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Citi Acquiring Wachovia

FDIC brokers deal to avoid market disruptions

September 29, 2008 (updated 10:11 a.m.)

By staff

The federal government has stepped in to prevent a failure of Wachovia Bank.

The Federal Deposit Insurance Corporation has brokered the sale of the Charlotte, N.C.-based bank to Citigroup Inc., an announcement today said.

The acquisition had the support of the U.S. Treasury and Federal Reserve and was made in consultation with President Bush.

"Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC," the statement said.

The deal calls for Citi's acquisition of most of Wachovia's assets and liabilities, including five depository institutions. In addition, is will assume Wachovia's senior and subordinated debt.

Another aspect of the transaction is the FDIC's agreement to absorb losses beyond $42 billion on a $312 billion pool of loans identified as troubled. In return for FDIC's risk-sharing, Citi has granted the bank insurer $12 billion in preferred stock and warrants.

Wachovia made a fatal mistake with its ill-timed $26 billion acquisition of Golden West Corp. in October 2006 -- just as the housing market was beginning one of the most severe declines since the Great Depression.

Golden West had a heavy concentration of option adjustable-rate mortgages in California, and former Wachovia chief executive officer Ken Thompson attempted to expand that product in a big way. But that decision proved disastrous -- leading to a $9 billion second-quarter 2008 loss and Thompson's ouster in June.

Thompson was replaced in July by Robert K. Steel, who had recently served as Under Secretary for Domestic Finance for the U.S. Department of Treasury under Secretary Henry M. Paulson Jr. -- under whom he served during his 30-year tenure at Goldman Sachs.

In today's statement, the FDIC said it concurred with a Treasury assessment that a collapse of Wachovia could have had serious adverse effects on economic conditions and financial stability.

"A failure of Wachovia would have posed a systemic risk," Treasury Secretary Paulson said in a statement today. "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."

FDIC Chairman Sheila Bair added, "On the whole, the commercial banking system in the United States remains well capitalized."

In a statement issued early Monday, Citi said it will $2.16 billion in stock for Wachovia and acquire $700 billion in assets. The transaction, expected to close by Dec. 31, has been approved by both companies' boards and is subject to approval by Wachovia shareholders.

The deal is forcing Citi to raise $10 billion and reduce to quarterly dividends so that it can maintain a strong capital position.

After the acquisition, Citi will have around 4,300 U.S. branches, though up to 5 percent of the branches could be closed. Wachovia will continue to operate its remaining business after the deal is done.

New York-based Citi said the transaction will create "the largest U.S. bank by total deposits."

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