As was widely reported, Citigroup (C) and Wells Fargo (WFC) were the two top bidders for Wachovia (WB). After Wells dropped out, Citi got some help from the FDIC and a sweetheart deal. For about $2 billion in stock they landed Wachovia's banking operations. Evidently, Wells Fargo management was pretty stunned at the deal Citi got and decided it could do better and still not overpay. Wells will now buy the entire company for $15 billion in stock, without any assistance from the government.

This a big deal for Wells Fargo. Despite heavy exposure to mortgages in the most problematic states in the U.S. (notably California, where of course Wachovia has a huge stake), Wells has weathered the storm well so far as their underwriting standards have proven tighter than most competitors. Wells has made money every quarter since this crisis began. Now they are issuing $20 billion in new stock (nearly 20% dilution to current shareholders) to pay for this deal and raise a little extra capital.

Investors clearly think it is a great deal for Wells, as the stock is trading up 8%. As with most of these bank deals, the long term benefits for strong deposit institutions will likely far exceed the short term losses incurred by taking on even more bad mortgage debt. The trend continues... the strong are getting even stronger as the weak die off. The problem, of course, might be that we wind up with a few even larger big banks that are perceived as "too big to fail."

Full Disclosure: No positions in the companies mentioned at the time of writing, but positions may change at any time