Wachovia Fails; Citicorp Next?

Citigroup will acquire the banking operations of the Wachovia Corporation, the Federal Deposit Insurance Corporation said Monday morning, the latest bank to fall victim to the distressed mortgage market.

Citigroup will pay $1 a share, or about $2.2 billion, according to people briefed on the deal.

The F.D.I.C. said that the agency would absorb losses from Wachovia above $42 billion and that it would receive $12 billion in preferred stock and warrants from Citigroup in return for assuming that risk.

“Wachovia did not fail,” the F.D.I.C. said, “rather it is to be acquired by Citigroup Inc. on an open-bank basis with assistance from the F.D.I.C.”

Under the deal, Citigroup will acquire most of Wachovia’s assets and liabilities, including $400 billion in deposits and will assume senior and subordinated debt of Wachovia, the F.D.I.C. said. Wachovia Corporation will continue to own the retail brokerage firm AG Edwards and the money management arm Evergreen.

“There will be no interruption in services and bank customers should expect business as usual,” the F.D.I.C. chairman, Sheila C. Bair, said.

The move was necessary, the F.D.I.C. said, to avoid serious fallout on economic conditions and financial stability.

“This morning’s decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury,” Ms. Bair said. “This action was necessary to maintain confidence in the banking industry given current financial market conditions.”

The sale would further concentrate Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup. Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors.

Wachovia has been hurt badly by its 2006 purchase of Golden West Financial, a California lender specializing in so-called pay-option mortgages. The bank also faced mounting losses on loans made to home builders and commercial real estate developers, and its acquisition of A. G. Edwards, a retail brokerage firm, turned out to be problematic. In June, Wachovia’s board ousted G. Kennedy Thompson, the bank’s longtime chief executive.

The talks with Wachovia intensified on Sunday after a weekend of negotiations in Washington over a $700 billion rescue for the banking industry. Only days earlier, federal regulators seized and sold the nation’s largest savings and loan, Washington Mutual, in one of a series of important deals that have reshaped the financial landscape.

As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks.

The impact will be felt on Main Street, Wall Street and in Washington. While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts.

Some small and midsize banks may be unable to compete with these behemoths.

Last week, Wachovia held discussions with Citigroup, Wells Fargo and Banco Santander of Spain, before the foreign bank’s interested cooled.

As lawmakers worked in Washington on the financial bailout this weekend, Wachovia executives huddled in the Seagram Building offices of Sullivan & Cromwell on Park Avenue.

Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department, who took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker. At 8:15 am. on Saturday, Citigroup and Wells took their first peek at Wachovia’s books.

Regulators pressed the parties to move quickly. Senior officials at the Federal Reserve in Washington, and its branches in New York, Richmond and San Francisco held weekend discussions with all the banks involved. Top officials at the Federal Deposit Insurance Corporation and the Treasury were also in the loop.

Timothy F. Geithner, the president of the Federal Reserve Bank of New York, personally reached out to executives involved in the process to assess the situation and spur it along.

Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial guarantee, as regulators did with JP Morgan’s acquisition of Bear Stearns, according to people briefed on and involved with the process.

Both Citigroup and Wells Fargo were deeply concerned about absorbing Wachovia’s giant loan portfolio, which is littered with bad mortgages, these people said. Bankers had little time to assess the risk.

Citigroup executives considered Wachovia a make-or-break deal for their consumer banking ambitions. With Wachovia, Citigroup would gain one of the pre-eminent retail bank operations after struggling to build one for years. It will also give Citigroup access to more stable customer deposits, allowing it to rely less heavily on outside investors for funds.

Source - New York Times