Wachovia Assets Acquired by CitigroupFeds Broker Deal to Avoid 'Systemic Risk' to U.S. Financial Industry
The Citigroup acquisition of Wachovia comes only four days after Washington Mutual failed, and JP Morgan Chase bought the Seattle, WA.-based mortgage giant for $1.9 billion.
In the press announcement about the Wachovia acquisition, the FDIC maintains Wachovia didn't fail, and says all depositors are protected. It adds there is to be no cost to the Deposit Insurance Fund. The bank listed $812.4 billion assets and $447.8 billion deposits in June. Wachovia, based on its assets, was the fourth-largest bank holding company in the U.S. and was the third-largest full-service brokerage firm.
Citigroup Inc. will take the bulk of Wachovia's assets and liabilities, including five depository institutions, and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own investment firms AG Edwards and Evergreen. Citigroup will pay $2.1 billion to Wachovia and assume the senior and subordinated debt of Wachovia Corporation. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.
Over the weekend, Treasury Secretary Henry Paulson consulted with President Bush, the Federal Reserve and the FDIC and determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability. Citigroup fended off competing bids over the weekend from Wells Fargo and Spain's Banco Santander for the troubled Charlotte, NC-based bank.
Paulson says he commends the action taken by Chairman Bair and FDIC "to facilitate the sale of Wachovia Bank to Citigroup in an orderly fashion to mitigate potential market disruptions." Paulson agrees with the FDIC and the Federal Reserve that the failure of Wachovia "would have posed a systemic risk. The FDIC's actions help to mitigate potential systemic risk to our financial system."
Wachovia was one of the hardest hit of the big banks in the continuing subprime mortgage meltdown. Where the bank's problems started was when it bought mortgage lender Golden West Financial Corp at the height of the housing boom in 2006 for $25 billion. Dragging behind that purchase was a crumbling portfolio of $122 billion that Golden West had promoted as "Pick a Payment" loans that allowed borrowers to skip payments.
"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."
Despite the series of unusual events that led up to the Wachovia buyout, FDIC's Bair maintains that the majority of banks are sound, "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."
In Other News ...
The Wachovia buyout by Citigroup is just one event among many that continue to grip the world's financial markets, and comes as government regulators try to bring the economy away from the perilous edge it has been on over the past two weeks as they try to jump start battered U.S. credit markets to work normally again. Other developing stories:
The Bailout -- Democrats and Republicans met over the weekend to work out a final version of the $700 billion bailout proposal. The result, a changed bailout would offer a staged disbursement of funds for the government to buy bad mortgage loans from banks.
President Bush on Monday made an unusual early-morning statement to the nation about the $700 billion bailout. Calling the proposed measure "an extraordinary agreement to deal with an extraordinary problem," Bush urged Congress to pass the bill, saying it is needed to "keep the crisis in our financial system from spreading throughout our economy."
The U.S. House of Representatives passed the bailout bill in 220-198 vote to move it to three hours of general debate and a final vote. The bill failed to pass in its first round, though, after which its fate was uncertain.
Global Banking News -- On Sunday, Dutch-Belgian bank and insurance giant Fortis NV was given an 11.2 billion euro ($16.4 billion) lifeline to avert insolvency as part of a wider bailout plan agreed to by Belgium, the Netherlands and Luxembourg.
Bradford and Bingley, a Yorkshire, UK based British Bank is nationalized by the British government. B&B is the second UK bank, after Northern Rock, to be nationalized in 2008 and its 41 billion pounds ($82 billion) of mortgage loans will be added to England's national debt.