Citigroup Inc., the biggest U.S. bank by assets, will acquire banking operations of Wachovia Corp. for about $2.16 billion after shares of the North Carolina lender collapsed under the weight of overdue mortgages.
The all-stock deal equals about $1 a share for the Charlotte-based bank, ranked sixth by assets in the U.S. All depositors will be protected, according to the Federal Deposit Insurance Corp., which helped broker the takeover by Citigroup. The New York-based bank plans to cut its own dividend in half and raise $10 billion in capital as it takes on Wachovia's senior and subordinated debt.
Wachovia is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and Washington Mutual Inc. into bankruptcy and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos. The purchase gives Citigroup about 3,300 branches and offices in 21 states. Wachovia will continue to own the A.G. Edwards Inc. brokerage and the Evergreen mutual-fund family.
```The problem must have occurred last week with their ability to continue to attract and hold deposits after the failure of Washington Mutual,'' said Gary Townsend of Hill- Townsend Capital in Chevy Chase, Maryland. ``On Thursday and Friday they must have had a large run on the bank.''
Wachovia's stock, which finished last week at $10 on the New York Stock Exchange, traded for 95 cents at 9 a.m. in early transactions. It had lost 83 percent in the past two years as of last week. Trading today was halted during regular hours. Citigroup gained 4.5 percent to $21.06 as of 12:01 p.m.
Citigroup's Role
Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said in a statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.
``Of course they are going to raise capital,'' Oppenheimer & Co. analyst Meredith Whitney said in an interview on CNBC. ``I don't know how they absorb $42 billion on the income basis they have.''
Wells Fargo & Co. had also bid for Wachovia, according to the Wall Street Journal.
``Citi needed it more than anybody,'' said Nancy Bush, an independent bank analyst. ``It would have been nice for Wells, but I couldn't see them taking on that chunk of bad debt.''
Citigroup expects $3.7 billion in pretax restructuring charges for severance costs over the next four years, the company said in a statement.
What's Left
The combined company will have about 4,300 U.S. bank offices and more than $600 billion in deposits for a 9.8 percent share of the U.S. banking market. Citigroup's total deposits globally will be $1.3 trillion, the bank said, or about $350 billion more than JPMorgan Chase & Co.
Wachovia will be left with its retail brokerage and Evergreen asset management units. The brokerage has about 14,600 financial advisers and more than $1 trillion under management, making it third in the U.S. behind Merrill Lynch & Co. and Citigroup's Smith Barney unit.
The FDIC said that it won't have to tap its insurance fund, something the agency also avoided in the WaMu failure last week. Keeping the FDIC's fund healthy has been a priority for U.S. regulators because its $100,000 insurance on deposits helps keep small depositors from panicking when a bank's health is questioned.
Whitney said today there was ``no doubt'' in her mind that there had been a run on Wachovia.
Customer Relations
Wachovia CEO Robert Steel sent a memo to the staff last week affirming that the company was sound and more diversified than Washington Mutual after the lender failed. The memo, according to a copy obtained by Bloomberg, included a set of questions and answers for employees who might have to answer queries from worried customers, such as ``Does all the recent news put Wachovia at risk?'' and ``How is Wachovia different'' from Lehman, Bear Stearns and WaMu.
Louise Pitt, a credit analyst at Goldman Sachs Group Inc., wrote Friday that Wachovia may have been facing the possibility of a ``silent'' run on deposits similar to that confronted by WaMu, in which customers fearful of a bank failure withdraw their money in unusually large numbers. WaMu became ``unsound'' after customers withdrew $16.7 billion since Sept. 16, the Office of Thrift Supervision said when it seized WaMu.
The FDIC and Wachovia didn't say today whether the bank suffered similar withdrawals.
Loan Defaults
Wachovia reported $9.7 billion of losses in the first half of 2008. The slide toward collapse began when the bank paid more than $24 billion in October 2006 for Golden West Financial Corp., the California lender that specialized in option-ARM home mortgages. The bank holds about $122 billion of the adjustable- rate home loans. Kennedy Thompson, the chief executive officer at the time, later admitted that the purchase at the height of the real estate boom was ill-timed.
Wachovia is the largest holder of option ARMs, ahead of Washington Mutual, the Seattle-based lender that collapsed last week. The loans are prone to default because they allow borrowers to skip some interest payments and add them to the principal. The terms backfired when housing markets weakened, leaving borrowers with loans bigger than the value of their home. Prices in California during August fell 41 percent from year-earlier levels.
Pressure From WaMu
Pressure on the bank to make a deal grew last week when JPMorgan Chief Executive Officer Jamie Dimon bought WaMu and then announced writedowns on loans similar to those held by Wachovia.
``Jamie Dimon threw gas on the fire when JPMorgan built in losses of 25 percent on the Washington Mutual option ARMs,'' Bush said yesterday. Steel ``has put his losses at 12 percent, but that was a couple of weeks ago and the situation has gotten more dire since then.''
Analysts at Fitch Ratings predict default rates on such loans packaged as securities may reach 45 percent.
``Bob Steel missed the opportunity to raise more equity,'' Townsend said. ``What we heard from him from the beginning is that they didn't need to raise more equity. That clearly wasn't the case.''
The transaction is likely to hurt Charlotte, where Wachovia is the largest private employer with about 20,000 workers, said Michael Nix, portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina. The bank said today in a statement that the corporate headquarters will stay in Charlotte.
``It's a bad, bad thing for Charlotte,'' Nix said. ``The only good thing about this is that we really don't know who else is left to have similar problems. The big guys are done.''
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