Citigroup Inc. will take over the banking operations of Wachovia Corp. in a deal orchestrated by the Federal Deposit Insurance Corp. The takeover is the latest ripple in a ever-widening financial crisis that is now taking on global implications even though the FDIC is saying Wachovia did not fail.
While waiting to see if the government-sponsored $700-billion bailout plan would be approved by Congress, the markets were down across the board in early trading Monday. During late-morning trading, the Dow fell 289.68 (2.6%) to 10,853.45 after having been down more than 350. The Standard & Poor's 500 Index declined 42.92 (3.5%) to 1,170.35, and the Nasdaq composite index fell 85.80 (3.3%) to 2,097.54.
According to statements from the FDIC, Citigroup will take up to $42 billion of losses from Wachovia's $312-billion loan portfolio, with the federal agency reporting it will cover any remaining losses. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC. It will also try to sell $10 billion in common stock and cut its quarterly dividend to 16 cents in a move to strengthen its capital position.
A spokesman for the Houston offices of Wachovia Securities, which has a large number of energy industry clients, says he could not comment on the Citigroup takeover of the corporation, adding “it is too early to say anything.”
The takeover comes after weekend negotiations in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia, which suffers from mounting losses linked to its 2006 acquisition of mortgage lender Golden West Financial Corp.
The Wachovia deal vaults Citigroup and put it into the top three U.S. banks, with Bank of America Corp. and J.P. Morgan Chase & Co.
Wachovia, like Washington Mutual Inc., which was seized by the federal government last week, created a large number of option adjustable-rate mortgages, which offer very low introductory payments and let borrowers defer some interest payments until later years. In its statement, the FDIC reports that Wachovia did not fail, and that all depositors are protected and there will be no cost to the Deposit Insurance Fund.
Wachovia shares plunged 91% to 94 cents during early trading Monday. The stock had closed Friday at $10, down 74% for the year. Citigroup shares rose 69 cents, or 3.4%, to $20.84.JAS
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