Citigroup agrees to acquire Wachovia's banking operation
All Wachovia depositors will be protected against losses, and customers should expect business as usual under the deal brokered by the FDIC.
In the latest government-backed bid to prop up the financial system, banking goliath Citigroup Inc. agreed today to acquire rival Wachovia Corp.'s banking operation for $2.16 billion in stock in a deal brokered by the Federal Deposit Insurance Corp.
All Wachovia depositors will be protected against losses, and the bank's customers should expect business as usual as Citigroup, parent of Citibank, takes over, FDIC Chairwoman Sheila Bair said in a statement.
Citigroup agreed to shoulder as much as $42 billion in losses on Wachovia's loan portfolio, which includes troubled mortgages acquired in 2006 when Wachovia bought California-based Golden West Financial Corp.
The deal, the latest in a series of emergency transactions reshaping the tottering banking industry, could result in closures of some bank offices in California. By acquiring savings and loans that survived the 1980s savings-and-loan meltdown, New York-based Citigroup and Charlotte, N.C.-based Wachovia each established a large retail presence in California.
Citibank has 382 branches in California, according to the FDIC website, and Wachovia Bank has 176. Banks typically close some branches and eliminate jobs of support staffers to cut costs after taking over a rival.
The FDIC said it "facilitated" the deal with approval by the Federal Reserve and the Treasury Department, an illustration of the combined muscle the agencies will exercise as central players in the government's $700-billion bailout plan.
Citigroup, the nation's largest bank by assets, will absorb the first $42 billion in losses on a $312-billion pool of loans that includes $122 billion in pay-option adjustable-rate mortgages from Golden West's World Savings unit.
The $42 billion is enough of a cushion that no losses to the federal deposit insurance fund are expected, the FDIC said. However, the insurance fund, which currently holds about $45 billion, would suffer any losses on the loans in excess of that amount.
Citigroup granted the FDIC $12 billion in preferred stock and warrants to compensate the government agency for bearing the risk of losses in excess of $42 billion.
The pay-option loans allowed borrowers to pay down their mortgages or to pay so little in the first few years that their loan balances rose. As late as this month, new Wachovia Chief Executive Robert Steel projected only a 12% loss rate on the option ARMs, which would have amounted to about $15 billion.
