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I’m no fan of Citicorp but I think they’re going to either win Wachovia outright or Wells Fargo is going to have to write them a check for billions to go away.

The FDIC wanted a deal saving Wachovia done by market open last Monday. Wells Fargo was negotiating a deal last weekend walked away at the last minute, Citi and Wachovia worked out a deal by the deadline. If there was no deal by the market’s open, Wachovia probably would have failed and gone into FDIC receivership. So the only reason Wells Fargo can in with a new offer now is because Citi kept Wachovia alive (and Citi’s stock has dropped as a consequence of agreeing to the buyout).

Another thing is Citi was paying $2 billion to Wachovia, but it also gave the FDIC $12 billion in stock warrants. The Wells Fargo deal pays $15 billion direct to Wachovia, thus cutting Citi out of its deal and the taxpayers out of their $12 billion in warrants. Beyond that, from how Wells Fargo structure their deal, they’re using a tax loophole worth at least $29 billion. In other words, the taxpayers stand to gain at least $41 billion more from the City deal than the Wells Fargo one.

The FDIC is on the hook (under the Citi deal) for losses above $42 billion, but the converse is Citi has promised to cover the first $42 billion in losses. In contrast Wells Fargo is free to hit the $700 billion bailout fund immediately.

If Citicorp fails, then let it fail on its own and apart from Wachovia. It appears that Citicorp was “using” Wachovia to gain some more time before they failed. At least with Wells Fargo, it’s in much better shape than Citicorp and Wells Fargo will leave Wachovia all together and not break it up.

It’s this kind of “fire sale” type of mentality that is doing in the financial system across the board and which is threatening to bring the whole thing crashing down. That’s why we need a massive amount for “bail-out” and to restore confidence and get the system working smoothly again. Then, after that is accomplished (i.e., “stabilize the patient”) you can work on ways to make things better in the long-term (and overall).

Wells Fargo could easily pay for any “out of pocket” expenses incurred by any of the other parties involved — but it doesn’t need to pay for the “blood-sucking” that Citicorp was hoping to do with Wachovia...