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Wachovia Bites the Dust, Citigroup Cements 'Too Big to Fail' Status

Posted Sep 29, 2008 01:37pm EDT by Aaron Task in Investing, Venture Capital, M and A, IPOs, Recession, Banking
Related: C, WB, JPM, BAC, MS, GS, XLF

Facing insolvency, Wachovia became the credit crunch's latest victim Monday, selling its banking operations to Citigroup for $2.2 billion, or $1 per share. Citi will assume Wachovia's debt, meaning bondholders will not be wiped out, as they have in some recent transactions.

After the deal, Citigroup have one of nation's largest retail bank franchises and cements its place among a handful of other firms that appear truly "too big to fail," lest the entire U.S. banking system crumble: Bank of America, JPMorgan Chase, Wells Fargo, Morgan Stanley and Goldman Sachs.

The deal is far from a coup for Citigroup, which expects to take a loss of up to $42 billion to write down Wachovia's $312 billion loan portfolio. Citi slashed its dividend and said it will seek to raise $10 billion in equity to offset the loss. The transaction was brokered by the FDIC, which received $12 billion of warrants in Citi in exchange for insuring the bank's losses won't exceed $42 billion.

Speaking of the FDIC: Unlike Washington Mutual, Wachovia had not been taken over by regulators prior to the deal. But just like JPMorgan's acquisition of Washington Mutual last week, the deal was brokered by the FDIC, which wanted no part of having to insure Wachovia's depositors.

"All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund," the FDIC said in a statement. "Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open-bank basis with assistance from the FDIC."

The operative words in that statement being "expected to be no cost" and "assistance from."

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