Deal for Wachovia Goes to Citigroup

Speculation had focused on Wells Fargo as the buyer, but the FDIC brokers a Citi arrangement that excludes AG Edwards and Evergreen. Also, Goldman is looking to buy $50b in assets from troubled lenders.

Citigroup Inc. is acquiring the banking operations of Wachovia Corp.

Much of the speculation about a buyer for Wachovia swirled around Wells Fargo over the weekend. But the announcement of the Citigroup deal was made this morning by the Federal Deposit Insurance Corp., which orchestrated the deal. The FDIC also had announced the acquisition of the banking operations of Washington Mutual Inc. by JP Morgan Chase.

Meanwhile, the Financial Times reported that Goldman Sachs is looking to discuss with U.S. regulators the possibility of buying up to $50 billion in assets from troubled lenders. Goldman also is considering shifting $150 billion of assets to the balance sheet of its Utah industrial loan corporation. These assets include loans to private clients and other assets that are typically found at a traditional commercial bank,the paper noted, according to the FT report.

Any assets that Goldman purchases from trouble lenders would also would be put under the Utah bank, according to the report.

Under the Wachovia-Citi deal, Citi will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. However, the deal does not involve AG Edwards and Evergreen, which will continue to be owned by Wachovia.

Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans, with the FDIC absorbing losses beyond that.

The FDIC said that all Wachovia depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund, as was the case in the WaMu deal.

“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.

Under the deal, Citi granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.

Later in the morning, Citi said that it would sell $10 billion worth of common stock and slash its quarterly dividend in half, to 16 cents a share, in a bid to maintain its strong capital positionafter the Wachovia takeover.

The most encouraging signal to come out of the Wachovia and WaMu deals may be that the FDIC did not need to shell out any money to orchestrate the transactions. Also, Treasury Secretary Henry Paulson said Wachovia’s senior and subordinated debt will be assumed, providing some reassurance to the bond market.

“On the whole, the commercial banking system in the United States remains well capitalized,” said FDIC Chairman Sheila C. Bair.

In a statement, Secretary Paulson said: “I commend the action taken by Chairman Bair and the FDIC today to facilitate the sale of Wachovia Bank to Citigroup in an orderly fashion to mitigate potential market disruptions. I agree with the FDIC and the Federal Reserve that a failure of Wachovia would have posed a systemic risk. As a result of this transaction, all Wachovia depositors will be protected and Wachovia’s senior and subordinated debt will be assumed by Citigroup. The FDIC’s actions help to mitigate potential systemic risk to our financial system. As I have said before, in this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy.”

Wachovia has been struggling since its $24 billion acquisition of Golden West Financial Corp. two years ago.

Golden West had specialized in payment-option adjustable-rate mortgages and was the largest holder of these controversial mortgages, even ahead of Washington Mutual, according to Bloomberg News. The wire service noted that option ARMs allow borrowers to skip part of their payment and add that sum to their principal. Also, monthly payments increase after five years or once the loan balance reaches a certain level, says 110 percent to 125 percent.

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