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.