Citigroup acquires Wachovia operations

By Daniel Pimlott in New York

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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.

Sheila Bair, FDIC chairman, said the decision to provide assistance to the deal was made necessary in order to “maintain confidence in the banking industry given current financial market conditions” given “extraordinary circumstances”.

She said the assistance had been provided after consulting with President George W. Bush and Hank Paulson, Treasury secretary, on the advice of the FDIC and the Federal Reserve.

”I commend the action taken by [FDIC Chairman Sheila Bair] today [Monday] to facilitate the sale of Wachovia Bank to Citigroup in an orderly fashion to mitigate potential market disruptions,” Mr Paulson said in a statement. ”I agree with the FDIC and the Federal Reserve that a failure of Wachovia would have posed a systemic risk.”

Wachovia has been suffering since its acquisition of Golden West, a Californian mortgage lender bought for $26bn in 2006 at the height of the US housing boom.

In pre-market trading, Wachovia shares were nearly wiped out, falling 91 per cent to 86 cents, having already losing 72 per cent this year before the close on Friday. Citigroup shares fell 5.4 per cent after initially gaining about 3 per cent.

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 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 US banks in the US. However, it deal 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.

The FDIC said that all depositors with Wachovia were “fully protected”.

“For Wachovia customers, today’s action will ensure seamless continuity of service from their bank and full protection for all of their deposits.” Ms Bair said. ”There will be no interruption in services and bank customers should expect business as usual.”

The FDIC said Wachovia did not fail and there would be no cost to the Deposit Insurance Fund.

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