Citigroup Acquires Struggling Wachovia Bank and Becomes the Third Largest Bank in the U.S.

As a new consequence of the financial crisis in the U.S., it was announced on Monday that Citigroup Inc. will acquire the banking operations of Wachovia Corp., according to an agreement facilitated by the Federal Deposit Insurance Corporation – FDIC.

Citigroup will take on up to $42 billion in losses from Wachovia’s $312 billion loan portfolio, while the FDIC will cover all remaining losses, the government agency announced on Monday. Citigroup will issue $12 billion in preferred stock and notes to the FDIC. The agreement significantly expands Citigroup’s branch network and secures its place among the ‘big three’ of the U.S. banking industry – alongside Bank of America and J.P. Morgan Chase.

However, the agreement comes at a cost; Citigroup announced on Monday that it will sell $10 billion in common stock and halve its quarterly dividend to 16 cents per share to strengthen its capital, MSNBC News reports.

The agreement was reached after it was reported over the weekend that Citigroup and Wells Fargo & Co. were reviewing Wachovia’s books, whose losses surged following a poorly timed acquisition of mortgage lender Golden West Financial Corp. in 2006. Wachovia, like Washington Mutual Inc., which was taken over by federal authorities last week, was a major issuer of adjustable-rate mortgage loans that offered low payments in the first two years of repayment, which later would multiply.

Delays and defaults on payments for such loans have recently risen to a record 9 percent of borrowers, resulting in huge losses for banks and other investors. Financial derivatives tied to these loans, which were traded on exchanges, have become illiquid burdens on bank balance sheets, prompting the government to prepare a $700 billion program for their discounted buyback, which the House of Representatives will vote on Monday.

The FDIC announced on Monday that Wachovia has not failed, and that all depositors are protected and there will be no costs to the Deposit Insurance Fund. The Chairman of the U.S. Federal Reserve, Ben Bernanke, stated on Monday that he supports the FDIC’s “timely action” that demonstrates the “government’s unwavering commitment to financial and economic stability.” Treasury Secretary Henry Paulson also welcomed the sale of Wachovia to Citigroup, stating that it would “mitigate potential market disruptions.” Paulson agreed with the FDIC’s and Fed’s assessment that “the failure of Wachovia would pose a systemic risk” to the country’s financial system.

At the time of the announcement of the acquisition, Wachovia’s stock had fallen 91 percent to 94 cents on the New York Stock Exchange – NYSE. At the close of trading on Friday, Wachovia’s stock was at $10, a drop of 74 percent since the beginning of the year.

Following the agreement on Wachovia, solutions have been found or are being developed for most of the largest distressed financial institutions in the U.S. The FDIC estimates that there are still 117 banks and other financial firms in distress in the second quarter, the highest since 2003, and that this number could increase in the third quarter.

With the acquisition of Wachovia, Citigroup has regained the title of the largest bank in the U.S. by total assets. With Wachovia, the bank now has assets of $2.91 trillion. According to current market capitalization, Bank of America, which recently acquired the struggling investment giant Merrill Lynch, remains the largest U.S. bank, followed by J.P. Morgan Chase in second and Citigroup in third place. (Hina)