CITIGROUP agreed to buy troubled Wachovia's banking operations in a deal today that gives the US government a stake in another sector shakeup amid the worst financial crisis since the Great Depression.
The government-engineered rescue marked further consolidation of the struggling US banking sector saddled with heavy losses from the bursting of the real estate bubble and a related credit crunch.
It came as Wachovia, the fourth-largest US bank by assets, faced a near collapse of its share price and weakening confidence because of its exposure to the subprime mortgage crisis.
The Wachovia takeover was unveiled just hours before the US House of Representatives rejected a massive $US700 billion ($840 billion) bailout of financial firms, roiling markets.
The tentative Wall Street bailout agreement was struck yesterday after intense negotiations between President George W Bush's administration and Republican and Democratic Congressional leaders.
The Bush administration insisted the rescue of financial firms exposed to toxic mortgage investments was crucial to avert a wider economic collapse.
The Federal Deposit Insurance Corp. (FDIC), which insures and regulates banks, said in announcing the Citigroup takeover that Wachovia "did not fail''.
Under the takeover agreement, the government will obtain a stake in Citigroup, which will become the country's largest US bank by total deposits, in exchange for guaranteeing a large portion of the distressed Wachovia assets linked to housing.
Citigroup will pay $US2.16 billion in stock to Wachovia and assume the senior and subordinated debt of Wachovia Corporation, the companies said.
New York-based Citigroup will assume up to $US42 billion of losses from a pool of $US312 billion ) of loans held by Wachovia; the FDIC will absorb losses beyond that. In exchange, Citigroup granted the FDIC $US12 billion in preferred stock and warrants to compensate the agency for bearing this risk.
Citigroup said it expected to raise $US10 billion in common shares to help finance the transaction.
Standard & Poor's said it was placing both companies on CreditWatch with negative implications.
The merger agreement with Wachovia in itself does not add materially to Citigroup's risk "because it is structured essentially as an acquisition of a 'clean' bank, S&P said in a statement,'' the credit agency said.
Shares in Citigroup slumped 11.9 per cent to $US17.75 in a massive late selloff on Wall Street after the House vote that dragged the Dow Jones Industrial Average down 777.68 points, the biggest one-day point drop ever.
Wachovia shares became nearly worthless, plunging 81 per cent to $US1.84.
Citigroup said the acquisition would create a leading retail bank with a 9.8 per cent share of US market deposits, and total deposits of $US1.3 trillion. Wachovia had $US812 billion in assets at the end of June.
The takeover was orchestrated with the Federal Reserve and Treasury Secretary Henry Paulson, in consultation with Bush, the FDIC said.
"A failure of Wachovia would have posed a systemic risk,'' Mr Paulson said.
Shares in Wachovia had lost 73 per cent of their value in a year and were plummeting in recent days as investors feared there would be a panic run on the beleaguered bank, as had occurred to its rival, savings and loan bank Washington Mutual.
WaMu was seized by the Government and sold to investment bank JPMorgan Chase late Thursday in what was the biggest-ever US bank failure.
"Following the collapse of Washington Mutual last week, it is assumed that wary depositors pulled funds out of Wachovia, sparking the need for the sale,'' analysts at Briefing.com said.
The FDIC noted that Wachovia depositors were "fully protected'' under its federal guarantee of bank deposits up to $US100,000 and the transaction was not expected to cost the Deposit Insurance Fund.
Under the agreement, Citigroup will acquire the bulk of the Charlotte, North Carolina-based Wachovia's assets and liabilities, including five depository institutions and assume senior and subordinated debt.
Wachovia Corp will remain a public company with two main operating subsidiaries: brokerage firm Wachovia Securities and Evergreen Asset Management.
The transaction is expected to close before year-end. It has been approved by directors of both companies and is subject to shareholder approval of Wachovia and the appropriate regulatory approvals.
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