Sep 30 2008
Citigroup bails out Wachovia Corporation
In continuation to the haunted times presently gripping the US financial sector, Citigroup, the world’s biggest bank in a daring bid announced its plans to come to the rescue of Wachovia Corporation which in recent times had reached the brink of collapse. Orchestrated by the Federal regulators, this deal is similar to the takeover of Bear Stearns by JP Morgan Chase and will cost Citigroup a bargain basement price of about $2.2 billion in stocks. in accordance to the deal Citigroup will absorb the $42 billion losses associated with the Wachovia’s mortgages and FDIC will assume responsibility of the losses exceeding this amount. In return, Citigroup will offer FDIC $12 billion in preferred stocks and warrants. As a result of this deal there is further concentration noticed in the deposit market of the United States where Bank of America, Citigroup and JP Morgan Chase will now sit over almost 30% of the industry’s deposits. This will automatically increase the scrutiny of the federal bodies on these organizations and will leave the small and lesser significant entities operating in the financial market with no other option but to look out for suitable suitors to enable them to continue operations. This deal clearly cements the impressive progress made by Citigroup after registering huge losses in the recent path. This deal will allow Citigroup to have access to all the assets and liabilities of Wachovia which in turn is expected to provide safety to all the present bondholders of Wachovia. The deal will also enable Citigroup to exercise control over Wachovia’s corporate and private banking operations. At present Wachovia had about 3,300 branches in about 21 states of the United States and held about $447 billion in form of customer deposits.
It is expected that Citigroup will raise money to pay for this deal by announcing the issuance of new shares of its common stock. This act is pegged to generate around $10 billion for Citigroup. It was the portfolio of Wachovia which had a huge share of mortgages known as ‘option ARM’s’ which proved to be the nail in the coffin of the bank. These mortgages gave the customers enhanced capabilities to restructure their repayment cycles causing increased distress to the bank’s operation. This year has clearly spelt doom for the banking sector in the US with 14 commercial banks already pulling down their shutters. This figure looks all the more baffling when compared to the aggregated count of 3 bank failures which the US witnessed in the last 3 years.