Anybody following the fight between Citi and Wells Fargo has to read Binyamin Appelbaum’s front-page piece in the Washington Post on the tax assumptions behind the Wells Fargo offer.
In touting the deal, Wells Fargo executives said they did not need money from the Federal Deposit Insurance Corp., which had agreed to limit Citigroup’s losses on a portfolio of Wachovia’s most troubled loans.
"This agreement won’t require even a penny from the FDIC," Wells Fargo chairman Richard Kovacevich said.
But experts in tax law said the Wells Fargo deal actually was likely to be more expensive for the government…
The amount of lost tax revenue would depend on the future profitability of Wells Fargo and the losses on Wachovia’s loans, but based on Wells Fargo’s financial disclosures, it could shelter $74 billion in profits from taxation.
Meanwhile, the NYT reports that Citigroup, now armed with its latest injunction, is seeking $60 billion in damages from Wells Fargo for interfering with the initial transaction — a number which seems to have been arrived at by the famous "think of a number and treble it" technique.
I think the most elegant solution is for Citi to match the Wells Fargo bid over the weekend and litigate the deal-protection devices in Friday’s transaction as illegal. This is a better case to pursue than a tortious interference case on a three-page letter in New York, even though the letter is very clear on the issue.
As far as the cost to the government is concerned, I do wonder whether Sheila Bair worries overmuch about Treasury’s future tax revenues, or whether there’s anybody in charge who can reject the Wells Fargo offer on the grounds that it will cost the government more than the Citi offer. Now that WaPo is fronting the issue so forcefully, though, I suspect that everybody will pay more attention to it.