US banking giant Citigroup (C) has acquired Wachovia Corp. (WB-OLD), once America’s fourth largest bank. In a transaction facilitated by the Federal Deposit Insurance Corp. (FDIC), Citi agreed to buy Wachovia’s banking operations, including five depository institutions and assume the bank’s senior and subordinated debt for $2.1 billion in stock.
Under a loss sharing arrangement, Citigroup will assume up to $42 billion of losses from a pool of $312 billion of loans held by Wachovia — the FDIC will absorb losses beyond that and take a stake in Citi for the guarantee.
Following the completion of the acquisition, Citi will have more than $600 billion in deposits in the U.S., nearly 10% market share. Total deposits worldwide will be $1.3 trillion.
In a statement the FDIC said that “Wachovia did not fail; rather, it was acquired by Citigroup on an open bank basis with assistance from the FDIC.”
“For Wachovia customers, today’s action will ensure seamless continuity of service from their bank and full protection for all of their deposits.” said FDIC Chairman Sheila C. Bair. “There will be no interruption in services and bank customers should expect business as usual”.
Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.
The engineered bailout of Wachovia, which was brought down by mortgage-related losses, was taken in agreement with the Federal Reserve and the Treasury Secretary, in consultation with the White House. The parties involved determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability.
The deal followed much speculation over the weekend about the fate of the Charlotte, NC-based bank.
Wachovia will continue to own AG Edwards, a retail brokerage, and Evergreen, its asset management division, the FDIC said.
For Citigroup, which over the past year accumulated more than $40 billion in write-downs, and was a leader in creating some of the exotic securities that have been at the heart of the credit crunch ; this is quite a transformation — from one of Wall Street’s biggest losers to now a powerhouse.
Citi’s CEO Vikram Pandit called the acquisition extremely attractive from a strategic perspective, emphasizing the fact that it would augment the company's access to funding and liquidity.