Monday, September 29, 2008

Citi buys most of Wachovia; Wachovia stock plunges to under $1

Citi buys Wachovia banking operations; cuts dividend to 16¢; plans to raise $10 billion:
Citigroup will buy the banking operations of Wachovia in a deal brokered by the Federal Deposit Insurance Corp, the FDIC said on Monday. ...

Under the deal, struck in consultation with the Federal Reserve, the Treasury and President Bush, Wachovia depositors will be fully protected, and no cost to the Deposit Insurance Fund is expected, the FDIC said.

"Wachovia did not fail; rather, it is to be acquired by Citigroup Inc on an open bank basis with assistance from the FDIC,'' the agency said in a statement on its website.

Shares of Wachovia, the sixth-biggest U.S. bank by assets, tumbled more than 80 percent in pre-market trading to below $2 per share. ...

The FDIC said it would share losses with Citi on certain Wachovia loans.

"The FDIC has entered into a loss-sharing arrangement on a pre-identified pool of loans,'' the agency said. "Under the agreement, Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans."

"The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.'' ...

"One thing that Citigroup has been wanting to do for a while is to expand its retail operations because they are in very limited areas, so this would basically allow them to do that,'' said Rose Grant, managing director of Eastern Investment Advisors in Boston.

Citigroup will buy the bulk of Wachovia's assets, including five depository institutions, and assume its senior and subordinated debt. Wachovia will retain ownership of AG Edwards, a big retail brokerage it bought a year ago, and its asset-management division, Evergreen.

"We will continue as a focused leader in retail brokerage and asset management,'' Wachovia spokeswoman Christy Phillips-Brown said.
It sounds as if Citi may have gotten a good deal that protects their downside, but many details are not yet known.

1 comment:

  1. "Wachovia did not fail"

    This is a technicality. For all practical purposes, Wachovia did fail. Had they not accepted this FDIC-brokered deal, the FDIC would surely have immediately seized them.