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Citi to acquire Wachovia's banking operations

September 29th, 2008 11:16 AM by Lehel Szucs

Citi to acquire Wachovia's banking operations

Federal agency helps to broker deal; deal transfers $700 billion in assets

By John Spence, MarketWatch
Last update: 10:32 a.m. EDT Sept. 29, 2008
BOSTON (MarketWatch) -- Wachovia Corp. became the latest financial-services giant to succumb to the global credit crunch when regulators announced Monday the company's banking operations were being bought by Citigroup Inc.
Citigroup (C:
Citigroup, Inc
 Last: 19.22-0.94-4.66%
1:59pm 09/29/2008
Delayed quote data
Sponsored by:
C
 19.22, -0.94, -4.7%)
will take on the bulk Wachovia (WB:
Wachovia Corp
 Last: 10.00-3.70-27.01%
12:22pm 09/29/2008
Delayed quote data
 
WB
 10.00, -3.70, -27.0%)
assets and liabilities, according to a statement that was issued by the Federal Deposit Insurance Corp. before the markets opened.
The government brokers another bank consolidation, as Citigroup buys Wachovia's banking assets for $2.1 billion and the assumption of debt. MarketWatch's Steve Gelsi talks with Kelsey Hubbard about the deal's significance. (Sept. 29)
Ahead of the announcement, Wachovia's stock had plunged some 82% in pre-market trading vs. Friday's close of $10. In early trading, shares of Citigroup fell 30 cents to $19.85 while Wachovia shares remained halted.
Wachovia said it would sell its retail bank, corporate and investment bank and wealth-management businesses to Citigroup. Under the deal, Citigroup will pay Charlotte, N.C.-based Wachovia $2.1 billion and assume its senior and subordinated debt.
Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, while the FDIC will take losses beyond that.
Additionally, Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing the risk, according to the federal agency.
The transaction is expected to close before the end of the year, and has been approved by directors of both firms, Wachovia said. However, the deal is subject to approval by Wachovia shareholders and regulatory approvals.
Frantic weekend
"Customers of both companies should continue banking as usual, and feel confident that their deposits are secure," Wachovia said. "Also, employees and vendors should continue to operate business as usual."
Wachovia, one of the nation's largest banks, was in negotiations to sell itself over the weekend, with media reports naming Wells Fargo & Co. (WFC:
Wells Fargo & Company
 Last: 35.86-1.45-3.88%
1:59pm 09/29/2008
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WFC
 35.86, -1.45, -3.9%)
and Citigroup as the most likely buyers. Reports also mentioned Banco Santander (SAN:
banco santander chile new sp adr rep com
 Last: 39.09-4.23-9.76%
1:54pm 09/29/2008
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SAN
 39.09, -4.23, -9.8%)
as a potential merger partner. Read related MarketWatch First Take commentary.
Chart of WB
Federal regulators on Sunday evening were pushing for the sale of Wachovia, but the government was opposing demands to provide financial guarantees to the buyer, the New York Times reported.
The Wachovia talks took place over a weekend of high drama during which legislators hammered out a $700 billion rescue plan intended to take pressure off banks squeezed by the credit crunch. The draft bill is designed to get toxic mortgage assets off banks' balance sheets to stimulate lending and prevent a freeze-up in global financial markets. See related story.
Wachovia has been hit by its ill-timed acquisition of California mortgage lender Golden West Financial. The sale of Wachovia's banking operations to Citi follows the collapse of Washington Mutual Inc. (WM:
Washington Mutual Inc
 Last: 0.16-1.53-90.51%
4:14pm 09/26/2008
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WM
 0.16, -1.53, -90.5%)
, Lehman Brothers (LEH:
Lehman Brothers Holdings Inc
 Last: 0.22-0.08-26.05%
1:59pm 09/29/2008
Delayed quote data
Sponsored by:
LEH
 0.22, -0.08, -26.0%)
and insurance giant American International Group (AIG:
American International Group, Inc
 Last: 2.75-0.40-12.70%
1:59pm 09/29/2008
Delayed quote data
Sponsored by:
AIG
 2.75, -0.40, -12.7%)
.
FDIC's role
The Wachovia deal was facilitated by the FDIC with the blessing of the Federal Reserve and the Treasury Dept.
"All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund," the FDIC said. "Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. 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 Bair. "There will be no interruption in services and bank customers should expect business as usual."
FDIC said bank assistance was required to "avoid serious adverse effects on economic conditions and financial stability."
"On the whole, the commercial banking system in the United States remains well capitalized. This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury," Bair said.
"This action was necessary to maintain confidence in the banking industry given current financial market conditions."
Deal terms
Wachovia said it will remain a public company with two main operating units: brokerage firm Wachovia Securities and investment manager Evergreen Asset Management.
"During recent weeks, the financial landscape has changed significantly and presented us with unprecedented challenges," said Wachovia Chief Executive Robert Steel in a written statement. "Today's announcement is the best alternative for the company, enabling a resolution on the Golden West portfolio."
Wachovia said it will remain headquartered in Charlotte, while the brokerage unit will remain based in St. Louis, the longtime headquarters of its A.G. Edwards subsidiary.
"At this time, there are no changes to Wachovia's board of directors and two Wachovia directors will join Citigroup's board," Wachovia said.
Citigroup said it would assume Wachovia senior and subordinated debt, totaling about $53 billion. Citi will acquire more than $700 billion of assets of Wachovia's banking subsidiaries, and related liabilities. The company expects to raise $10 billion in common equity in connection with the Wachovia deal. It will also reduce its quarterly dividend to 16 cents a share, effective immediately.
"The transaction is extremely attractive from a strategic perspective," said Citigroup CEO Vikram Pandit. "It will deliver the combined capabilities of two powerful organizations to our customers and shareholders."
After the deal closes, Citi said it will have about 4,300 branches in the U.S. and roughly another 3,300 throughout the world. End of Story
John Spence is a reporter for MarketWatch in Boston.
Posted in:General
Posted by Lehel Szucs on September 29th, 2008 11:16 AM

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