Citigroup grabs Wachovia on the cheap

Wachovia Corporation has agreed to be bought out by Citigroup in a deal supported by the U.S. government. Exact terms of the deal are still forthcoming, but this could be seen as a best case scenario for a bank which was increasingly under stress due to the global credit crisis.

In 2006 Wachovia’s shares changed hands for nearly $60. On Friday they were trading hands for $10 a share, a loss of more than 80% in two short years. As with the WaMu-JP Morgan deal, the U.S. government is looking to recapitalize the banking sector by allowing shares in distressed financial institutions to fall to near zero and then arranging a buyout by a bigger, better capitalized bank. In my opinion, these are sweetheart deals for the likes of JPMorgan and Citigroup.

However, this may be one of the last such of these types of deals as the largest institutions, Citigroup, JP Morgan Chase and Bank of America have become absolutely gigantic institutions.

Wachovia, the fourth-largest U.S. bank, is being bought by larger rival Citigroup in a rescue deal backed by U.S. authorities.

Wachovia customers were told the action would provide “full protection for all their deposits”, and that the bank would continue to operate as normal.

Under the deal, Citigroup will absorb up to $42bn (£23bn) of Wachovia losses.

U.S. authorities said the decision to back the sale had been made “under extraordinary circumstances”.

The comment came from the Federal Deposit Insurance Corporation (FDIC), the government body that guarantees the safety of banking deposits.

“This action was necessary to maintain confidence in the banking industry given current financial market conditions,” said FDIC chairman Sheila Bair.

Mortgage debt

Citigroup is taking on $312bn of Wachovia loans.

Any debts on these loans above the $42bn Citigroup will absorb will be taken on by the FDIC in return for $12bn in Citigroup stock and other share options.

Wachovia is just the latest bank that has needed to be rescued as a result of high levels of bad mortgage debt and the wider turmoil in the global financial sector.

Analysts said much of its problems were caused by its 2006 purchase of mortgage lender Golden West for $25bn at the height of the then U.S. housing boom.

Rose Grant, of Eastern Investment Advisors, said it seemed a good deal for Citigroup.

“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,” she said.
BBC News

Citigroup to buy U.S. bank Wachovia – BBC News

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