Monday, September 29, 2008

Citigroup’s Financial Bet on Wachovia Banking Operations

Recently, Citigroup Inc. has just prepared an extra bet of its financial portfolios to acquire the banking operations of Wachovia Corp. in deal facilitated by the Federal Deposit Insurance Corp.

The extra bet comes after a fevered weekend courtship in which Wells Fargo & Co. and Citigroup both were reportedly examining the Wachovia’s financial reports. Wachovia was suffering from mounting mortgage losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.

The acquisition of the Wachovia assets comes just days after the government's seizure of Seattle-based Washington Mutual Inc., the biggest bank failure in U.S. history. As details of its takeover unfolded, Wachovia shares plunged 91% in Monday pre-market trading to 91 cents. The stock had closed Friday at $10, down 74 percent for the year.

According to the government agency, in the latest byproduct of the widening global financial crisis, Citigroup will absorb up to $42 billion of losses in the deal, with the FDIC covering any remaining losses. Citigroup also will give the FDIC $12 billion in warrants and preferred stock. Undoubtedly, the risky deal greatly expands Citigroup's retail outlets and leaves it among the U.S. banking industry's Big Three along with Bank of America Corp. and J.P. Morgan Chase & Co.

The FDIC has stated clearly that Wachovia did not bankrupt and that all depositors are protected and there will be no cost to the Deposit Insurance Fund. In addition, Federal Reserve Chairperson Ben Bernanke supports the "timely actions" taken by the FDIC, which show the U.S. government's commitment to financial and economic stability.

Henry Paulson, the Treasury Secretary, also pleased the acquisition of Wachovia to Citigroup, saying it would "mitigate potential market disruptions." Moreover, he also agreed with the Fed and the FDIC that a "failure of Wachovia would have posed a systemic risk" to the nation's financial system.

North Carolina-based Wachovia, the fourth largest banking chain in the U.S. based on total assets, has been among the banks hardest hit by the ongoing crisis in the mortgage market. It paid approximately $25 billion for Golden West at the height of the nation's housing boom. With that purchase, Wachovia inherited a huge deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty that let borrowers skip some payments.

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