Citi Will Buy Wachovia Operations

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.

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  1. mjs

    I agree, tyaresun. What taxpayer wouldn’t prefer the $700b be used to temporarily re-insure our savings and retirement funds as the financial services industry contracts to a more appropriate size? Instead the government decides this is the best time to get into the hedge fund business…..

  2. Anonymous

    Heh yes actually TARP is not intended to save weak banks. It’s intended as a gift to strong ones.

    I’m all in favor of recapitalizing healthy banks but I want equity, like with AIG. TARP specifically avoids taking significant equity in healthy banks, it is intended to be a nice gift.

    Listen to the SIFMA Analyst Call!

  3. Jerry

    does anyone know when Wachovia’s stock is gonna open?

    I have some puts and am just waiting to see what they’re gonna be worth today.

  4. S

    Citi finally finds cover to cut the dividend.

    National Champions: WFC, JPM, BAC, C

    Ibanks: GS, MS

    Roubini has it exactly right — disgraceful!!

  5. S

    Remaining assets at Wachovia about $1.5B in earnigns..8x gets you 8-10B on 2.3B shares – $4-5 buicks/ Also get $1 from citi as comp.

  6. Dave

    This deal smells fishy to me. WB stock is halted yet the company was not seized by the Feds. Shareholders must approve this deal and they get… $1 Citi stock?? I don’t think this will fly, even in the current market environment.

  7. Anonymous

    The government appears to be trying to lower the cost of TARP by wiping out equity in some of the largest institutions that would have used it.

  8. VoiceFromTheWilderness

    Is this legal?

    The agencies of the federal government, first the fed and now the fdic, are being used as LBO financing by powerful, connected financial firms.

    Welcome to the age of crony capitalism. Actually welcome to the age of financeocracy –government by and for finance firms.

  9. Anonymous

    Does anyone know why on this one Citi is assuming $53B in senior & sub debt of the Wachovia holding company, whereas on WaMu that debt was effectively wiped out? Seems like the $53B could have gone toward reducing the FDIC loss guarantee. Something to do with CDS, or maybe GS is a debt holder?

  10. baychev

    FDIC’s reserves are about 45bn and this is about the size of their guarantee to Citi. Would it matter if they get any Citi stock after going belly up? Or this is a de-facto marriage-yet-to-be-consumed by a federal agency and a private bank?

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