Citigroup announced it will acquire Wachovia Corp. and its banking operations in a deal that the Federal Deposit Insurance Corp. (FDIC) assisted in. The decision to purchase Wachovia was reached after a long weekend of negotiations and research as Citigroup and Wells Fargo & Co. were both reported as studying the books of Wachovia.
In the acquisition of Wachovia, Citigroup’s portfolio has increased greatly and secured its spot among the top three in the U.S. banking industry behind Bank of America Corp. and J.P. Morgan Chase & Co.; but not with out a heavy price. Citigroup stated it will be necessary for the institution to sell $10 billion of its common stock and slash its quarterly dividend in half to 16 cents in order to sustain its capital position.
Citigroup will take in up to $42 billion of losses from Wachovia's $312 billion loan portfolio; the FDIC however, announced Monday that it has agreed to cover any remaining losses. In turn, Citigroup will issue $12 billion in preferred stock and warrants to the FDIC.
Wachovia's financial woes have greatly resulted from its acquirement of mortgage lender Golden West Financial Corp. back in 2006 at a purchase price of about $25 billion at the pinnacle of the nation's housing boom. As Wachovia inherited Golden West Financial Corp. it also inherited a failing $122 billion portfolio of Pick-A-Payment loans, which would allow its borrowers to skip some payments.
Both the Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson welcome the transaction between Citigroup and Wachovia.
Bernanke, in a statement on Monday, mentioned he supports the "timely actions" the FDIC has taken "which demonstrate our government's unwavering commitment to financial and economic stability."
Paulson stated that as Citigroup took over Wachovia it would "mitigate potential market disruptions." Paulson went on to say that he agreed with the FDIC and the Fed that a "failure of Wachovia would have posed a systemic risk" to the nation's financial system.
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