As a Wachovia (NASDAQ:WB) investor, I was shocked by this morning's news - it was just too much, too fast. Anyway, based on the news this morning, here is the lowdown on the deal.
Citi (NYSE:C) takes over Wachovia's banking/mortgage business: Citi pays Wachovia $2.1 billion in stock in exchange for Wachovia’s banking and mortgage assets (over $700 billion in deposits+assets). Citi also assumes about $53 billion in debt. Citi needs to cover losses up to $42 billion on mortgage related losses. Anything beyond that is guaranteed by the Federal government. In exchange for that guarantee, the Feds get $12 billion in preferred Citi stock, which pays 6% interest - possibly a sweet deal for the Feds. Wachovia's over $300 billion mortgage portfolio had about $120 billion in option-ARM mortgages and expected losses on about 14% of those loans, but really, is the deal justified?
Wachovia keeps the other businesses: Wachovia Securities, Evergreen Investments and Wachovia Insurance Services will remain part of Wachovia. The question here is how much the remaining Wachovia is now worth. Wachovia Securities is the nation's second largest investment firm, Wachovia Insurance Services is the 12th largest insurance brokerage and Evergreen Investments is America's 29th largest asset management company. So now each Wachovia share is worth $1 from Citibank's 2.1 billion + whatever these businesses are worth.
In pre-market trading, even before any details were announced, Wachovia stock dropped 90% and trading was halted at the NYSE on WB for the day. In spite of everything, the S&P still maintains its hold rating on WB but will revise its price target.
What does all this mean for you? Well, I’m not even sure this whole Wachovia mess was necessary in the face of the bailout. But the question facing us now is - is the bailout necessary in the the face of this deal?? Your deposits at both Citi and Wachovia are safe and the FDIC doesn’t need to spend anything here. Your local Wachovia will soon become a Citibank and Citibank plans on moving its banking headquarters to Charlotte, NC, while keeping its investment headquarters in NYC. Since Citi and Wachovia don’t have much of an overlap in branches, not much is expected to change for depositors.
Disclosure: Author holds a long position in WB