Citigroup to Acquire Wachovia Operations in Government Brokered Deal

The U.S. government facilitated a takeover of Wachovia by Citigroup on Monday.

The agreement is a complex deal that shares liabilities between the Federal Deposit Insurance Corporation (FDIC) and Citigroup while leaving Wachovia holding some of its assets.

The FDIC stressed that Wachovia did not fail but that it was acquired with government assistance. Wachovia shares are trading at $0.71 after closing at $10 on Friday

"For Wachovia customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits." said FDIC Chairman Sheila Bair in a press release. "There will be no interruption in services and bank customers should expect business as usual."

Citigroup will acquire the bulk of Wachovia's assets and liabilities while assuming senior and subordinated debt. Under the agreement, Citigroup will take the first $42 billion of losses on Wachovia's $312 billion mortgage portfolio. The FDIC will absorb losses beyond the first $42 billion. To compensate the FDIC for the risk, Citigroup will pay the agency $12 billion in preferred shares and warrants.

Wachovia will continue to exist and own AG Edwards and Evergreen.

The Federal Reserve and Treasury Department also helped to facilitate the deal. Following the announcement, at 8:15 a.m. EDT, Fed Chairman Ben Bernanke expressed his support from the "timely action" of the FDIC.

Treasury Secretary Henry Paulson said if Wachovia was allowed to fail, it would pose a "systemic risk" and that he's "committed to taking all actions necessary."

By Adam Button and edited by Stephen Huebl
©CEP News Ltd. 2008