Saturday, September 27, 2008

Viewer asks would Wachovia's demise halt CC funding?

NewsLanc received a letter expressing concerns that the potential failure of Wachovia Bank might halt funding for the Convention Center / Hotel project.

We don't think this will occur. The bonds are sold and the money set aside for the project.

The people at potential risk are those who own the bonds. If there suddenly were no guarantee, they would not be able to sell them at the end of the two week duration. (These very short term bonds are what are called "low floaters.") In that circumstance, the bond holders would be stuck with them.

However, this is highly unlikely to occur. Whatever institution acquires Wachovia, be it through a buy out or via a "shot gun wedding" arranged by the Federal Reserve, will continue to serve as guarantor as a matter of successor in interest.

What is so disturbing here is that Wachovia should never have done that deal. They were well aware they were likely to be stuck with the bonds at the end of five years and would have to renew their guarantee and take a charge on their financial statement for a guarantee of non-performing bonds. Sooner or later they would be obliged to acquire the defaulting bonds.

With the assistance of others very experienced in finance and bank lending, we provided a half dozen Wachovia executives with detailed information, including the negative PKF Study, presenting the case why they should not provide the guarantees.

Wachovia's attitude from the local level all the way to the CEO appeared to be "Make money now and let someone else worry about it later." It is doubtful they realized that the "someone else" would be the bank's successor!