. It was a system designed to limit losses which also, conveniently helped homeowners.

Tampering yet again with the market can only add to its problems. Is that message seeping through yet? It doesn’t look that way.