The FDIC will backstop Wachovia portfolio losses beyond $42 billion. Citi paying $1 a share in Citi stock and Wachovia will be left with some assets (Release). Citi will assume Wachovia’s debt obligations, which suggests the bondholders won’t get hit.
Citi will not be buying AG Edwards and other non-banking Wachovia operations. Citi is also granting the FDIC $12 billion of preferred stock and warrants to pay for the guarantee. Citi’s preferred shareholders, therefore, will be diluted. If the markdowns on Wachovia’s book are anything close to $42 billion, Citi will have to raise more capital. Citi’s stock in pre-market originally was up modestly, but has now turned down.
Part of the plan is likely that Citi will sell many of Wachovia’s crap assets to the government under the Paulson Bailout. Kudos to FDIC on this: Seems relatively low risk to taxpayer (though losses could obviously be higher than $42 billion.)
Citi is now 100% too big to fail. So is JP Morgan, Bank of America, Goldman, Morgan, Wells Fargo. This is where panicked depositors will be storing money.
Meredith Whitney taking a much-deserved victory lap on CNBC:
Wells Fargo might have dropped out of the Wachovia bidding because it might have had to mark down its assets to Wachovia’s levels. Wachovia’s house-price decline assumption has been absurdly low (20% peak to trough on housing), so there will be huge markdowns. This is a complicated deal. Citi also has to mark down its assets. Meredith still a seller of Citi. They are so bloated in terms of expenses, we’re in a different revenue paradigm. Don’t know how they handle $42 billion in losses. Citi will have to raise at least $10 billion of capital.
Bailout plan: Government needs to decide who are winners/losers. Otherwise just support institutions that will die anyway. Taxpayers definitely lose money. There’s no idea where house prices bottom. So how make money? Difficult to imagine that cash flows will meet expectations. Government is subsidizing this by paying above market. Plenty of investors want to buy these assets, but only at levels banks don’t want. Government will pay much more.
Effect on other banks. If primary funding comes from deposits, and they are leaving, you have a funding problem. Wachovia and WaMu were the biggies. But there are others: Nat City, BB&T, Key…a ton of other regional banks will face similar predicaments.
Lehman should not have been allowed to go under. Wasn’t thought through. Put a lot of others at risk.
Hank Paulson issues statement: Wachovia failure would have been catastrophic. Senior and sub debt protected (assumed by Citi). We’ll do everything we need to to protect the system.
John Gutfreund, ex CEO Salomon: Banks have been deceiving us about the value of these assets. Gasparino jumps on this, tries to get him to say banks lied. Gutfreund says no, that’s not what I said. (It is what he said, but for understandable reasons, he refuses to say it again).
More as we get it…
Citi and Wachovia Reach Agreement-In-Principle for Citi to Acquire Wachovia’s Banking Operations in an FDIC-Assisted Transaction Will create leading U.S. retail bank with 9.8% U.S. market deposit share, and total deposits globally of $1.3 trillion
FDIC provides loss protection to Citi in support of transaction more than $3 billion of estimated annualized expense synergies expected by year three through consolidation of overlapping functions Citi to raise $10 billion in common equity and reduce quarterly dividend to 16 cents per share to maintain strong capital position.
Citigroup Inc. will acquire the banking operations of Wachovia Corporation; Charlotte, North Carolina, in a transaction facilitated by the Federal Deposit Insurance Corporation and concurred with by the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund. Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.
“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 C. Bair. “There will be no interruption in services and bank customers should expect business as usual.”
Citigroup Inc. will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.
In consultation with the President, the Secretary of the Treasury on the recommendation of the Federal Reserve and FDIC determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability.
“On the whole, the commercial banking system in the United States remains well capitalised. This morning’s decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury,” Bair said. “This action was necessary to maintain confidence in the banking industry given current financial market conditions.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.