New York - Citigroup will buy the banking operations of Wachovia in a deal brokered by the Federal Deposit Insurance, the FDIC said on Monday.
The deal comes as authorities step in to rescue three European banks and as US lawmakers prepare to vote on a $700bn bailout of US financial firms.
Federal Reserve Chairperson Ben Bernanke said in a statement the FDIC action "demonstrates our government's unwavering commitment to financial and economic stability."
But a fixed income manager, William Larkin, said the Wachovia deal and the European bank rescues were taking the shine off the bailout plan and could spook world markets.
Under the deal, struck in consultation with the Federal Reserve, the Treasury and President George Bush, Wachovia depositors will be fully protected, and no cost to the Deposit Insurance Fund is expected, the FDIC said.
"Wachovia did not fail; rather, it is to be acquired by Citigroup on an open bank basis with assistance from the FDIC," the agency said in a statement on its website.
Shares of Wachovia, the sixth-biggest US bank by assets, tumbled more than 80% in pre-market trading to below $2 per share.
Citigroup shares were initially higher after the news but then slumped 6.5% in heavy pre-market trade. It was not immediately known how much Citigroup was paying for the Wachovia assets.
Loss-sharing agreement
The FDIC said it would share losses with Citi on certain Wachovia loans.
"The FDIC has entered into a loss-sharing arrangement on a
pre-identified pool of loans," the agency said. "Under the agreement, Citigroup will absorb up to $42bn of losses on a $312bn pool of loans.
"The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12bn in preferred stock and warrants to compensate the FDIC for bearing this risk."
Earlier, The New York Times reported that Citigroup and Wells Fargo were looking at Wachovia but that neither was likely to bid more than a few dollars a share for the bank.
"One thing that Citigroup has been wanting to do for a while is to expand its retail operations because they are in very limited areas, so this would basically allow them to do that," said Rose Grant, managing director of Eastern Investment Advisors in Boston.
Citigroup will buy the bulk of Wachovia's assets, including five depository institutions, and assume its senior and subordinated debt. Wachovia will retain ownership of AG Edwards, a big retail brokerage it bought a year ago, and its asset-management division, Evergreen.
"We will continue as a focused leader in retail brokerage and asset management," Wachovia spokesperson Christy Phillips-Brown said. She declined to comment on other terms of the deal.
Wall Street's alarm about the freeze in credit markets and the state of the $700bn bailout plan was heightened by the deal and the bank rescues in Europe.
Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts, said, "These announcements couldn't have worse timing because they're taking the shine off the potential bailout (in Washington)."
He added, "That's going to spook people looking at the global markets. They're thinking this thing is spreading."
David Buik, strategist at Cantor Index in London, said, "This cannot be allowed to go on like this. This is hopeless. They need to be taking this stuff off the street sooner rather than later. The trouble is toxic."
- Reuters