Snowball Warren Buffett’s Goldman Sachs deal negotiated last week may be looking a little slushy right now. The same for Citigroup’s Wachovia buy. And it’s all because of Congress’s Tarp rejection.
Buffett wagered $5bn last week buying up GS stock — an action explicitly predicated on some form of government bailout. This from Buffett’s Sept. 24 interview with CNBC — a day after buying into GS:
If I didn’t think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.
Ditto (though less overtly) Citigroup’s Wachovia buy yesterday. They’re now the proud owners of $122bn of option ARMS, the most toxic of mortgage assets. Those wouldn’t have been much of a problem if the proposed Emergency Economic Stabilization Act had been voted through Congress, mopping up banks’ illiquid assets along the way. From Bloomberg yesterday:
It was unclear how any rescue package might affect Wachovia’s portfolio of bad loans, said Kenneth Thomas, an independent banking consultant and economist in Miami.
Federal officials ‘probably told Citigroup that if they do this deal, we’ll figure out a way to make to work,’ Thomas said. ‘The biggest fear of regulators is seeing lines of people on TV trying to withdraw their money.’
Without a confirmed bailout, Citigroup CEO Vikram Pandit’s $2.2bn splurge may be looking a little premature. Of course Citi will get to share some of the Wachovia risk with the US Federal Deposit Insurance Corporation, with Citi absorbing $42bn of losses and FDIC taking losses beyond that. That might help take some of the no-Tarp sting off Citi (and perhaps shift it onto FDIC).
Regardless, a US government bailout of some sort will likely emerge later this week. Whether it will be one as favourable to Buffett and Pandit’s ambitions will be interesting to see.