Citigroup's Collapse

| Sat Nov. 22, 2008 2:07 AM EST

CITIGROUP'S COLLAPSE....The New York Times explains the proximate cause of Citigroup's imminent demise:

The current turmoil can be traced back to the last weekend of September, when it sought to reassert itself by swallowing Wachovia, the stricken bank based in Charlotte, N.C., whose vast deposit base would have turned Citi into one of America's dominant lenders.

As the global financial crisis drove Wachovia toward collapse, the government frantically engineered their marriage. At a bargain price of $1 a share, Vikram S. Pandit, Citigroup's chief executive, was happy to oblige: The deal would have greatly enhanced Citi's retail banking presence and added more stable consumer deposits to a balance sheet staggered by billions in write-downs on bad mortgage loans and related securities.

But like so many other things for Citigroup over the last several years, it fell apart. Less than a week later, Wells Fargo, the powerful San Francisco-based bank, swooped in with a higher offer. Citi was left in the lurch, without a business that was vital to its future.

And why was Wells Fargo able to swoop in? You remember the Treasury notice a few weeks ago that modified Section 382 of the tax code, don't you? Pretty much every tax attorney in the country thinks the change was illegal, but Treasury went ahead with it anyway:

The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo.

I'd like to hear more about this before jumping to any conclusions. Citigroup's problems run deeper than merely the failed merger with Wachovia, after all. Still, if these two stories are right, it was the sudden and illegal change in Section 382 that allowed Wells Fargo to conclude their deal with Wachovia, and it was the loss of Wachovia that sparked the downward spiral of Citigroup, one of America's three big money center banks. Was this yet another own goal from the Treasury Department?