By Binyamin Appelbaum, Neil Irwin and Howard Schneider
Washington Post Staff Writers
Monday, September 29, 2008 8:41 AM
The FDIC announced the deal on its Web site this morning. No price for the transaction was included in the announcement. But the FDIC said that the deal hinged on a loss sharing arrangement between Citigroup and the FDIC, the agency responsible for insuring bank deposits.
Wachovia has been saddled by mortgage-related losses. Under the terms of the deal, Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will be responsible for any losses beyond that, but was given $12 billion in Citigroup preferred stock and warrants in return for that guaranty.
The Wachovia purchase is the second major bank buyout orchestrated by the FDIC recently. The agency also helped arrange the sale of the failed Washington Mutual to J.P. Morgan.
FDIC chairman Sheila Bair said in a statement that the action was "necessary to maintain confidence in the banking industry given current market conditions."
The FDIC statement emphasized that Wachovia "did not fail," and that its branches and other offices will be open as usual.
"Today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits," the FDIC statement said.
Wachovia was in talks over a possible sale to both Citigroup and Wells Fargo, healthier institutions that it could help it avoid mounting problems, according to sources familiar with the discussions.
Senior executives of the three companies held extensive discussions over the weekend in a process closely watched and encouraged by federal regulators. The Treasury Department, the Federal Deposit Insurance Corp. and several branches of the Federal Reserve were involved in the conversations.
Wachovia, based in Charlotte, operates the nation's third-largest commercial bank and the second-largest retail brokerage. It is the largest bank in the Washington area.
Wachovia's success in recent years was widely admired by its rivals, and its financial health was considered superb. Its survival as an independent company was threatened by losses on mortgage loans, suggesting how virulent the plague sweeping the financial system has become.
The company bought its troubles in 2006 with the $25 billion acquisition of Golden West Financial, a major mortgage lender based in California. Golden West specialized in "option" mortgage loans, which allow customers to pay less than the maximum each month, as on a credit card.
High rates of borrower defaults have already crushed several of the largest option mortgage companies, including IndyMac Bancorp and Washington Mutual, which failed last week and was immediately bought by J.P. Morgan.
J.P. Morgan estimated that Washington Mutual had a loss rate of 20 percent on its mortgage portfolio. Wachovia so far has acknowledged a loss rate of only 12 percent on its portfolio, leading many investors to conclude that the worst is yet to come.
The company has said repeatedly that its financial condition remains strong.