Citigroup acquires Wachovia

September 29, 2008

Under the Wachovia-Citi deal, Citi will acquire the bulk of Wachovia's assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. However, the deal does not involve AG Edwards and Evergreen, which will continue to be owned by Wachovia.

Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans, with the FDIC absorbing losses beyond that.

The FDIC said that all Wachovia depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund, as was the case in the WaMu deal.

"Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC," the agency said.

Under the deal, Citi granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.

Wachovia has been struggling since its $24 billion acquisition of Golden West Financial Corp. two years ago.

Golden West had specialized in payment-option adjustable-rate mortgages and was the largest holder of these controversial mortgages, even ahead of Washington Mutual, according to Bloomberg News. The wire service noted that option ARMs allow borrowers to skip part of their payment and add that sum to their principal. Also, monthly payments increase after five years or once the loan balance reaches a certain level, says 110 percent to 125 percent.

reference
cfo.com