Wachovia…gone

I didn’t even get a chance to write a post about WaMu being the largest bank failure in history.  Continental Illinois, which failed during the S&L crisis, had held the record for 14 years until last Friday, when the FDIC took out WaMu and forced a sale to JP Morgan.  Continental had $30-$40 billion of assets when it failed.  WaMu had $310 billion of assets as of June 30th.  But WaMu only held the record for a single business day.

Wachovia, with $812 billion of assets on the balance sheet, blows WaMu out of the water.  Today the FDIC seized the bank and forced a sale to Citigroup.  (Not all of those are banking assets, but you get the point that Wachovia is massive.)

Citigroup will acquire the banking operations of the Wachovia Corporation, the Federal Deposit Insurance Corporation said Monday morning, the latest bank to fall victim to the distressed mortgage market.

Citigroup will pay $1 a share [in Citigroup stock], or about $2.2 billion, according to people briefed on the deal.

The F.D.I.C. said that the agency would absorb losses from Wachovia above $42 billion and that it would receive $12 billion in preferred stock and warrants from Citigroup in return for assuming that risk.

“Wachovia did not fail,” the F.D.I.C. said, “rather it is to be acquired by Citigroup Inc. on an open-bank basis with assistance from the F.D.I.C.”

Under the deal, Citigroup will acquire most of Wachovia’s assets and liabilities, including $400 billion in deposits and will assume senior and subordinated debt of Wachovia, the F.D.I.C. said. Wachovia Corporation will continue to own the retail brokerage firm AG Edwards and the money management arm Evergreen.

“There will be no interruption in services and bank customers should expect business as usual,” the F.D.I.C. chairman, Sheila C. Bair, said.

Points to FDIC for saving taxpayer dollars on this and the WaMu deal.  In the case of Wachovia, FDIC will be sharing losses with Citigroup, which agrees to absorb the first $42b of losses on Wachovia’s loan portfolio.  WaMu’s failure apparently won’t cost FDIC anything.  Some think the deal put in place to protect FDIC was borderline illegal.

Ever larger banks are failing as the confidence crisis grows larger.  Citigroup will try to raise $10b of capital by selling stock today, which it will need to repair its own balance sheet.  Only a few months ago, Citigroup was thought to be in deep trouble.  Now it looks relatively strong compared to WaMu and Wachovia.

The hope now must be that Treasury will pump capital back onto Citigroup’s balance sheet, buying back Wachovia’s (and Citi’s) toxic loans at above-market values.

Posted in Fed, Interest Rates, Wall Street, bailout, banking, credit crunch, stocks, taxpayer issues |