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Citigroup Inc. agreed to acquire Wachovia Corp.'s banking operations in another deal orchestrated by the federal government, this time by the Federal Deposit Insurance Corporation and one in which the agency could be on the hook for loan losses.
The Federal Reserve and Treasury Department were also part of the effort, another sign of how proactive the government has been in preventing ailing financial firms from failing and instead pushing for stronger firms to acquire some assets of the weaker companies.
Wachovia shares, in premarket activity, had plummeted steadily and were off 93% to 74 cents recently. Citigroup rebounded briefly before falling 6.2% to $18.90.
The FDIC said the deal was reached in concurrence with it, the Federal Reserve Board and the U.S. Treasury Department. "There will be no interruption in services and bank customers should expect business as usual," FDIC Chairwoman Sheila Bair said.
In a separate statement, Fed Chairman Ben Bernanke said he welcomes the Wachovia bailout deal and supports the timely actions taken by the FDIC. He added that the FDIC action shows the government is committed to U.S. financial stability.
The FDIC sought to calm any concerns the Citigroup and Wachovia deal might have on financial markets.
"On the whole, the
commercial banking system in the U.S. remains well capitalized," Bair said. "This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury."
The FDIC said the move was necessary to "avoid serious adverse effects on economic conditions and financial stability."
For Citigroup, it is a rapid transformation from one of Wall Street's biggest losers to a "pillar of strength," as top executives began calling the company earlier this month, and a testament to the torment sweeping the banking sector.
Over the past year, Citigroup has racked up more than $40 billion in write-downs and other losses stemming from the mortgage meltdown. The company was a leader in creating and marketing some of the exotic securities that have been at the heart of the credit crunch. Its stock price has shriveled to less than $20, compared to more than $50 early last summer.
Citigroup is buying what the FDIC said is "the bulk of" Wachovia's assets and liabilities, including five depository institutions, and assumes the company's senior and subordinated debt. Not being sold are the A.G. Edwards brokerage division and Evergreen Investments operations.
The FDIC also has entered into a loss-sharing arrangement on a pre-identified pool of loans under which Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, with the FDIC covering anything beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing the risk.
The agency said Wachovia customers with questions should contact their usual banking representative.
Saddled with a mountain of troubled adjustable-rate mortgages inherited through its 2006 takeover of Golden West Financial Corp., Wachovia has seen its financial condition weaken.
The company's woes came into sharp focus after late Thursday's seizure of Washington Mutual Inc. Shares of Wachovia slumped early and ended down 27% as investors looked at it has the potential next victim in the credit crunch.
Like WaMu, Wachovia has tens of billions of dollars in so-called option-ARMs outstanding. The adjustable-rate mortgages allow some homeowners to actually increase their loans' balance by paying less than the full monthly interest they owe. They have been at the heart of surging foreclosures and defaults.
Citigroup had no immediate comment on the price tag.
