With Citigroup Inc.'s government-brokered deal to swallow up most of rival Wachovia Corp., the country moves a step closer to a banking landscape dominated by a handful of goliaths.
The diversified operations and national retail footprints of these super banks -- Citigroup, Bank of America Corp. and JPMorgan Chase & Co. -- draw comparisons to the banking business in other highly developed nations, whose financial systems are dominated by a few gigantic banks overseen by a single powerful regulator.
"I don't know if the government is inadvertently or intentionally building giant financial companies like in Japan or the U.K., but it's turning out that way," said Gerard Cassidy, an analyst who follows banking companies for RBC Capital Markets.
New York-based Citigroup, the largest U.S. bank by assets, agreed Monday to pay $2.16 billion for Wachovia's banking operations and also to shoulder the first $42 billion in losses on a $312-billion pool of troubled Wachovia loans.
The loans include adjustable-rate mortgages inherited from Oakland-based Golden West Financial Corp., the parent of World Savings, which Wachovia acquired in 2006.
The Federal Deposit Insurance Corp. would be on the hook for losses over $42 billion, but the FDIC said it didn't expect any losses. Depositors won't lose a dime, even on uninsured deposits, the FDIC said, just as they were fully protected last week when JPMorgan Chase took over Washington Mutual Inc.
Citigroup also took over Wachovia's obligations to its bondholders. But Charlotte, N.C.-based Wachovia itself -- what remains is mainly its brokerage and a unit that manages funds for institutional investors -- saw its stock hammered.
The shares already had been down 74% for the year as delinquencies increased on Wachovia's adjustable-rate home loans, commercial real estate loans and Wall Street operations. They fell from $10 to $1.84 on Monday, an 82% decline for the day.
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. 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. Citigroup said it would close less than 5% of the combined banks' branches but didn't break out a California figure.
In agreeing to take over Wachovia, Citigroup joins Bank of America and JPMorgan in working with regulators to take over competitors that have run out of cash or are loaded with failing mortgages. Bank of America swallowed Merrill Lynch & Co. as well as Countrywide Financial Corp., and JPMorgan took over Bear Stearns and Washington Mutual.
Citi, JPMorgan and BofA are by far the largest commercial banks in the country, with Wells Fargo & Co. now a distant fourth.
The trend will lead to greater regulation, however. The Federal Reserve and the U.S. Treasury, as a condition of helping troubled financial institutions, are forcing the combinations of big banks and requiring lightly regulated Wall Street firms to become commercial banks. Commercial banks are highly regulated and are required to have a far larger capital cushion against losses.
Several experts said it was likely that the insurance industry, now regulated by individual states, eventually would be moved under the umbrella of a federal regulator, because the government had to take over the giant New York insurer American International Group Inc., along with mortgage giants Fannie Mae and Freddie Mac.
"The organizing principle is that if an institution is big enough to pose a risk to the overall system, it may need to be subject to federal regulation," said Jim Wilcox, a UC Berkeley banking professor.
Insurers were among the institutions that would have been helped by the Bush administration's proposed $700-billion bailout -- a rescue plan that was available only on condition that the beneficiaries give the government more control over them going forward.
The House's rejection of the bailout Monday is unlikely to derail the trends toward consolidation, increased limits on certain risky financial derivative products and the move to empower regulators, said Donald F. Kettl, political science professor at the University of Pennsylvania.
He said pressure for additional regulation was mounting not only here but among our allies, nations where the fallout from the U.S. credit crunch is creating "a global financial crisis."
To be sure, the idea of more regulation of bigger companies strikes many as a flawed model.
UCLA banking professor Avanidhar Subrahmanyam said that regulators should protect "the little guy" through deposit insurance and other safeguards at retail banks, but the country would generally be better off if companies were allowed to compete freely and to fail if they made bad mistakes.
"Regulators will never be able to keep pace with financial innovation," he said.
* Founded: 1812
* Headquarters: New York
* Chief executive:
* Employees: 357,000
* Key brands: Citibank, CitiFinancial, Salomon Bros., Smith Barney, Primerica
* Assets (as of June 30): $2.1 trillion
* Founded: 1879
* Chief executive:
Robert K. Steel
* Employees: 120,000
* Branches: 3,300
* Assets (as of June 30): $812.4 billion
Source: Times research