In the frenzied legal activity this weekend over the battle for who will acquire Wachovia, Wachovia sued Citi in federal court claiming that the exclusivity agreement between it and Citi was voided by Section 126(c) of the bailout law. It seems nearly everyone thinks this provision was slipped in at the last minute–either at the behest of Wachovia or Citi or the FDIC, no one is sure. But, once again, nearly everyone is wrong.
Section 126(c) seems aimed at clearing away contractual obstacles to a strong bank acquiring a failing bank. Wachovia argues that the law undoes the exclusivity agreement with Citi. Citi argues that the law undoes Wachovia’s merger agreement with Wells Fargo and leaves the exclusivity agreement in place because the CIti deal had FDIC support.
Here’s the section:
“(c) UNENFORCEABILITY OF CERTAIN AGREEMENTS.—Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)) is amended by adding at the end the following new paragraph:
(11) UNENFORCEABILITYOFCERTAINAGREEMENTS.—No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly—
(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,
(B) prohibits any person from offering to acquire or acquiring, or
(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of, all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the Corporation [FDIC] exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.”
There’s a lot of debate over what Section 126(c) means—here’s Steven Davidoff’s excellent discussion of the issues—but one thing that shouldn’t be under debate is when it appeared in the bill. This section wasn’t a last minute addition to the final draft of the law. It was in the bill rejected by the House on September 29th. Word for word, not one jot changed. Apparently no one noticed it until it was invoked by Wachovia in this deal, but it’s easy to overlook these things in hundreds of pages of legal mumbo-jumbo.
Whatever this provision means, it was written long before the Wachovia deal was in place.
What other secrets are contained in the bailout law? We have a feeling we’ll keep discovering the law does many things no one expected.