The latest domino to fall is Wachovia. Citigroup has agreed to buy Wachovia's banking operations for about $1.6 billion after shares of the North Carolina lender collapsed under the weight of overdue mortgages.
The Federal Deposit Insurance Corporation (FDIC) said Citigroup would assume all Wachovia deposits insured and uninsured and all Wachovia debt. Citigroup has also agreed to acquire all Wachovia loans, and nearly all of its other assets, with no assets being assumed by the FDIC.
In addition, Citigroup has agreed to assume first losses on a portfolio of assets that includes Wachovias payment option mortgages. The FDIC is exposed to these losses only if Citigroups losses on these assets exceed $42 billion plus the $12 billion in preferred stock and warrants issued to the agency which the FDIC said it does not expect to occur at this time.
By providing this assistance, the FDIC took precisely the prudent action in difficult circumstance that Congress foresaw in legislation passed in 1991, said Comptroller of the Currency and FDIC Board member John C. Dugan. It protects all depositors, ensures smooth operations for customers, keeps banking assets in private hands, and helps maintain confidence in our banking system all without any likely cost to the Federal Deposit Insurance Fund.
Treasury Secretary Henry Paulson issued a statement commending the FDIC's action.
"I agree with the FDIC and the Federal Reserve that a failure of Wachovia would have posed a systemic risk. As a result of this transaction, all Wachovia depositors will be protected and Wachovia's senior and subordinated debt will be assumed by Citigroup," he said.
Wachovia is the latest financial titan to collapse or be acquired in the meltdown that is blamed largely on subprime mortgages and other hastily-written loans.
The purchase gives Citigroup about 3,300 branches and offices in 21 states. Wachovia will continue to own the A.G. Edwards Inc. brokerage and the Evergreen mutual-fund family.
Analysts said that depositors basically staged a "run" on Wachovia after Washington Mutual failed last week.
