In the latest consolidation of the banking industry brought about by the credit crunch, Citigroup Inc. will absorb up to $42 billion in losses on loans on Wachovia Corp.’s books to acquire the Charlotte, N.C.-based company’s banking operations.
The Federal Deposit Insurance Corp. is on the hook for losses above and beyond that amount, but does not expect to draw on its Deposit Insurance Fund.
Federal regulators insisted that Wachovia "did not fail," but is being acquired by Citigroup "with assistance from the FDIC." Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate for the risk it’s taking on.
The deal fully protects Wachovia depositors and ensures no interruption in services and "business as usual" for bank customers, FDIC Chairwoman Sheila Bair said in announcing the move.
The news came on a day when the U.S. House of Representatives voted 228-205 against a $700 billion plan for the government to buy up troubled assets — like those on Wachovia’s books.
The Bush administration maintains it needs to provide an outlet for banks and financial institutions to unload "frozen" assets to stop the credit crunch that began in mortgage lending from spreading throughout the financial system and bringing lending to a grinding halt.
The news that the administration’s plan had been rejected by Congress sent the stock market plummeting, despite actions taken earlier today by the Federal Reserve and foreign central banks to provide billions of dollars in liquidity to financial markets.
The Fed boosted the supply of 84-day loans from $75 billion to $225 billion, and is continuing to make available $75 billion in 28-day loans to banks, for a total of $300 billion in cash loans available to banks. The Fed also boosted from $290 billion to $620 billion the amount available through swaps with the European Central Bank and other central banks.
Wachovia, which gained greater exposure to the housing downturn in 2006 with its $25 billion purchase of California-based mortgage lender Golden West Financial Corp., had $488.2 billion in loans on balance sheets at the end of June. Those included $230.5 billion in real estate loans to consumers and $45.8 billion in commercial real estate and construction loans, according to the company’s last quarterly report to investors.
In announcing an $8.9 billion second-quarter loss in July, Wachovia said it was exiting the wholesale mortgage business and moving 1,000 mortgage originators into efforts to help customers refinance and restructure "Pick-a-Pay" adjustable-rate mortgage (ARM) loans.
Other recent consolidation in the banking industry includes JP Morgan Chase’s acquisitions of Washington Mutual and Bear Stearns Cos.; Bank of America’s purchases of Countrywide Financial Corp. and Merrill Lynch & Co.; the federal government’s bailout of insurer AIG; and the failures of IndyMac Bank and Lehman Brothers.
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