Citi Acquires Wachovia, FDIC Shares Risk

123jump.com Staff
29 Sep, 2008
New York City

After intense discussions this morning between Fed regulators, the FDIC, and Treasury Secretary and the Board of Governors Citigroup agreed to acquire Wachovia Corp for $2.16 billion. The FDIC will get $12 billion of preferred stock in Citi for bearing any risk to portfolio beyond $42 billion.

[R]3:30PM New York – Citigroup agrees to acquire banking operations of Wachovia Corp with FDIC sharing risks and receiving a stake in the company.[/R]

Citigroup Inc will acquire the banking operations of Wachovia Corp with assistance from the FDIC. This morning, after furious discussions with the Board of Governors of the Federal Reserve and the Secretary of the Treasury the bank was sold to Citigroup and FDIC agreed to bear risks of losses at Wachovia. The deal terms were not disclosed till the afternoon and stock reopened for trading but before the U.S. House vote on the bailout plan.

Deal Terms

Citigroup will acquire Wachovia’s most of the assets and liabilities and will assume senior and subordinated debts of the troubled bank. The FDIC agreed to share loan losses at Wachovia with Citigroup on an agreed pool of loans. Under the agreement, FDIC will be responsible for all loan losses after $42 billion of losses on a $312 billion loans and in exchange Citigroup will issues preferred stocks and warrants to FDIC for holding the risk.

Citigroup will pay $1 a share or $2.16 billion for Wachovia. Wachovia ((WB)) opened in the afternoon at 95 cents and traded between $1.80 and $1.85. Citigroup will cut its dividend in half and also seek $10 billion from investors to bolster its capital.

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

Wachovia, the Charlotte, North Carolina based bank reported losses in the first two quarter of this year. The bank declared $8.7 billion in the second quarter ending in June 2008 and $0.66 billion in the first quarter ending in March. Wachovia existed the wholesale mortgage market and dropped its quarterly dividend to 5 cents at the time of its second quarter earnings release.

Citigroup ((C)) in the morning trading dropped 24 cents to $19.90 and Wachovia Corp ((WB)) was halted.

Historic Origins

In 1753, Moravian settlers bought about 100,000 acres in the North Carolina Piedmont. They called the land """"Wachau"""" in appreciation of their benefactor, Count Nicholas Ludwig von Zinzendorf according to the company Web site.

Source of Problems

The Wachovia Corp’s decision to acquire the subprime lender at the height of the housing bubble saddled the bank with loan losses that contributed to the bank’s demise.

Wachovia purchased Golden West Financial Corp on May 07, 2006 for $25.5 billion or $81.07 per Golden West share, 15% premium to its share price on that day. Wachovia offered 1.051 of its share and $18.65 in cash for the purchase which was billed as a merger. The combined company, immediately after the acquisition had assets of $669 billion and a market capitalization of $117 billion.

At the time of purchase, Wachovia had assets of $553.6 billion, market capitalization of $86.0 billion and stockholders' equity of $48.9 billion at June 30, 2006. Wachovia has retail and commercial banking operations in 16 states with 3,109 offices.

AG Edwards Acquisition

In May 2007, Wachovia announced an agreement to acquire A.G. Edwards, Inc., a financial services holding company whose primary subsidiary is the national investment firm of A.G. Edward & Sons, Inc. A.G. Edwards and its affiliates employ 6,623 financial consultants in 741 offices nationwide and two European locations in London and Geneva.

In October 2007 Wachovia completed the acquisition of A G Edwards, Inc which will be combined with Wachovia Securities LLC by the early 2009 and will have $1.1 trillion in assets and 15,000 advisors.

At the time of the announcement in October of 2007, the company had said that for the immediate future, A.G. Edwards and Wachovia Securities brokerage offices will continue to operate under their current trade names. Danny Ludeman, president and CEO of Wachovia Securities and Robert Bagby, chairman and CEO of A.G. Edwards, is chairman of the merged brokerage firm.

Post Merger Bank Assets

As of June 30, 2008 Wachovia had total assets of $812.4 billion and total deposits of $447.8 billion with stockholders’ equity of $75.4 billion.

Wachovia is the fourth largest bank holding company in the United States based on assets and third largest U.S. full-service brokerage firm based on financial advisors. Wachovia employs 120,000 people and has 3,300 financial centers and 1,500 retail brokerage centers.

The company subsidiaries include Wachovia Bank, N.A., Wachovia Mortgage, FSB, Wachovia Securities, LLC, Wachovia Capital Markets, LLC and has 2.1 billion shares of common stock outstanding.

Wachovia Exceeded Minimum Regulatory Requirements

It just shows high risky investments in banks have become. Wachovia was forced to find a merger partner even after it had met all the regulatory requirements. WaMu, which was recently sold in a fire sale to JP Morgan had met all the regulatory requirements as well.

The company at the end of second quarter in June said it exceeded all 2008 regulatory guidelines with Tier 1 capital ratio of 8.0% compared to 4% required by the Fed, and total capital ratio of 12.74% compared to 8% minimum, and leverage of 6.57% compared to 3% to 5% minimum.

Second Quarter ended 30th June 2008 Wachovia Net loss was $8.85 billion or $4.20 per diluted share compared to profit of $2.34 billion or $1.22 per diluted share. Wachovia reported $9.7 billion of losses in its first six month result of 2008.