UPDATE: BusinessWeek weighs in with a good piece about why Wachovia is just what the Citi needed. For the bargain basement price of $1 a share Citi gets the retail banking franchise it always dreamed of as a little girl.
UPDATE: From Clusterstock: The FDIC breaks the news and will backstop Wachovia portfolio losses beyond $42 billion. No official word on share price, but stock trading below $1 in pre-market (NYT says $1/share, CNBC says wipeout). 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.
Read More At Clusterstock.
EARLIER: Wachovia is close to a deal to sell itself to either Wells Fargo or Citigroup (Spain’s Banco Santander is reportedly no longer interested), with encouragement from the Federal Reserve and Treasury Department, who must’ve had a busy weekend. The New York Times goes behind the scenes.
Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department, who took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker. At 8:15 am. on Saturday, Citigroup and Wells took their first peek at Wachovia’s books.
Regulators pressed the parties to move quickly. Senior officials at the Federal Reserve in Washington, and its branches in New York, Richmond and San Francisco held weekend discussions with all the banks involved. Top officials at the Federal Deposit Insurance Corporation and the Treasury were also in the loop.
Timothy F. Geithner, the president of the Federal Reserve Bank of New York, personally reached out to executives involved in the process to assess the situation and spur it along. Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial guarantee, as regulators did with JP Morgan’s acquisition of Bear Stearns, according to people briefed on and involved with the process.
Both Citigroup and Wells Fargo are deeply concerned about absorbing Wachovia’s giant loan portfolio, which is littered with bad mortgages, these people said. Bankers had little time to assess the risk. Citigroup and Wells Fargo were unlikely to bid more than a few dollars per share for Wachovia, substantially less than the $10-a-share price where its stock was trading on Friday, according to people briefed on the talks.
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