FDIC: Citi to buy Wachovia's banking operations

Posted Sep 29th 2008 9:15AM by Peter Cohan
Filed under: Deals, Citigroup Inc. (C), Wachovia Corp (WB), Wells Fargo (WFC), Financial Crisis

As I posted last week, Citigroup (NYSE: C) was in talks to acquire Wachovia (NYSE: WB). Over the weekend, it surfaced that Wells Fargo (NYSE: WFC) was also in on the bidding. This morning, the Federal Deposit Insurance Corporation (FDIC) announced that the "winner" is Citi. But is Citi really winning? I'm not so sure.

Citi will take a $42 billion loss on Wachovia's $312 billion pool of loans and the FDIC will take on losses beyond that amount in exchange for $12 billion in Citi preferred stock and warrants. The good news for Citi is that it picks up 3,300 branches and offices in 21 states. Wachovia will continue to own A.G. Edwards Inc. and the Evergreen mutual-fund family.

Thanks to Wachovia's purchase of Golden West Financial in 2006, it is the leader in option ARMs, which allow borrowers to skip part of their payment and add the skipped amount to their principal. Fitch estimates that the average option ARM holder will see their payments rise 63% -- an additional $1,053 per month.

Now Citi owns the massive numbers of mortgages likely to default, so it is unclear how this deal will add to Citi's earnings, if ever. And who knows how much of the FDIC's $45 billion reserve fund will be hit with this deal? Wachovia is down 91% in pre-market where Citi slid 3.6%.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup and Wells Fargo stock and has no financial interest in the other securities mentioned.

Tags: c, featured, wb, wfc

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Reader Comments (Page 1 of 1)

9-29-2008 @ 10:12AM

william lindblad said...

Well, we both missed Fortis - too many these days and the Brits are putting their latest into the Northern Trust pile of bad debt. The more you read the more you know and the more reason to wonder where the end really is? Boy, talk about name creation - SIV's, CDO's - now we can add the Brit "buy to let". This pig had more than lipstick. This whole scene is starting to look like the days of P.T. Barnum and selling "gold bricks".
I guess we can take from Wagner - "it ain't over till the fat lady sings" - and I don't think that she is even on stage yet.

9-29-2008 @ 3:45PM

Janette said...

I was for the bell-out until I read that home owners still have a hard time in keeping their homes. Yes our goverment should help people keep their home. Dont we have enought homelessness and children in the streets. Our goverment and banks know what was going and yet did nothing to stop it. All of the VP's should be made to pay back all of the money they sucked out of homer owners. If the homer owners knew that this kind of s*** and they would be on the streets with their kid's they would not have taken out these D*** loans. Who in their right minds want to lose there homes. And all of you heartless A** H**** that feel that the people that lost their homes or going to lose their homes got what
they deserve, God will get you. One day you will look around and you won't have tolet paper to wipe your A**. I hope that our goverment will bell-out home owners or make the banks refi the damn loan at what the value of home at todays market.
Citigroup I hope you help all of the people that have an ARM with Wachovia.

10-02-2008 @ 12:11AM

C.Reed Ulmer said...

Myself and many other Wachovia customers were scammed by Wachovia in recent months. The day after I was scammed there was an article in the Greensboro News-Record stating that Wachovia agreed to pay a fine of about 125 million for "shady dealings", especially with senior citizens although they would not admit any wrong doings.
Do you think they would pay this type fine without being guilty.
The guy that scammed me should be terminated.
I went in Wachovia to buy a $95,000.00 CD that was FDIC insured and ended up with a 5 year uninsured $95,000.00 Anunity and the guy than tricked me into it received a very nice commission. He should be fired!
I am 81 years old.