Citigroup Agrees to Buy Wachovia's Banking Business

Sept. 29 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, will acquire the banking operations of Wachovia Corp., rescuing the Charlotte, North Carolina-based lender beset by mortgage losses for more than $2 billion in stock.

The accord may have averted a collapse at Wachovia, ranked sixth by assets, whose stock fell below $1 a share today. All depositors will be protected, according to the Federal Deposit Insurance Corp., which helped broker the takeover by New York- based Citigroup. The bank assumes senior and subordinated debt of Wachovia, the FDIC said, and Citigroup said it will cut its dividend in half and raise $10 billion in new capital.

``For Wachovia's customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits,'' FDIC Chairman Sheila C. Bair said in a statement. ``There will be no interruption in services and bank customers should expect business as usual.''

Wachovia is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and Washington Mutual Inc. into bankruptcy and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos. The purchase gives Citigroup about 3,300 branches and offices in 21 states. Wachovia will continue to own the A.G. Edwards Inc. brokerage and the Evergreen mutual-fund family.

Wachovia's stock, which finished last week at $10 on the New York Stock Exchange, traded for 95 cents at 9 a.m. in early transactions. It sold for more than $48 in February 2007. Citigroup traded at $19.09 in early trading, compared with $20.15 at last week's close.

Citigroup's Role

Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said in the statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.

``Of course they are going to raise capital,'' Oppenheimer & Co. analyst Meredith Whitney said in an interview on CNBC. ``I don't know how they absorb $42 billion on the income basis they have,'' Whitney said.

Wells Fargo & Co. had also bid for Wachovia, according to the Wall Street Journal.

``Citi needed it more than anybody,'' said Nancy Bush, an independent bank analyst. ``It would have been nice for Wells, but I couldn't see them taking on that chunk of bad debt.''

Christy Phillips-Brown, a Wachovia spokeswoman, said she had no comment and that the company's release will be issued later. The FDIC release didn't say what will happen to Wachovia's investment bank. Citigroup's Shannon Bell didn't immediately respond to a message seeking comment.

Loan Defaults

Wachovia reported $9.7 billion of losses in the first half of 2008. The slide toward collapse began when the bank paid more than $24 billion in October 2006 for Golden West Financial Corp., the California lender that specialized in option-ARM home mortgages. The bank holds about $122 billion of the adjustable- rate home loans. Kennedy Thompson, the chief executive officer at the time, later admitted that the purchase at the height of the real estate boom was ill-timed.

Wachovia is the largest holder of option ARMs, ahead of Washington Mutual, the Seattle-based lender that collapsed last week. The loans are prone to default because they allow borrowers to skip some interest payments and add them to the principal. The terms backfired when housing markets weakened, leaving borrowers with loans bigger than the value of their home. Prices in California during August fell 41 percent from year-earlier levels.

Pressure on the bank to make a deal grew last week when JPMorgan CEO Jamie Dimon bought WaMu and then announced writedowns on loans similar to those held by Wachovia.

``Jamie Dimon threw gas on the fire when JPMorgan built in losses of 25 percent on the Washington Mutual option ARMs,'' Bush said yesterday. Wachovia CEO Robert Steel ``has put his losses at 12 percent, but that was a couple weeks ago and the situation has gotten more dire since then.''

Analysts at Fitch Ratings predict default rates on such loans packaged as securities may reach 45 percent.

To contact the reporter on this story: Steve Dickson in New York at sdickson1@bloomberg.net.
Last Updated: September 29, 2008 09:27 EDT

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