naked capitalism

Note that unlike the FDIC’s resolution of WaMu, senior and secured debtors are preserved, but the FDIC may wind up absorbing some losses on a pool of Wachovia loans. But the agency also will take upside stake in Citi. From the Financial Times:

Citigroup on Monday said it would acquire the banking operations of Wachovia, after the Federal Deposit Insurance Corporation offered assistance to the deal and agreed to share losses on a $312bn pool of loans….

Under the deal, Citigroup will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions, and assume Wachovia’s senior and subordinated debt. Wachovia will continue to own AG Edwards, its retail brokerage arm, and Evergreen, its asset management unit.

The FDIC said it had entered into a loss-sharing arrangement on a $312bn pool of loans with Citigroup. Citigroup will absorb up to $42bn of losses on the loans and the FDIC will be responsible for losses beyond that. In return for taking that on risk, Citigroup will give the FDIC $12bn in preferred stock and warrants.

The deal turns Citigroup from one of the biggest losers of the credit crisis to one of the stronger large banks in the US. However, it saddles the group with the threat of further losses after the bank has already recorded writedowns and credit losses of about $50bn.

The Wachovia deal comes after the takeover of Washington Mutual’s banking unit last week by JPMorgan Chase, which was also assisted by the FDIC. JPMorgan said it was taking $32bn in writedowns on WaMu’s loans after the deal.

Wells Fargo and Spain’s Banco Santander had also been in talks with Wachovia over a merger.