FDIC Helps Citigroup Acquire Banking Ops From Wachovia

Unable to recover from its ill-advised acquisition of mortgage lender Golden West Financial Corp. in 2006, Wachovia Corp. said it will sell its banking operations for $2.1 billion to Citigroup Inc., which agreed to absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio.


The Federal Deposit Insurance Corp. (FDIC) agreed to cover any losses beyond that.

Upon the completion of the transaction, Citigroup will have more than 4,300 U.S. branches and $600 billion in deposits, reserving a place alongside Bank of America Corp. and JPMorgan Chase & Co. in dominating the banking industry.

Citigroup will reclaim its spot as the biggest U.S. bank by total assets with $2.91 trillion.

However, the deal forces Citigroup to cut its quarterly dividend in half to 16 cents and dilute existing shares by selling off $10 billion in common stock to bolster its capital position.

In addition to assuming $53 billion worth of debt and up to $42 billion of loan losses from Wachovia's portfolio, Citigroup will issue $12 billion in preferred stock and warrants to the FDIC for the risk it agreed to take on.

Wachovia has not been acquired outright, although it is effectively stripped of much of its core business.

The Charlotte, North Carolina-based company will still maintain its asset management, retail brokerage and certain select parts of its wealth management businesses.

It will continue to be a publicly traded company under the Wachovia brand.

The FDIC noted that Wachovia did not fail, declaring that all depositors are protected and the Deposit Insurance Fund will not be affected by any immediate costs.

The deal remains subject to approval by Wachovia's shareholders and regulators, and must close by the end of the year.

Wachovia shares have plummeted more than 80% in recent months, closing Monday at $1.84 in comparison to 52-week high of $52.25.

Meanwhile, Citigroup has reported losses over three straight quarters totaling $17.4 billion.

During that period, the New York-based bank has written down its assets by roughly $46 billion, the deepest writedown by a U.S. bank.

Much of Wachovia’s struggle stemmed from the $24.3 billion acquisition of Golden West Financial after the housing boom had already crested.

Golden West came with a $122 billion portfolio of Pick-A-Payment loans which allows borrowers to skip monthly payments, leading to a costly deterioration of the portfolio’s value.

Wachovia posted a $9.11 billion loss for the second quarter and announced plans to cut 11,350 jobs, largely from in its mortgage operations.

The company’s wholesale lending operation known as Vertice was included as part of the acquired operations going to Citigroup.