700B bailout package truned into $850B spending

Politics in Washington DC defies logic. Last week, the House vetoed the 700B bailout package with a 228-205 vote. Then the Senate took on almost the same exact bill, adding to that an additional $150B pork spending. Surprise, surprise, the bill passed both the Senate (yesterday) and the House (today). Bush signed it into law immediately after.

Will the bailout help? Certainly it will help the banks' balance sheet. But I do not think the lending activity will come back quickly. The credit spreads won't narrow in short term, either. What the bailout will do for sure is to ensure some of the big banks to make a lot of money.

JPMorgan took on WaMu with its mortgage portfolio at depressed value without paying anything for it. Bank of America earlier took on Merrill Lynch, which also has lots of mortgage exposure. Now Wells Fargo and Citi are battling for Wachovia. Last Sunday, Wells Fargo pulled out in the last minute from the negotiation of potential take over of Wachovia. Citi came as the rescuer, after FDIC sweetened the deal with some loss guarantees for Wachovia's mortgage assets. Now with the knowledge of the bailout package likely to pass, Well Fargo came back today with a better offer to acquire the entire Wachovia at roughly $7/share. Citi's offer was a measly $1/share, only for the banking portion of Wachovia. Citi was hoping that Wachovia to provide it with the much needed cheap domestic source of financing, as most of Citi's deposits are international, while its investments are more geared towards US. It seems that it would be a great deal for Citi. But Well Fargo, with the backing of Warren Buffet, came in to spoil it.

A lot of people may be surprised to know that shares of Well Fargo, JP Morgan and many other banks are trading close to 52-week highs. These banks will do even better with the Treasury's $700B to help them shed those "toxic" assets from their balance sheet.

You got to love capitalism!